-----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, RVIm75J5pbA7XJAn+WXKEbJ7t7to08tlOe+cz9uTkTwlkYmWjcwg39m+erIiGoaC 3vr+jykca+UTYt9562VQ3Q== 0000940180-98-000640.txt : 19980608 0000940180-98-000640.hdr.sgml : 19980608 ACCESSION NUMBER: 0000940180-98-000640 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19980605 SROS: NYSE 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-49881 FILM NUMBER: 98643511 BUSINESS ADDRESS: STREET 1: 1010 WISCONSIN AVE NW CITY: WASHINGTON STATE: DC ZIP: 20007 BUSINESS PHONE: 202965-445 S-1/A 1 AMENDMENT #2 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1998 REGISTRATION NO. 333-49881 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- MERISTAR HOTELS & RESORTS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7011 51-0379982 (STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) MERISTAR HOTELS & RESORTS, INC. 1010 WISCONSIN AVENUE, N.W. WASHINGTON, D.C. 20007 (202) 965-4455 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- PAUL W. WHETSELL CHAIRMAN AND CHIEF EXECUTIVE OFFICER MERISTAR HOTELS & RESORTS, INC. 1010 WISCONSIN AVENUE, N.W. WASHINGTON, D.C. 20007 (202) 965-4455 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: RICHARD S. BORISOFF, ESQ. PAUL, WEISS, RIFKIND, WHARTON & GARRISON 1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019-6064 (212) 373-3000 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. --------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JUNE 5, 1998 PROSPECTUS . SHARES MERISTAR HOTELS & RESORTS, INC. SHARES OF COMMON STOCK AND RIGHTS TO ACQUIRE UP TO . OF SUCH SHARES ---------- MeriStar Hotels & Resorts, Inc. ("MeriStar Hotels" or the "Company") is distributing to holders of record of (a) the common stock, par value $0.01 per share (the "REIT Common Stock"), of MeriStar Hospitality Corporation, a Maryland corporation operating as a real estate investment trust (the "REIT"), and (b) the units of limited partnership (the "REIT OP Units") of MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership (the "REIT Operating Partnership"), other than REIT OP Units held by the REIT or any of its subsidiaries, as of the effective time of the Merger defined below (the "Record Date"), non-transferable rights (the "Rights") to subscribe for and purchase shares of the common stock, par value $0.01 per share (the "Common Stock"), of MeriStar Hotels, at a subscription price (the "Subscription Price") equal to 95% of the average of the daily high and low prices of the Common Stock on the New York Stock Exchange Inc. ("NYSE") for the period (the "Measurement Period") of five consecutive trading days (a "Trading Day") on the NYSE immediately following the third Trading Day after the date the Common Stock opens for trading on the NYSE. The Company will be spun off (the "Spin-Off") by CapStar Hotel Company, a Delaware corporation ("CapStar"), and certain of its affiliates, as further described below, to become the lessee, manager and operator of various hotel assets, including those currently (i) owned, leased and managed by CapStar and its affiliates. CapStar intends to transfer or cause to be transferred certain assets and liabilities constituting the hotel management and leasing business currently operated by CapStar and its subsidiaries to MeriStar Hotels, a wholly owned subsidiary of CapStar. CapStar then intends to distribute, on a share- for-share basis, to its stockholders of record as of the effective time of the Merger (the "Spin-Off Record Date") all of the outstanding capital stock of MeriStar Hotels in the Spin-Off. The Spin-Off will provide the stockholders of CapStar as of the Spin-Off Record Date with the opportunity to participate in the benefits of both the real estate operations of the REIT, and the leasing and management operations of MeriStar Hotels. Pursuant to an Agreement and Plan of Merger, dated as of March 15, 1998 (the "Merger Agreement"), among American General Hospitality Corporation, a Maryland corporation operating as a real estate investment trust ("AGH"), American General Hospitality Operating Partnership, L.P., a Delaware limited partnership ("AGH Operating Partnership"), CapStar, CapStar Management Company, L.P., a Delaware limited partnership, ("CapStar Management"), and CapStar Management Company II, L.P., a Delaware limited partnership ("CapStar Management II"), CapStar after spinning-off MeriStar Hotels will merge with and into AGH (the "Merger"), with the result that (a) AGH will be the surviving corporation operating under the name MeriStar Hospitality Corporation and (b) each outstanding share of common stock, par value $0.01 per share, of CapStar ("CapStar Common Stock") will be converted into 1.0 share of REIT Common Stock, and each outstanding share of common stock, par value $0.01 per share, of AGH ("AGH Common Stock") will be converted into 0.8475 shares of REIT Common Stock. Immediately following the Spin-Off and the effective date of the Merger, the Company will acquire 100% of the partnership interests in the third-party lessee of most of the hotels owned by AGH and substantially all of the assets and certain liabilities of the third-party manager of most of the hotels owned by AGH, pursuant to an Acquisition Agreement, dated as of March 15, 1998 (the "Lessee-Manager Acquisition Agreement"). See "The Merger and the Spin-Off--The Lessee-Manager Acquisition Agreement." (Continued on next page) PRIOR TO DECIDING TO EXERCISE THE RIGHTS, RIGHTHOLDERS SHOULD CAREFULLY CONSIDER THE MATERIAL RISKS SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 12 HEREOF. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
SUBSCRIPTION PROCEEDS TO PRICE COMPANY(1)(2)(3) - ----------------------------------------------------------------------------------------------------- Per Share............................................... $ $ - ----------------------------------------------------------------------------------------------------- Total................................................... $ $ - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
(1) The Common Stock issuable pursuant to the Rights Offering is being offered and sold directly by the Company, and no commission or other remuneration will be paid to any person for soliciting purchases of the Common Stock. (2) Before deducting expenses payable by the Company. (3) Assumes the sale of all of the . shares offered hereby. The date of this Prospectus is , 1998. (cover page continued) Each holder of record of REIT Common Stock and/or REIT OP Units on the Record Date (a "Rightholder") will receive one-sixth of a Right for each share of REIT Common Stock and/or each REIT OP Unit so held. Each whole Right will entitle the Rightholder (but not a subsequent transferee of the REIT Common Stock and/or REIT OP Units held by such Rightholder on the Record Date) to purchase one share of Common Stock at the Subscription Price (the "Subscription Privilege"). The Company will publicly announce the Subscription Price promptly following determination thereof. Although fractional Rights will be issued to Rightholders, the Company reserves the right, in its sole discretion, to pay cash in lieu of fractional shares of Common Stock that would otherwise be issued or issuable in respect of fractional Rights exercised by Rightholders, based on a value per whole share of Common Stock equal to the closing price of the Common Stock on the Principal Market on the Expiration Date. Any such cash payment will be made to the applicable Rightholder at the same time that shares of Common Stock are issued in respect of whole rights exercised by Rightholders. Fractional Rights can only be exercised concurrently with the exercise of whole Rights. The Company intends to pay cash in lieu of all such fractional shares of Common Stock. An election to exercise Rights, once made, may not be revoked. The subscription agent (the "Subscription Agent") for the Rights Offering will be Continental Stock Transfer & Trust Company. All amounts received by the Subscription Agent pursuant to the exercise of Rights will be held in a non-interest-bearing escrow account until the completion of the Rights Offering. See "The Rights Offering--Subscription Privilege." The Rights will be evidenced by non- transferable subscription certificates. The issuance of shares of Common Stock pursuant to the Rights Offering is conditioned upon consummation of the Spin- Off, the Merger and transactions contemplated by the Lessee-Manager Acquisition Agreement. The Company also reserves the right, at its sole option, to cancel the Rights Offering if the Subscription Price is less than .. The Rights will be exercisable at any time following 5:00 p.m., New York City time, on the last day of the Measurement Period until 5:00 p.m., New York City time, on the sixteenth calendar day immediately following the last day of the Measurement Period, or such later date as the Company may determine (the "Expiration Date"), unless the Rights Offering is earlier cancelled. The Rights may not be exercised by any person, and neither this Prospectus nor any Subscription Certificate shall constitute an offer to sell or a solicitation of an offer to purchase any shares of Common Stock, in any jurisdiction in which such transactions would be unlawful. If the Rights Offering is not completed, the Subscription Agent will return the Subscription Price paid by investors as soon as practicable thereafter. See "The Rights Offering--Conditions to Sale of Shares" and "Risk Factors-- Risk of Termination of the Rights Offering Under Certain Circumstances." The maximum number of shares which may be issued in the Rights Offering is ., representing approximately .% of the shares of Common Stock that would be outstanding after the Rights Offering. The Common Stock has been approved for listing on the NYSE, under the symbol "MMH", subject to official notice of issuance. No listing has been applied for with respect to the Rights. Prior to the Spin-Off, there will be no established trading market for the Common Stock and there can be no assurance that after the Spin-Off any such trading market will develop. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF SO GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF ANY SECURITIES HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF MERISTAR HOTELS SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. 2 AVAILABLE INFORMATION Following the Spin-off, MeriStar Hotels will be subject to the informational requirements of the Exchange Act, and in accordance therewith will file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Copies of such reports, proxy statements and other information filed with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the following Regional Offices of the Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at prescribed rates. MeriStar Hotels will file information electronically with the Commission, and the Commission maintains a Web Site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's Web Site on the Internet is http://www.sec.gov. In addition, the Company expects to apply to list the Common Stock on the NYSE. If the Common Stock is so listed, MeriStar Hotels will file reports, proxy and information statements and other information with the NYSE. These documents may be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. MeriStar Hotels has filed with the Commission a registration statement on Form S-1 (together with all amendments, exhibits and schedules thereto, the "Registration Statement") under the Securities Act, relating to the Rights and the shares of Common Stock that will be issued to Rightholders upon exercise thereof in connection with the Rights Offering. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto filed by MeriStar Hotels with the Commission, certain portions of which are omitted in accordance with the rules and regulations of the Commission. Such additional information is available for inspection and copying at the offices of the Commission. Statements contained in this Prospectus as to the contents of any contract or other document referred to herein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The distribution of this Prospectus and the offering of the Rights and the shares of Common Stock in certain jurisdictions may be restricted by law. No action has been taken by MeriStar Hotels that would permit an offering of the Rights or such shares or the circulation or distribution of this Prospectus or any offering material in relation to the Company, the Rights or such shares in any country outside the United States where action for that purpose is required. Persons into whose possession this Prospectus comes are required by the Company to inform themselves about and to observe any such restrictions. 3 SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and the notes thereto appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under the heading "Risk Factors." Unless the context otherwise requires, references herein to "MeriStar Hotels" or the "Company" include MeriStar Hotels & Resorts, Inc. and its subsidiaries, including its subsidiary operating partnership, MeriStar H&R Operating Company, L.P., and, with respect to periods prior to the Spin-Off, the Merger and the consummation of transactions contemplated by the Lessee-Manager Acquisition Agreement (collectively, the "Formation Transactions"), the real estate leasing, management and related operations of CapStar. The historical combined financial information of the Company included herein relates to the real estate leasing, management and related operations of CapStar prior to the Formation Transactions and the pro forma combined financial information of the Company included herein reflects such historical combined financial information as adjusted for the assumption by the Company of rights and liabilities under hotel management contracts and operating leases of AGHI and AGH Leasing upon consummation of the Formation Transactions. THE COMPANY................. MeriStar Hotels & Resorts, Inc. ("MeriStar Hotels" or the "Company") will be spun off (the "Spin-Off") by CapStar Hotel Company, a Delaware corporation ("CapStar"), to become the lessee, manager and operator of various hotel assets, including those currently owned, leased and managed by CapStar, and certain of its affiliates. CapStar intends to transfer or cause to be transferred certain assets and liabilities constituting the hotel management and leasing business currently operated by CapStar and its subsidiaries to MeriStar Hotels, a wholly owned subsidiary of CapStar. The Company will initially have two $50 million credit facilities, one through the REIT and the other through third- party lenders. CapStar intends initially to capitalize the Company with approximately $48 million of cash, including approximately $18 million of forgiveness of indebtedness and a $30 million draw on the Company's credit facilities. The Company intends to draw an additional $35 million from the credit facilities in connection with the consummation of the transactions contemplated by the Lessee-Manager Acquisition Agreement (as defined herein). The rate on the revolving credit facilities will not exceed 350 basis points over LIBOR. Immediately following the Spin-Off and the effective date of the Merger, the Company will acquire 100% of the partnership interests in the third-party lessee of most of the hotels owned by AGH and substantially all of the assets and certain liabilities of the third-party manager of most of the hotels owned by AGH, pursuant to an Acquisition Agreement, dated as of March 15, 1998 (the "Lessee-Manager Acquisition Agreement"). See "The Merger and the Spin-Off--The Lessee-Manager Acquisition Agreement." Pursuant to the purchase of AGHI and AGH Leasing, MeriStar Hotels will be the manager and operator of most of the hotels owned by American General Hospitality, a Maryland corporation operating as a real estate investment trust ("AGH"). Immediately following consummation of the Formation Transactions, the Company expects to be one of the largest independent hotel management companies in the United States based on rooms under management. The Company will be the successor-in-interest and will assume all of the rights and liabilities 4 with respect to hotel management contracts and operating leases of CapStar, AGHI, and AGH Leasing. Pursuant to the Formation Transactions, the Company will lease and manage 201 hotels containing 42,476 rooms (the "Hotels"). Of the Hotels, MeriStar Hotels will (i) lease and manage 99 hotels owned by MeriStar Hospitality Corporation, a Maryland corporation operating as a real estate investment trust (the "REIT"), containing 25,854 rooms (the "REIT Owned Hotels"), (ii) lease 47 (of which they manage 36) hotels that are not REIT Owned Hotels containing 6,800 rooms, and (iii) manage an additional 55 hotels that are not REIT Owned Hotels containing 9,822 rooms. The Hotels are located throughout the United States and Canada including most major metropolitan areas and rapidly growing secondary cities. The Hotels include hotels operated under nationally recognized brand names such as Hilton(R), Sheraton(R), Westin(R), Marriott(R), Doubletree(R) and Embassy Suites(R). The Company's business strategy will be to renovate, reposition and operate each hotel according to a business plan specifically tailored to the characteristics of the hotel and its market. See "The Merger and the Spin-Off," "The Company," "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources" and "Business." THE SPIN-OFF................ CapStar intends to distribute on a share-for- share basis to its stockholders of record as of the effective time of the Merger (the "Spin-Off Record Date") all of the outstanding Common Stock, par value $0.01 per share, of MeriStar Hotels (the "Common Stock"). The Spin-Off will provide the stockholders of CapStar as of the Spin-Off Record Date with the opportunity to participate in the benefits of both ownership of real estate through the REIT, and the leasing and management operations (including the ownership of certain non-real estate assets) of MeriStar Hotels. THE MERGER.................. Pursuant to the Agreement and Plan of Merger dated as of March 15, 1998 (the "Merger Agreement"), among AGH, American General Hospitality Operating Partnership, L.P., a Delaware limited partnership ("AGH Operating Partnership"), CapStar, CapStar Management Company, L.P., a Delaware limited partnership, ("CapStar Management"), and CapStar Management Company II, L.P., a Delaware limited partnership ("CapStar Management II"), CapStar intends to merge with and into AGH (the "Merger"), with the result that (a) AGH will be the surviving corporation operating under the name MeriStar Hospitality Corporation (the "REIT") and (b) each outstanding share of common stock, par value $0.01 per share of CapStar ("CapStar Common Stock"), will be converted into 1.0 share of common stock of the REIT, par value $0.01 per share ("REIT Common Stock") and each outstanding share of common stock, par value $0.01 per share of AGH ("AGH Common Stock"), will be converted into 0.8475 shares of REIT Common Stock. See "The Merger and the Spin-Off." 5 THE INTERCOMPANY AGREEMENT.. Pursuant to the Intercompany Agreement (the "Intercompany Agreement") among MeriStar Hotels and its subsidiary operating partnership, MeriStar H&R Operating Company, L.P., a Delaware limited partnership that will be a manager and lessee of hotels and resorts ("Hotels OP" and, together with MeriStar Hotels, the "Hotel Parties"), on the one hand, and the REIT and its subsidiary operating partnership, MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership which will own hotels, resorts and other real property (the "REIT Operating Partnership" and, together with the REIT, the "REIT Parties"), on the other hand, the Hotel Parties and the REIT Parties will provide each other with, among other things, reciprocal rights to participate in certain transactions entered into by such parties. In particular, subject to certain exceptions, the Hotel Parties will have a right of first refusal to become the lessee of any real property acquired by the REIT Parties if the REIT Parties determine that, consistent with the REIT's status as a real estate investment trust, the REIT Parties are required to enter into such a lease arrangement; provided that the Hotel Parties or an entity that the Hotel Parties control is qualified to be the lessee. Further, pursuant to the Intercompany Agreement, MeriStar Hotels has agreed, subject to certain exceptions, not to acquire or make (i) investments in real estate (which, for purposes of the Intercompany Agreement, include the provision of services related to real estate and investment in hotel properties, real estate mortgages, real estate derivatives or entities that invest in real estate assets) or (ii) any other investments that may be structured in a manner that qualifies under the federal income tax requirements applicable to a real estate investment trust, unless in either case it has notified the REIT of the acquisition or investment opportunity, in accordance with the terms of the Intercompany Agreement, and the REIT has determined not to pursue such acquisition or investment. In addition, the Hotel Parties intend to pursue additional opportunities with other hotel owners in the future. See "The Company--The Intercompany Agreement." THE LESSEE-MANAGER ACQUISITION AGREEMENT...... Following the Spin-Off and the effective date of the Merger, the Company will acquire 100% of the partnership interests in AGH Leasing, the third- party lessee of most of the hotels owned by AGH, and substantially all of the assets and certain liabilities of AGHI, the third-party manager of most of the hotels owned by AGH, for $95 million pursuant to an Agreement, dated as of March 15, 1998 (the "Lessee-Manager Acquisition Agreement"), by and among Hotels OP, AGHI, AGHL GP, Inc., a Delaware corporation, the general partner of AGH Leasing, and the limited partners of AGH Leasing. Specifically, the Company will acquire (i) substantially all of the assets and certain liabilities of AGHI for a cash purchase price of $10 million; and (ii) 100% of the partnership interests in AGH Leasing for a purchase price of $85 million, consisting of approximately $73.8 million in cash and approximately $11.2 6 million in the form of partnership units of Hotels OP convertible into Common Stock ("Hotels OP Units"). Upon consummation of the transactions contemplated by the Lessee-Manager Acquisition Agreement, Hotels OP will become the lessee and manager of most of the AGH Owned Hotels that are currently leased and/or managed by AGH Leasing. The Lessee-Manager Acquisition Agreement further contemplates that the REIT and the Company will enter into new lease agreements with respect to all of the CapStar Owned Hotels and amend the lease agreements with respect to most of the AGH Owned Hotels. See "The Merger and the Spin-Off-- The Lessee-Manager Acquisition Agreement." THE RIGHTS OFFERING......... The distribution of the Rights by the Company and the sale of shares of Common Stock upon the exercise of the Rights are referred to herein as the "Rights Offering." RIGHTS...................... Non-transferable rights (the "Rights") to subscribe for and purchase shares at the Subscription Price. RECIPIENTS OF RIGHTS; RIGHTS RECEIVED............ MeriStar Hotels is distributing the Rights to holders of record of (a) the REIT Common Stock and/or (b) the units of limited partnership (the "REIT OP Units") of the REIT Operating Partnership (other than REIT OP Units held by the REIT or any of its subsidiaries) as of the Record Date defined below. Each holder of record of REIT Common Stock and/or REIT OP Units on the Record Date (a "Rightholder") will receive one-sixth of a Right for each share of REIT Common Stock and/or each REIT OP Unit so held. RECORD DATE................. The effective time of the Merger (the "Record Date"), which will be publicly announced by the Company. EXPIRATION DATE............. The Rights will be exercisable at any time following 5:00 p.m., New York City time, on the last day of the Measurement Period until 5:00 p.m., New York City time, on the sixteenth calendar day immediately following the last day of the Measurement Period, or such later date as the Company may determine (the "Expiration Date"), unless the Rights Offering is earlier cancelled. SUBSCRIPTION PRICE; MEASUREMENT PERIOD......... An amount in cash per share of Common Stock equal to 95% of the average of the daily high and low prices of the Common Stock on the New York Stock Exchange Inc. ("NYSE") for the period (the "Measurement Period") of five consecutive trading days (a "Trading Day") on the Principal Market immediately following the third Trading Day after the date that the Common Stock opens for trading on the Principal Market (the "Subscription Price"). The Company will publicly announce the Subscription Price promptly following determination thereof. SUBSCRIPTION PRIVILEGE...... Each whole Right will entitle the Rightholder (but not a subsequent transferee of the REIT Common Stock and/or REIT OP Units held 7 by such Rightholder on the Record Date) to purchase one share of Common Stock at the Subscription Price (the "Subscription Privilege"). See "The Rights Offering-- Subscription Privilege." COMMON STOCK OUTSTANDING AFTER RIGHTS OFFERING...... A maximum of . shares. See "The Spin-Off and the Merger," "Capitalization," "Management," and "Security Ownership of Certain Beneficial Owners and Management." TRANSFERABILITY OF RIGHTS... The Rights are non-transferable. In the event that Rightholders transfer the REIT Common Stock and/or REIT OP Units owned by them as of the Record Date, they will remain the owners of Rights issued in respect of such shares of REIT Common Stock or such REIT OP Units. PROCEDURE FOR EXERCISING The Subscription Privilege may be exercised by RIGHTS..................... properly completing the subscription certificate evidencing the Rights (a "Subscription Certificate") and forwarding such Subscription Certificate (or following the Guaranteed Delivery Procedures (as described in "The Rights Offering--Exercise of Rights")), with payment of the Subscription Price for each share subscribed for pursuant to the Subscription Privilege, to the Subscription Agent on or prior to the Expiration Date. If the mail is used to forward Subscription Certificates, it is recommended that insured registered mail be used. Once a Rightholder has exercised the Subscription Privilege, such exercise may not be revoked. See "The Rights Offering--Exercise of Rights." PROCEDURE FOR EXERCISING RIGHTS BY FOREIGN Subscription Certificates will not be mailed to STOCKHOLDERS............... Rightholders whose addresses are outside the United States or who have an APO or FPO address, but will be held by the Subscription Agent for their account. To exercise the Rights represented thereby, such Rightholders must notify the Subscription Agent by completing an International Holder Subscription Form, which will be delivered to such Rightholders in lieu of a Subscription Certificate, and sending it by mail or telecopy to the Subscription Agent. Rightholders located in the United Kingdom will not initially be provided with an International Holder Subscription Form and, if they are interested in participating in the Rights Offering, should contact European Agent/broker-dealer, facsimile number . , attention: . . International Holder Subscription Forms must be returned to the Subscription Agent on or prior to 11:00 a.m., New York City time, on the date that is four Trading Days prior to the Expiration Date. Certain restrictions applicable to the exercise and sale of Rights by persons located outside of the United States are set forth elsewhere in this Prospectus. See "The Rights Offering--Foreign and Certain Other Stockholders." PERSONS HOLDING SHARES OR WISHING TO EXERCISE RIGHTS Rightholders holding or receiving the Rights THROUGH OTHERS............. through a broker, dealer, commercial bank, trust company or other nominee, as well as Rightholders who would prefer to have such institutions effect 8 transactions relating to the Rights on their behalf, should contact the appropriate institution or nominee and request it to effect the transactions for them. Such Rightholders should be aware that brokers or other nominee holders may establish deadlines for receiving instructions from beneficial holders significantly in advance of the Expiration Date. See "The Rights Offering--Exercise of Rights." ISSUANCE OF COMMON STOCK.... Certificates representing shares of Common Stock purchased pursuant to the exercise of Rights will be delivered to subscribers as soon as practicable following the fourth business day after the Expiration Date. The issuance of shares pursuant to the exercise of Rights is conditioned upon the consummation of the Formation Transactions prior to the closing of the Rights Offering. Although fractional Rights will be issued to Rightholders, the Company reserves the right, in its sole discretion, to pay cash in lieu of fractional shares of Common Stock that would otherwise be issued or issuable in respect of fractional Rights exercised by Rightholders, based on a value per whole share of Common Stock equal to the closing price of the Common Stock on the Principal Market on the Expiration Date. Any such cash payment will be made to the applicable Rightholder at the same time that shares of Common stock are issued in respect of whole rights exercised by Rightholders. Fractional Rights can only be exercised concurrently with the exercise of whole Rights. The Company intends to pay cash in lieu of all such fractional shares of Common Stock. The Company also reserves the right, at its sole option, to cancel the Rights Offering if the Subscription Price is less than . . See "The Spin-Off and the Merger," "The Rights Offering--Conditions to the Sale of Shares." USE OF PROCEEDS............. MeriStar Hotels will use the proceeds of the Rights Offering to repay existing indebtedness and for general corporate purposes. See "Use of Proceeds." SUBSCRIPTION AGENT.......... Continental Stock Transfer & Trust Company. MARKET FOR COMMON STOCK; PROPOSED TRADING SYMBOL.... The Common Stock has been approved for listing on the NYSE, under the symbol "MMH", subject to official notice of issuance. No listing has been applied for with respect to the Rights. RISK FACTORS................ The purchase of the Common Stock involves certain risks. See "Risk Factors." POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF DELAWARE LAW AND OF THE MERISTAR HOTELS CHARTER AND BY-LAWS........ Certain provisions of Delaware General Corporation Law ("DGCL") and of the Amended and Restated Certificate of Incorporation of MeriStar Hotels (the "Charter") and the By-Laws of MeriStar Hotels (the "By-laws") may have the effect of 9 discouraging a third party from making an acquisition proposal for MeriStar Hotels and could delay, defer or prevent a transaction or a change in control of MeriStar Hotels under circumstances that could otherwise give the holders of Common Stock the opportunity to realize a premium over the then prevailing market prices of the Common Stock. See "Description of Capital Stock" and "Certain Antitakeover Provisions." FEDERAL INCOME TAX See "The Rights Offering--Federal Income Tax CONSEQUENCES............... Consequences." 10 OWNERSHIP STRUCTURE The diagram set forth below illustrates the ownership structure of the Company after the Spin-Off and the Merger. [DIAGRAM OF OWNERSHIP STRUCTURE AFTER THE SPIN-OFF AND THE MERGER] 11 RISK FACTORS Rightholders, in considering whether to exercise their Rights in the Rights Offering, should consider, in addition to the other information set forth in this Prospectus, the matters discussed in this section. Such matters address the risks of the Spin-Off, the risk arising from the relationship of MeriStar Hotels and the REIT and the risks relating to the business in which MeriStar Hotels is engaged. This Prospectus contains forward-looking statements which involve material risks and uncertainties. MeriStar Hotels' actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. IMPACT ON EXISTING SHAREHOLDERS The Rights entitle the Rightholders to purchase shares of Common Stock from the Company at a price below the prevailing average closing market price of the Common Stock during the Measurement Period. If any Rightholders exercise Rights, those Rightholders who do not exercise Rights will experience a decrease in their proportionate interests in the Company. TERMINATION OF THE RIGHTS OFFERING UNDER CERTAIN CIRCUMSTANCES The issuance of shares of Common Stock pursuant to the exercise of the Rights is conditioned upon the consummation of the Spin-Off, the Merger and related transactions and the transactions contemplated by the Lessee--Manager Acquisition Agreement. The Company also reserves the right, at its sole option, to cancel the Rights offering if the Subscription Price is less than . . See "The Rights Offering--Conditions to the Sale of Shares." MERISTAR HOTELS' DEPENDENCE UPON THE REIT; LIMITED RESOURCES FOR GROWTH THROUGH NEW OPPORTUNITIES Due to MeriStar Hotels' restricted corporate purpose and the Intercompany Agreement, MeriStar Hotels will rely on the REIT to provide MeriStar Hotels with opportunities described in the Intercompany Agreement only if it is necessary for the REIT, consistent with its status as a real estate investment trust, to enter into a master lease arrangement and only if MeriStar Hotels and the REIT negotiate a mutually satisfactory master lease arrangement. If the REIT in the future should fail to qualify as a real estate investment trust, such failure could have a substantial adverse effect on those aspects of MeriStar Hotels' business operations and business opportunities that are dependent upon the REIT. For example, the Intercompany Agreement remains effective even if the REIT ceases to qualify as a real estate investment trust, with MeriStar Hotels' rights relating to lessee opportunities under the Intercompany Agreement continuing to be based on the REIT's need to create a master lease structure due to its status as a real estate investment trust. Accordingly, if the REIT failed to qualify as a real estate investment trust and thereafter acquired a property, the REIT would have the right under the Intercompany Agreement to lease the property to any person or entity pursuant to any type of lease (including a master lease arrangement) or to operate the property itself. MeriStar Hotels, however, would remain subject to all of the limitations on its operations contained in the Charter and the Intercompany Agreement. In addition, although it is anticipated that any master lease arrangement involving MeriStar Hotels generally will provide that MeriStar Hotels' rights will continue following a sale of the property or an assignment of the lease (with the likelihood of a sale or assignment of lease possibly increasing if the REIT fails to qualify as a real estate investment trust), MeriStar Hotels could lose its rights under any such master lease arrangement upon the expiration of the lease. If MeriStar Hotels and the REIT do not negotiate a mutually satisfactory lease arrangement within 30 days after the REIT provides MeriStar Hotels with written notice of the lessee opportunity (or such longer period to which MeriStar Hotels and the REIT may agree), the REIT may offer the opportunity to others for a period of one year before it must again offer the opportunity to MeriStar Hotels. LACK OF DIVIDENDS The Company anticipates that for the foreseeable future the Company's earnings, if any, will be retained for use in the operation of the business and that no cash dividends will be paid on the Common Stock. 12 Declaration of dividends on the Common Stock will depend upon, among other things, future earnings, the operating and financial condition of the Company, its capital requirements and general business conditions. See "Dividend Policy." INITIAL CAPITALIZATION; LIMITED FINANCIAL RESOURCES CapStar will initially have two $50 million credit facilities, one through the REIT and the other through third-party lenders. CapStar intends initially to capitalize the Company with approximately $48 million of cash, including approximately $18 million of forgiveness of indebtedness and a $30 million draw on the Company's $100 credit facilities. In addition, in connection with the consummation of the transactions contemplated by the Lessee--Manager Acquisition Agreement, the Company intends to draw an additional $35 million from the revolving credit facilities. The rate on the revolving credit facilities will not exceed 350 basis points over LIBOR. There can be no assurance that the Company will be able to satisfy its obligations under, or to pay amounts due under, such revolving credit facility. RISK OF IRS RECHARACTERIZATION OF THE RIGHTS OFFERING Although MeriStar Hotels, CapStar, AGH, the REIT and the REIT Operating Partnership intend to take the position that the federal income tax treatment of the issuance of Rights to CapStar stockholders, AGH stockholders and holders of REIT OP Units is as described in "Federal Income Tax Consequences," it is possible that the Internal Revenue Service ("IRS") might attempt to recharacterize the Rights Offering. For example, in the case of CapStar and AGH stockholders, it is possible that the IRS could treat the Rights as a distribution of property by CapStar and AGH to their stockholders subject to the rules governing dividend distributions, rather than as boot received by such stockholders in the Merger. It is also possible that, in the case of holders of REIT OP Units, the IRS could view the REIT Operating Partnership, and not MeriStar Hotels, as the distributor of the Rights. If the distribution of the Rights to holders of AGH and CapStar Common Stock were treated as a distribution of property by AGH and CapStar to its stockholders, an amount equal to the fair market value of the Rights on the date of distribution would be treated as a dividend to holders of AGH and CapStar Common Stock to the extent of the current and accumulated earnings and profits of AGH, in the case of AGH stockholders, or CapStar, in the case of CapStar stockholders, on such date, including earnings and profits resulting from the distribution of the Rights. Any amount in excess of the earnings and profits of AGH, in the case of AGH stockholders, or CapStar, in the case of CapStar stockholders, would be treated first as a tax-free return of capital, reducing the stockholder's tax basis in its AGH or CapStar Common Stock, and any amount in excess of tax basis would be taxable as gain from sale or exchange of such stockholder's shares of AGH or CapStar Common Stock. Such gain would be capital gain if such stockholder's shares of AGH or CapStar Common Stock were held as a capital asset on the date of distribution. If the distribution of the Rights to holders of REIT OP Units were treated as a distribution by the REIT Operating Partnership, it would be treated as a distribution by a partnership of marketable securities so that such unit- holder would have to recognize capital gain to the extent that the fair market value of the Rights as of the date of distribution exceeds such holder's basis in such Units. Under such a view, holders of REIT OP Units would take a basis in the Rights equal to the fair market value of the Rights as of the date of distribution. See "The Rights Offering--Federal Income Tax Consequences" for a description of the potential recharacterization. ADVERSE EFFECTS RESULTING FROM THE MERGER TRANSACTIONS INTEGRATION RISKS To operate successfully following the Spin-Off and related transactions, MeriStar Hotels must be able to successfully integrate all of the operations of AGHI and AGH Leasing with and into the management and 13 operating businesses of CapStar, and the REIT must be able to successfully integrate operations for the hotels owned by CapStar (the "CapStar Owned Hotels") and those owned by AGH (the "AGH Owned Hotels"). The consolidation of functions and integration of departments, systems and procedures and the spin- off of MeriStar Hotels to manage the hotels owned by the REIT (the "REIT Owned Hotels") will present a significant management challenge, and the failure to integrate all of such hotels into MeriStar Hotels' management and operating structures could have a material adverse effect on the results of operations and financial condition of MeriStar Hotels. There can be no assurance that such integration will be successfully and timely implemented. FAILURE TO TRANSFER OPERATING LICENSES In connection with the Merger, certain operating licenses, such as food and beverage licenses, are to be transferred to MeriStar Hotels. It may not be possible to transfer such licenses, or to obtain new licenses in a timely manner in the event such licenses cannot be transferred. Although hotels can provide alcoholic beverages under interim licenses or licenses held by the hotel's previous owner, there can be no assurance that these licenses will remain in effect until MeriStar Hotels obtains new licenses or that new licenses will be obtained. The failure to have alcoholic beverage licenses or other operating licenses could adversely affect the results of operations of MeriStar Hotels. CONFLICT OF INTEREST IN RELATIONSHIP BETWEEN THE REIT AND MERISTAR HOTELS. GENERAL CONFLICTS OF INTEREST MeriStar Hotels and the REIT will have several common members of their Boards of Directors and several common senior executives, including their two top executives. MeriStar Hotels and the REIT will operate in a relationship governed by the Intercompany Agreement which restricts each party from taking advantage of certain business opportunities without first presenting those opportunities to the other party. Also, in their relationship with MeriStar Hotels as lessee and manager of hotels and the REIT as owner of hotels, MeriStar Hotels and the REIT may have conflicting views on the manner in which the hotels are operated and managed, and with respect to lease arrangements, acquisitions and dispositions. As a result, the directors and senior executives of MeriStar Hotels (who serve in similar capacities at the REIT) may well be presented with several decisions which provide them the opportunity to benefit the REIT to the detriment of MeriStar Hotels or benefit MeriStar Hotels to the detriment of the REIT. Such inherent potential conflicts of interest will be present in all of the numerous transactions between MeriStar Hotels and the REIT. See "The Company--The Intercompany Agreement" for a description of the relationship between MeriStar Hotels and the REIT and the Intercompany Agreement. RESTRICTIONS ON MERISTAR HOTELS' AND THE REIT'S BUSINESS AND FUTURE OPPORTUNITIES The Charter provides that for so long as the Intercompany Agreement is in effect, MeriStar Hotels is prohibited from engaging in activities or making investments that a real estate investment trust could make unless the REIT was first given the opportunity but elected not to pursue such activities or investments. Under the Charter and the Intercompany Agreement, MeriStar Hotels has agreed not to acquire or make (i) investments in real estate (which, for purposes of the Intercompany Agreement, include the provision of services related to real estate and investment in hotel properties, real estate mortgages, real estate derivatives or entities that invest in real estate assets) or (ii) any other investments that may be structured in a manner that qualifies under the federal income tax requirements applicable to a real estate investment trust, unless in either case it has notified the REIT of the acquisition or investment opportunity, in accordance with the terms of the Intercompany Agreement, and the REIT has determined not to pursue such acquisition or investment; provided, however, that MeriStar Hotels may make limited minority investments or contributions as part of a lease arrangement with a party that is not an affiliate of MeriStar Hotels in a bona fide arms- length transaction; provided further, that such investment or contribution does not materially impact MeriStar Hotels' financial and legal qualifications to lease and manage additional real estate investment trust properties. See "The Company--The Intercompany Agreement." MeriStar Hotels also has agreed to assist the REIT in structuring and consummating any such acquisition or investment which the REIT elects to pursue, on terms determined by the REIT. On the other hand, the Intercompany Agreement grants MeriStar Hotels the right of first refusal to become the lessee of any real property acquired by 14 the REIT as to which the REIT determines that, consistent with the REIT's status as a real estate investment trust, it is required to enter into a master lease arrangement. This lessee opportunity will be available to MeriStar Hotels only if the REIT determines, in its sole discretion, that MeriStar Hotels is qualified to be the lessee. Because of the provisions of the Intercompany Agreement and the Charter, the nature of MeriStar Hotels' business and the opportunities it may pursue are restricted. CONFLICTS RELATING TO SALE OF HOTELS SUBJECT TO LEASES The REIT generally will be obligated under its master leases with MeriStar Hotels to pay a lease termination fee to MeriStar Hotels if the REIT elects to sell a hotel or if it elects not to restore a hotel after a casualty and does not replace it with another hotel on terms that would create a leasehold interest in such hotel with a fair market value equal to MeriStar Hotels' remaining leasehold interest under the lease to be terminated. Where applicable, the termination fee is equal to the fair market value of MeriStar Hotels' leasehold interest in the remaining term of the lease to be terminated. A decision to sell a hotel may, therefore, have significantly different consequences for MeriStar Hotels and the REIT. NO ARM'S LENGTH BARGAINING The terms of the Intercompany Agreement, the agreement pursuant to which (i) the REIT and the Company will provide to each other a right of first opportunity with respect to certain investment opportunities available to each of them, (ii) the Company will provide certain corporate and other general services to the REIT and (iii) the REIT and the Company agree to cooperate and coordinate with each other with regard to certain matters, was not negotiated on an arm's length basis. Because Messrs. Whetsell, Jorns, Worms and Doctoroff will be directors of both the REIT and the Company and Messrs. Whetsell and Jorns will be executive officers of both the REIT and the Company, there is a potential conflict of interest with respect to the enforcement and termination of the Intercompany Agreement to benefit the REIT to the detriment of the Company or benefit of the Company to the detriment of the REIT. Because of these conflicts, Messrs. Whetsell, Jorns, Worms and Doctoroff may have conflicts of interest with respect to their decisions relating to the enforcement of the Intercompany Agreement. TAX RISKS IN RELATIONSHIP BETWEEN THE REIT AND MERISTAR HOTELS A real estate investment trust generally is not subject to federal corporate income taxes on that portion of its income distributed currently to stockholders. Section 269B(a)(3) of the Internal Revenue Code of 1986, as amended (the "Code") provides that if the shares of a real estate investment trust are stapled with the shares of any other entity, then the real estate investment trust and such other entity shall be treated as one entity for purposes of determining whether the real estate investment trust qualifies as a real estate investment trust for federal income tax purposes. If Section 269B(a)(3) of the Code applied to the Company and the REIT, the REIT would not qualify as a real estate investment trust under the Code. MeriStar Hotels and the REIT are not stapled entities because the Common Stock will be issued independently of the shares of the REIT and will be traded separately as well. However, because at least initially some employees and members of management of the Company and the REIT will be the same, it is possible that the Internal Revenue Service could seek to assert that the Company should be treated as an agent of the REIT or that the Company and the REIT should be treated as one entity for federal income tax purposes. If such assertion were successful, the REIT would not qualify as a real estate investment trust under the Code. AGH and CapStar will receive an opinion of counsel in connection with the Merger providing in part that the Company and the REIT will not be treated as stapled entities under Section 269B(a)(3) of the Code and that, based upon the intended operations of each entity and certain other factors and upon representations made by certain persons who will be members of management of the Company and the REIT, the separate corporate identities of MeriStar Hotels and the REIT will be respected and the Company will not be treated as an agent of the REIT for federal income tax purposes. 15 ADVERSE EFFECTS RELATING TO THE LODGING INDUSTRY OPERATING RISKS Various factors could adversely affect the ability of MeriStar Hotels to generate revenues and make lease payments to the REIT. MeriStar Hotels' business will be subject to all of the operating risks inherent in the lodging industry. These risks include the following: (i) changes in general and local economic conditions; (ii) cyclical overbuilding in the lodging industry; (iii) varying levels of demand for rooms and related services; (iv) competition from other hotels, motels and recreational properties, some of which may have greater marketing and financial resources than the REIT or MeriStar Hotels; (v) dependence on business and commercial travelers and tourism, which business may fluctuate and be seasonal; (vi) the recurring need for renovations, refurbishment and improvements of hotel properties; (vii) changes in governmental regulations that influence or determine wages, prices and construction and maintenance costs; and (viii) changes in interest rates and the availability of credit. Demographic, geographic or other changes in one or more of MeriStar Hotels' markets could impact the convenience or desirability of the sites of certain hotels, which would in turn affect the operations of those hotels. In addition, due to the level of fixed costs required to operate full-service hotels, certain significant expenditures necessary for the operation of hotels generally cannot be reduced when circumstances cause a reduction in revenue. SEASONALITY The lodging industry is seasonal in nature. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters although this may not be true for hotels in major tourist destinations. Revenues for hotels in tourist areas generally are substantially greater during tourist season than other times of the year. Seasonal variations in revenue at the hotels MeriStar Hotels manages can be expected to cause quarterly fluctuations in the revenues of MeriStar Hotels. Quarterly earnings also may be adversely affected by events beyond MeriStar Hotels' control, such as extreme weather conditions, economic factors and other considerations affecting travel. FRANCHISE AGREEMENTS Upon completion of the Merger, 93 of the REIT Owned Hotels will be operated pursuant to existing franchise or license agreements with nationally recognized hotel companies (the "Franchise Agreements"). The Franchise Agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor system. Those limitations may conflict with the REIT's and MeriStar Hotels' philosophy of creating specific business plans tailored to each hotel and to each market. Such standards are often subject to change over time, in some cases at the discretion of the franchisor, and may restrict a franchisee's ability to make improvements or modifications to a hotel without the consent of the franchisor. In addition, compliance with such standards could require a franchisee to incur significant expenses or capital expenditures. Action or inaction on the part of any of the REIT, MeriStar Hotels or third-party operators could result in a breach of such standards or other terms and conditions of the franchise agreements and could result in the loss or cancellation of a franchise license. In connection with terminating or changing the franchise affiliation of a REIT Owned Hotel or a subsequently acquired hotel, MeriStar Hotels or the REIT may be required to incur significant expenses or capital expenditures. Moreover, the loss of a franchise license could have a material adverse effect upon the operations or the underlying value of the hotel covered by the franchise because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. The Franchise Agreements covering the hotels expire or terminate, without specified renewal rights, at various times and have differing remaining terms. As a condition to renewal, the Franchise Agreements frequently contemplate a renewal application process, which may require substantial capital improvements to be made to a hotel. Under certain of their existing Franchise Agreements, AGH and CapStar may be required to obtain the consent of the franchisors under such agreements to consummate the Merger and related transactions. There can be no assurance that such consents will be obtained. 16 COMPETITION IN THE LODGING INDUSTRY The lodging industry is highly competitive. There is no single competitor or small number of competitors of the REIT and MeriStar Hotels that will be dominant in the industry. MeriStar Hotels will operate in areas that contain numerous competitors, some of which may have substantially greater resources than MeriStar Hotels and the ability to accept more risk than MeriStar Hotels will be able to manage. Competition in the lodging industry is based generally on location, room rates and range and quality of services and guest amenities offered. New or existing competitors could significantly lower rates or offer greater conveniences, services or amenities or significantly expand, improve or introduce new facilities in markets in which MeriStar Hotels will compete, thereby adversely affecting MeriStar Hotels' operations and the number of suitable business opportunities. COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to properly remediate such contaminated property, may adversely affect the owner's ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. The operation and removal of certain underground storage tanks are also regulated by federal and state laws. In connection with the ownership and operation of the hotels, the REIT could be held liable for the costs of remedial action with respect to such regulated substances and storage tanks and claims related thereto. Activities have been undertaken to close or remove storage tanks located on the property of several of the REIT Owned Hotels. All of the REIT Owned Hotels have undergone Phase I environmental site assessments ("Phase Is"), which generally provide a nonintrusive physical inspection and database search, but not soil or groundwater analyses, by a qualified independent environmental engineer, within the last 18 months. The purpose of a Phase I is to identify potential sources of contamination for which the REIT Owned Hotels may be responsible and to assess the status of environmental regulatory compliance. The Phase Is have not revealed and the Company is not aware of any environmental liability or compliance concerns that MeriStar Hotels believes would have a material adverse effect on MeriStar Hotels' results of operation or financial condition. In addition, the REIT Owned Hotels have been inspected to determine the presence of asbestos. Federal, state and local environmental laws, ordinances and regulations also require abatement or removal of certain asbestos- containing materials ("ACMs") and govern emissions of and exposure to asbestos fibers in the air. ACMs are present in various building materials such as sprayed-on ceiling treatments, roofing materials or floor tiles at some of the REIT Owned Hotels. Operations and maintenance programs for maintaining such ACMs have been or are in the process of being designed and implemented, or the ACMs have been scheduled to be or have been abated, at such hotels. However, there can be no assurance that this will be the case. Any liability resulting from non-compliance or other claims relating to environmental matters could have a material adverse effect on MeriStar Hotels' results of operations or financial condition. GOVERNMENTAL REGULATION A number of states regulate the licensing of hotels and restaurants, including liquor license grants, by requiring registration, disclosure statements and compliance with specific standards of conduct. MeriStar Hotels believes that it is substantially in compliance with these requirements or, in the case of liquor licenses, that it has or will promptly obtain the appropriate licenses. Managers of hotels are also subject to laws governing their relationship with hotel employees, including minimum wage requirements, overtime, working conditions and work permit requirements. Compliance with, or changes in, these laws could reduce the revenue and profitability of the REIT Owned Hotels and could otherwise adversely affect MeriStar Hotels' results of operations or financial condition. 17 Under the Americans with Disabilities Act (the "ADA"), all public accommodations are required to meet certain requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts have been and continue to be invested in ADA required upgrades to the REIT Owned Hotels, a determination that the REIT is not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. The REIT is likely to incur additional costs of complying with the ADA. ADVERSE EFFECTS RELATING TO THE OPERATION OF REAL ESTATE Upon consummation of the Formation Transactions, MeriStar Hotels will continue the hotel management businesses as previously undertaken separately by AGHI, AGH Leasing and CapStar. MeriStar Hotels will lease the REIT Owned Hotels pursuant to the Participating Leases. The REIT will have the right to terminate a Participating Lease upon the sale of a hotel to a third party or if MeriStar Hotels fails to meet certain performance criteria. The underlying value of MeriStar Hotels' operations and income will be dependent upon the its ability to operate the hotels in a manner sufficient to maintain or increase revenues and to generate sufficient revenue in excess of operating expenses to make lease payments to the REIT. Many of these risks are beyond the control of MeriStar Hotels and the effects of these risks are likely to be more pronounced than if MeriStar Hotels had diversified operations. PAPER CLIP STRUCTURE RISKS The Intercompany Agreement between the REIT and the Company has been structured to provide the two companies with mutually beneficial rights and obligations so that investors in both companies may enjoy the economic benefit of the entire enterprise. This is known as the "paper-clip" REIT structure. However, because of the independent trading of the REIT and the Company, stockholders in each company may develop divergent interests which could lead to conflicts of interest. This divergence of interests could also lead the two companies in separate directions which could lead to conflicts of interest. DEPENDENCE ON KEY PERSONNEL Upon consummation of the Merger, MeriStar Hotels will place substantial reliance on the lodging industry knowledge and experience and the continued services of both AGH and CapStar senior management, led by Messrs. Whetsell, Jorns and McCaslin. MeriStar Hotels' future success and its ability to manage future growth depend in large part upon the efforts of these persons and on MeriStar Hotel's ability to attract and retain other highly qualified personnel. Competition for such personnel is intense, and there can be no assurance that MeriStar Hotels will be successful in attracting and retaining such personnel. MeriStar Hotels' inability to attract and retain other highly qualified personnel may adversely affect its results of operations and financial condition. MeriStar Hotels will have employment agreements with Messrs. Whetsell and Jorns for terms of five years, and with Mr. McCaslin for a term of three years, in each case with automatic renewals on a year-to-year bases thereafter. See "Executive Officers-Employment Agreements." While certain of such contracts will contain non-compete clauses, such clauses may not be enforceable in certain jurisdictions. ADVERSE EFFECTS ON MARKET PRICE OF COMMON STOCK ARISING FROM SHARES AVAILABLE FOR FUTURE SALE No prediction can be made as to the effect, if any, that any future sales of shares, or the availability of shares for future sale, will have on the market prices for Common Stock following the Spin-Off. Sales of substantial amounts of Common Stock (including Common Stock issued in connection with the Rights, outstanding stock options or the exchange or sale of units of limited partner interest in Hotels OP) or the perception that such sales could occur could adversely affect the then-prevailing market price for Common Stock. With the exception of the Common Stock issued to affiliates of MeriStar Hotels in connection with the Spin-Off and the Rights Offering, all of the Common Stock to be issued in connection with the Spin-Off and the Rights Offering will be freely transferable. 18 ABSENCE OF A PUBLIC MARKET FOR COMMON STOCK There is currently no public market for the Common Stock. The Common Stock has been approved for listing on the NYSE, under the symbol "MMH", subject to official notice of issuance. There can be no assurance as to the prices at which trading in Common Stock will occur after the Spin-Off or that an active trading market in the Common Stock will develop or be sustained in the future. In the event no active trading market develops for the Common Stock, holders of shares of Common Stock may not be able to sell their shares promptly at a reasonable price. Accordingly, Rightholders and holders of Common Stock should consider the Common Stock a long-term investment. The prices at which the Common Stock trades will be determined by the marketplace and may be influenced by many factors, including, among others, MeriStar Hotels' and the REIT's performance and prospects, the depth and liquidity of the market for the Common Stock, investor perception of MeriStar Hotels and of the hotel industry in which MeriStar Hotels operate, economic conditions in general, MeriStar Hotels' dividend policy, and general financial and other market conditions. Such volatility and other factors may materially adversely affect the market price of the Common Stock. REDISTRIBUTION OF MERISTAR HOTELS COMMON STOCK Trading in shares of OpCo will likely be characterized by a period of redistribution among the MeriStar shareholders who receive such shares in the Spin-Off (especially in light of the taxable nature of the Spin-Off) which may temporarily depress the market price of such shares during such period. POTENTIAL ANTITAKEOVER EFFECT OF CERTAIN PROVISIONS OF DELAWARE LAW AND OF THE CHARTER AND BY-LAWS Certain provisions of Delaware law and of the Charter and By-Laws may have the effect of discouraging a third party from making an acquisition proposal for MeriStar Hotels and could delay, defer or prevent a transaction or a change in control of MeriStar Hotels under circumstances that could otherwise give the holders of Common Stock the opportunity to realize a premium over the then prevailing market prices of the Common Stock. Certain provisions of the Charter and By-laws, as each will be in effect as of the Rights Offering, and of the DGCL, have the effect of making more difficult an acquisition of control of the Company in a transaction not approved by the Board of Directors. These provisions include (i) a provision for a classified Board, with only approximately one-third of the Board to be elected in any year, to serve for three-year terms, (ii) a requirement that directors be removed only for cause upon the affirmative vote of holders of at least 66 2/3% of the total voting power, (iii) a requirement that actions of stockholders be taken at a meeting of stockholders, rather than by written consent, (iv) a prohibition on the stockholders' ability to call a special meeting, (v) an advance notice requirement for stockholders to make nominations of candidates for directors or to bring other business before an annual meeting of stockholders, and (vi) a requirement that certain amendments to the Charter be approved by the affirmative vote of 66 2/3% of total voting power. See "Description of Capital Stock" and "Certain Antitakeover Provisions." 19 SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The following table sets forth selected historical and pro forma financial information for the Company. The historical balance sheet data of the Company as of March 31, 1998 and 1997 and December 31, 1997 and 1996 and the historical operating results and other financial data for the three months ended March 31, 1998 and 1997 and the years ended December 31, 1997, 1996 and 1995, have been derived from the combined financial statements of the Company which are included elsewhere in this Prospectus. The historical balance sheet data as of December 31, 1995, 1994 and 1993 and the historical operating results and other financial data for the years ended December 31, 1994 and 1993 have been derived from financial statements of the Company which are not required to be included in this Prospectus. The following historical information should be read in conjunction with the combined financial statements and notes thereto of the Company and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The pro forma balance sheet data of the Company as of March 31, 1998 has been prepared assuming that the Formation Transactions had been consummated on such date. The pro forma operating results and other financial data have been prepared assuming that the Formation Transactions had been consummated at the beginning of the periods presented. The following pro forma information should be read in conjunction with MeriStar Hotels Unaudited Pro Forma Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. 20
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ----------------------------------- ---------------------------------------------------- PRO FORMA PRO FORMA 1998 1998 1997 1997 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ------- ------- ------ ------ ------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING RESULTS: Revenue: Rooms.................. $176,474 $23,404 $ -- $674,197 $ 9,880 $ -- $ -- $ -- $ -- Food, beverage and other................. 68,017 2,576 -- 264,440 1,871 -- -- -- -- Management services and other revenues.... 2,085 4,150 1,139 10,510 12,088 7,050 5,354 4,418 4,234 -------- ------- ------- -------- ------- ------- ------ ------ ------ Total revenues....... 246,576 30,130 1,139 949,147 23,839 7,050 5,354 4,418 4,234 -------- ------- ------- -------- ------- ------- ------ ------ ------ Operating expenses: Departmental expenses: Rooms.................. 41,232 5,124 -- 165,633 2,533 -- -- -- -- Food, beverage and other ................ 49,451 1,493 -- 195,555 1,170 -- -- -- -- Undistributed operating expenses: Administrative and general............... 43,794 6,963 2,202 159,909 10,473 6,140 4,745 4,508 4,065 Participating lease expense............... 85,592 10,655 -- 297,201 4,135 -- -- -- -- Property operating costs................. 29,962 4,142 -- 114,699 1,917 -- -- -- -- Depreciation and amortization.......... 1,224 421 96 4,690 636 349 84 23 14 -------- ------- ------- -------- ------- ------- ------ ------ ------ Total operating expenses.............. 251,255 28,798 2,298 937,687 20,864 6,489 4,829 4,531 4,079 -------- ------- ------- -------- ------- ------- ------ ------ ------ Net operating income (loss)................. (4,679) 1,332 (1,159) 11,460 2,975 561 525 (113) 155 Equity in earnings (loss) of affiliates... -- (521) -- 46 46 -- -- -- -- Interest expense, net... 2,006 18 14 5,297 56 123 44 -- -- Minority interest....... (1,074) 35 -- 1,047 103 -- -- -- -- Income tax provision (benefit).............. (2,244) -- -- 2,065 -- -- -- -- -- -------- ------- ------- -------- ------- ------- ------ ------ ------ Net income (loss).... $ (3,367) $ 758 $(1,173) $ 3,097 $ 2,862 $ 438 $ 481 $ (113) $ 155 ======== ======= ======= ======== ======= ======= ====== ====== ====== Basic and diluted net income (loss) per common share........... $ (0.14) $ -- $ -- $ 0.12 $ -- $ -- $ -- $ -- $ -- BALANCE SHEET DATA: Total assets ........... $198,879 $84,719 $25,415 $ -- $84,419 $24,366 $2,881 $1,232 $1,458 Debt.................... 65,776 776 800 -- 981 885 950 -- -- OTHER FINANCIAL DATA: EBITDA (A).............. (3,455) 1,753 (1,063) 16,150 3,611 910 609 (90) 169 Net cash provided by (used in) operating activities............. (1,583) 2,760 682 9,697 4,465 1,226 208 66 (101) Net cash used in investing activities... (84,125) (326) (902) (90,300) (6,501) (1,826) (61) (41) (24) Net cash provided by (used in) financing activities............. 64,795 (205) (85) 69,208 4,208 699 59 -- 244
- -------- (A) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Management believes that EBITDA is a useful measure of operating performance because (i) it is industry practice to evaluate hotel companies based on operating income before interest, depreciation and amortization and minority interests, which is generally equivalent to EBITDA, and (ii) EBITDA is unaffected by the debt and equity structure of the entity. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles ("GAAP"), is not necessarily indicative of cash available to fund all cash flow needs, should not be considered as an alternative to net income under GAAP for purposes of evaluating the Company's results of operations and may not be comparable to other similarly titled measures used by other companies.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ----------------------------------- -------------------------------------- PRO FORMA PRO FORMA 1998 1998 1997 1997 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----- ---- ---- ---- ---- EBITDA CALCULATION Net operating income (loss)................. (4,679) 1,332 (1,159) 11,460 2,975 561 525 (113) 155 Add: Depreciation and amortization........... 1,224 421 96 4,690 636 349 84 23 14 ------ ----- ------ ------ ----- --- --- ---- --- EBITDA.................. (3,455) 1,753 (1,063) 16,150 3,611 910 609 (90) 169
21 UNAUDITED PRO FORMA FINANCIAL STATEMENTS The Unaudited Pro Forma Balance Sheet of MeriStar Hotels as of March 31, 1998 is presented assuming the Formation Transactions had occurred on March 31, 1998. The Unaudited Pro Forma Statements of Operations of MeriStar Hotels for the three months ended March 31, 1998 and the year ended December 31, 1997 are presented assuming the Formation Transactions occurred at the beginning of 1997. In management's opinion, all material adjustments necessary to reflect the transactions are presented in the pro forma adjustments columns, which are further described in the notes to the MeriStar Hotels Unaudited Pro Forma Financial Statements. The MeriStar Hotels Unaudited Pro Forma Financial Statements are not necessarily indicative of what MeriStar Hotels' financial position or results of operations would have been if all the hotels were owned on such dates and if the Spin-Off and other related transactions occurred on such dates. Additionally, the pro forma information does not purport to project MeriStar Hotels' financial position or results of operations at any future date or for any future period. The MeriStar Hotels Unaudited Pro Forma Financial Statements should be read in conjunction with the financial statements and related notes thereto of MeriStar Hotels, AGH Leasing and AGHI which are included elsewhere in this Prospectus. 22 MERISTAR HOTELS UNAUDITED PRO FORMA BALANCE SHEET MARCH 31, 1998 (DOLLARS IN THOUSANDS)
ACQUIRE AGH SPIN- PARTICIPATING LEASING AND HISTORICAL (A) OFF (B) LEASES (C) SUBTOTAL AGHI (D) PRO FORMA -------------- -------- ------------- -------- ----------- --------- ASSETS Cash and cash equivalents............ $28,602 $ 30,000 $ -- $ 58,602 $(48,799) $ 9,803 Prepaid expenses, deposits and other..... 17,498 -- 37,959 55,457 -- 55,457 Intangible and fixed assets, net............ 38,619 -- -- 38,619 95,000 133,619 ------- -------- ------- -------- -------- -------- Total assets.......... $84,719 $ 30,000 $37,959 $152,678 $ 46,201 $198,879 ======= ======== ======= ======== ======== ======== LIABILITIES, MINORITY INTEREST AND OWNERS'/STOCKHOLDERS' EQUITY Due to affiliate........ $18,372 $(18,372) $ 871 $ 871 $ -- $ 871 Other liabilities....... 20,069 -- 37,088 57,157 -- 57,157 Credit facilities....... -- 30,000 -- 30,000 35,000 65,000 Capital leases and other debt................... 776 -- -- 776 -- 776 ------- -------- ------- -------- -------- -------- Total liabilities..... 39,217 11,628 37,959 88,804 35,000 123,804 Minority interest....... 3,835 768 -- 4,603 11,201 15,804 Common stock............ -- 249 -- 249 -- 249 Additional paid-in capital................ -- 59,022 -- 59,022 -- 59,022 Retained earnings....... -- -- -- -- -- -- Owners' equity.......... 41,667 (41,667) -- -- -- -- ------- -------- ------- -------- -------- -------- Owners'/Stockholders' equity............... 41,667 17,604 -- 59,271 -- 59,271 ------- -------- ------- -------- -------- -------- Total liabilities, minority interest and owners'/stockholders' equity............... $84,719 $ 30,000 $37,959 $152,678 $ 46,201 $198,879 ======= ======== ======= ======== ======== ========
- -------- (A) Reflects the unaudited historical condensed combined balance sheet of the Company as of March 31, 1998. (B) Reflects adjustments to capitalize MeriStar Hotels upon the Spin-Off for (i) $30,000 of cash drawn from MeriStar Hotels' credit facilities, and (ii) contributions of $18,372 to MeriStar Hotels shareholders ($17,604) and OP Unit holders ($768) by CapStar upon forgiveness of $18,372 due to CapStar. (C) Reflects the transfer of net hotel operating assets from CapStar ($37,959 of operating assets and $37,088 of operating liabilities) in conjunction with the execution of the Participating Leases and the resulting due to affiliates of $871 for the amount by which operating assets transferred to MeriStar Hotels exceed operating liabilities assumed by MeriStar Hotels. (D) Reflects the acquisitions of AGH Leasing and AGHI for $95,000. Based on preliminary estimates, the purchase price will be allocated $26,500 to intangible hotel leases acquired, to be amortized over 26 years (representing the average remaining initial lease terms plus the assumed exercise of three 5-year renewal options) and $68,500 to goodwill, to be amortized over 35 years. The transaction is to be financed with $48,799 in cash, an additional $35,000 drawn from MeriStar Hotels' credit facilities, and $11,201 in OP Units. 23 MERISTAR HOTELS UNAUDITED PRO FORMA STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ACQUIRE AGH LEASING AND AGHI ---------------------------------- SPIN-OFF PARTICIPATING AGH OTHER HISTORICAL(A) PRO FORMA(B) LEASES(C) SUBTOTAL LEASING(D) AGHI(D) ADJUSTMENTS(E) PRO FORMA ------------- ------------ ------------- -------- ---------- ------- -------------- --------- Revenue from hotel operations: Rooms................ $23,404 $ -- $84,254 $107,658 $68,816 $ -- $ -- $176,474 Food and beverage.... 1,357 -- 33,632 34,989 20,493 -- -- 55,482 Other hotel revenue.. 1,219 -- 7,024 8,243 4,292 -- -- 12,535 Hotel management, accounting and other................ 4,150 -- (3,121) 1,029 -- 2,815 (1,759) 2,085 ------- ----- ------- -------- ------- ------ ------- -------- Total revenue........ 30,130 -- 121,789 151,919 93,601 2,815 (1,759) 246,576 Hotel operating expense by department: Rooms................ 5,124 -- 21,130 26,254 14,978 -- -- 41,232 Food and beverage.... 995 -- 27,154 28,149 14,931 -- -- 43,080 Other operating departments......... 498 -- 3,819 4,317 2,054 -- -- 6,371 Undistributed operating expenses: Administrative and general............. 6,963 -- 20,775 27,738 14,203 2,430 (577) 43,794 Property operating costs............... 4,142 -- 15,778 19,920 12,112 -- (2,070) 29,962 Lease expense........ 10,655 -- 41,174 51,829 33,763 -- -- 85,592 Depreciation and amortization........ 421 -- -- 421 26 27 750 1,224 ------- ----- ------- -------- ------- ------ ------- -------- 28,798 -- 129,830 158,628 92,067 2,457 (1,897) 251,255 Interest expense and other, net........... 539 694 -- 1,233 6 (42) 809 2,006 ------- ----- ------- -------- ------- ------ ------- -------- Total expenses........ 29,337 694 129,830 159,861 92,073 2,415 (1,088) 253,261 ------- ----- ------- -------- ------- ------ ------- -------- Income (loss) before minority interest and income taxes......... 793 (694) (8,041) (7,942) 1,528 400 (671) (6,685) Minority interest..... 35 (20) (336) (321) -- -- (753) (1,074) ------- ----- ------- -------- ------- ------ ------- -------- Income (loss) before income taxes......... 758 (674) (7,705) (7,621) 1,528 400 82 (5,611) Income tax provision (benefit)............ -- 34 (3,082) (3,048) -- -- (804) (2,244) ------- ----- ------- -------- ------- ------ ------- -------- Net income (loss)..... $ 758 $(708) $(4,623) $ (4,573) $ 1,528 $ 400 $ (722) $ (3,367) ======= ===== ======= ======== ======= ====== ======= ======== Basic net income per common share......... -- $ (0.14)(F) ======= ======== Diluted net income per common share......... -- $ (0.14)(F) ======= ========
- -------- (A) Reflects the unaudited historical condensed combined statement of operations of the Company for the three months ended March 31, 1998. (B) Reflects adjustments to (i) record interest expense (at an annual rate of 9.25%) of $694 relating to the $30,000 drawn from MeriStar Hotels' credit facilities, (ii) adjust minority interest for the effects of (i) and (iii) record income taxes at 40% in conjunction with the change in tax status to a C-corporation. (C) Reflects the execution of the Participating Leases to (i) present a full period of hotel operations for hotels leased from CapStar, (ii) adjust minority interest for the effects of (i) and (iii) record income taxes at 40%. Lease expense was calculated based on contractual terms of existing leases or expected terms of leases that will be entered into concurrently with the Merger. (D) Reflects adjustments for the acquisition of AGH Leasing and AGHI for (i) pro forma AGH Leasing operations and (ii) the historical operating activity of AGHI for the three months ended March 31, 1998. Pro forma financial statements of AGH Leasing and the historical financial statements of AGHI are included elsewhere in this prospectus. (E) Other adjustments for the acquisition reflect (i) elimination of historical management fees earned by AGHI from the AGH Owned Hotels of $1,759, (ii) elimination of pro forma management fees incurred by AGH Leasing for AGHI services of $2,070, (iii) elimination of management advisory services fees of $858 that will not be incurred in the future (as the management advisory contract terminates upon sale of AGHI and the Company will perform these functions internally with existing management), net of $281 of additional general and administrative costs expected to be incurred upon the Spin-Off and acquisition, (iv) amortization of $750 on intangible assets acquired in the purchase, (v) interest expense of $809 relating to the $35,000 draw from MeriStar Hotels' credit facilities, (vi) minority interest of 16.2% adjusted for (i) through (v), and (vii) income taxes at 40%. (F) Pro forma basic and diluted net income per common share has been calculated using 24,890,355 shares of Common Stock. 24 MERISTAR HOTELS UNAUDITED PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ACQUIRE AGH LEASING AND AGHI ---------------------------------- SPIN-OFF PARTICIPATING AGH OTHER HISTORICAL(A) PRO FORMA(B) LEASES(C) SUBTOTAL LEASING(D) AGHI(D) ADJUSTMENTS(E) PRO FORMA ------------- ------------ ------------- -------- ---------- ------- -------------- --------- Revenue from hotel operations: Rooms................. $ 9,880 $68,738 $343,066 $421,684 $252,513 $ -- $ -- $674,197 Food and beverage..... 1,397 3,316 137,358 142,071 76,703 -- -- 218,774 Other................. 474 3,237 26,265 29,976 15,690 -- -- 45,666 Hotel management, accounting and other.. 12,088 -- (7,238) 4,850 -- 7,351 (1,691) 10,510 ------- ------- -------- -------- -------- ------ -------- -------- Total revenue......... 23,839 75,291 499,451 598,581 344,906 7,351 (1,691) 949,147 Hotel operating expense by department: Rooms................. 2,533 14,300 89,297 106,130 59,503 -- -- 165,633 Food and beverage..... 909 2,215 109,096 112,220 58,940 -- -- 171,160 Other operating departments.......... 261 1,648 14,227 16,136 8,259 -- -- 24,395 Undistributed operating expenses: Administrative and general.............. 10,473 11,169 77,254 98,896 54,873 7,242 (1,102) 159,909 Property operating costs................ 1,917 12,265 60,265 74,447 47,607 -- (7,355) 114,699 Participating lease expense.............. 4,135 32,002 140,936 177,073 120,128 -- -- 297,201 Depreciation and amortization......... 636 826 -- 1,462 104 124 3,000 4,690 ------- ------- -------- -------- -------- ------ -------- -------- 20,864 74,425 491,075 586,364 349,414 7,366 (5,457) 937,687 Interest expense and other, net............ 10 2,775 -- 2,785 (373) (135) 2,974 5,251 ------- ------- -------- -------- -------- ------ -------- -------- Total expenses......... 20,874 77,200 491,075 589,149 349,041 7,231 (2,483) 942,938 ------- ------- -------- -------- -------- ------ -------- -------- Income (loss) before minority interest and income taxes.......... 2,965 (1,909) 8,376 9,432 (4,135) 120 792 6,209 Minority interest...... 103 (14) 350 439 (1,663) -- 2,271 1,047 ------- ------- -------- -------- -------- ------ -------- -------- Income (loss) before income taxes.......... 2,862 (1,895) 8,026 8,993 (2,472) 120 (1,479) 5,162 Income tax provision (benefit)............. -- 387 3,210 3,597 -- -- (1,532) 2,065 ------- ------- -------- -------- -------- ------ -------- -------- Net income (loss)...... $ 2,862 $(2,282) $ 4,816 $ 5,396 $ (2,472) $ 120 $ 53 $ 3,097 ======= ======= ======== ======== ======== ====== ======== ======== Basic net income per common share.......... -- $ 0.12(F) ======= ======== Diluted net income per common share.......... -- $ 0.12(F) ======= ========
- -------- (A) Reflects the audited historical condensed combined statement of operations of the Company for the year ended December 31, 1997. (B) Reflects the pre-acquisition operations of the management operations and leases acquired during 1997 as if they were acquired at the beginning of the year. The pre-acquisition operations were obtained from each entity's pre-acquisition financial statements. Also reflects adjustments to (i) record pro forma depreciation and amortization at MeriStar Hotels' cost basis for its acquisitions, (ii) record interest expense of $2,775 at 9.25% relating to the $30,000 drawn from MeriStar Hotels' credit facilities, (iii) adjust minority interest for the effects of the acquisitions and (i) and (ii), and (iv) record income taxes at 40% in conjunction with the change in tax status to a C-corporation. (C) Reflects the execution of the Participating Leases to (i) present a full year of hotel operations for hotels leased from CapStar, (ii) eliminate $7,238 of management fee revenue earned from CapStar-owned hotels, (iii) adjust minority interest for the effects of (i) and (ii), and (iv) record income taxes at 40%. Lease expense was calculated based on contractual terms of existing leases or expected terms of leases that will be entered into concurrently with the Merger. 25 (D) Reflects adjustments for the acquisition of AGH Leasing and AGHI for (i) pro forma AGH Leasing operations and (ii) the historical operating activity of AGHI for the year. Pro forma financial statements of AGH Leasing and the historical financial statements of AGHI are included elsewhere in this prospectus. (E) Other adjustments for the acquisition reflect (i) elimination of historical management fees earned by AGHI from the AGH Owned Hotels of $1,691, (ii) elimination of pro forma management fees incurred by AGH Leasing for AGHI services of $7,355, (iii) elimination of management advisory services fees of $2,227 that will not be incurred in the future (as the management advisory contract terminates upon sale of AGHI and the Company will perform these functions internally with existing management) net of $1,125 of additional general and administrative costs expected to be incurred upon the Spin-Off and acquisition, (iv) amortization of $3,000 on intangible assets acquired in the purchase, (v) interest expense of $3,238 relating to the $35,000 draw from MeriStar Hotels' credit facilities net of historical AGH Leasing and AGHI interest expense of $264 will not be incurred upon acquisition, (vi) minority interest adjusted for (i) through (v), and (vii) income taxes at 40%. (F) Pro forma basic and diluted net income per common share has been calculated using 24,867,205 shares of Common Stock. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's financial condition and results of operations both on a pro forma basis as of March 31, 1998 and December 31, 1997 and for the periods then ended and on a historical basis as of March 31, 1998 and 1997 and December 31, 1997 and for the periods then ended reflect differing numbers of managed and leased hotels throughout the periods. The historical results of operations for the years ended December 31, 1996 and 1995 reflect the same number of managed hotels; however, the number of rooms under management increased significantly during 1996. The following table outlines the Company's pro forma and historical portfolio of managed and leased hotels:
THIRD-PARTY CAPSTAR HOTELS LEASED HOTELS MANAGED HOTELS MANAGED TOTAL ---------------- ------------- ------------ ------------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------- -------- ------ ------ ------ ----- ------ ------ Pro Forma: March 31, 1998...... -- -- 146 32,654 55 9,822 201 42,476 December 31, 1997... -- -- 146 32,654 55 9,822 201 42,476 Historical: March 31, 1998...... 55 14,414 45 6,410 40 6,899 140 27,723 December 31, 1997... 47 12,019 40 5,687 27 4,631 114 22,337 March 31, 1997...... 24 6,348 -- -- 28 4,482 52 10,830 December 31, 1996... 19 5,166 -- -- 28 4,619 47 9,785 December 31, 1995... 6 2,101 -- -- 41 6,089 47 8,190
The increases described above affect the comparability of the Company's financial condition and results of operations for these pro forma and historical periods. FINANCIAL CONDITION PRO FORMA MARCH 31, 1998 COMPARED WITH HISTORICAL MARCH 31, 1998 Total assets increased by $114.2 million to $198.9 million at March 31, 1998 on a pro forma basis from $84.7 million at March 31, 1998 on a historical basis. The increase is primarily due to the proposed acquisition of AGH Leasing and AGHI for $95 million. The remaining increase reflects primarily the net effect of the transactions to finance the acquisition of AGH Leasing and AGHI and to execute the leases on CapStar-owned hotels. Total liabilities increased by $84.6 million to $123.8 million at March 31, 1998 on a pro forma basis from $39.2 million on a historical basis. This overall increase was primarily due to the Company's draws on its revolving credit facilities of $65.0 million to partially finance both the Spin-Off and the acquisition of AGH Leasing and AGHI. The remaining increase reflects the net effect of this transaction to complete the Spin-Off and to execute the leases on CapStar-owned hotels. Minority interests increased by $12.0 million to $15.8 million on a pro forma basis from $3.8 million at March 31, 1998 on a historical basis. This increase was due to $11.2 million in REIT OP Units issued to third parties to finance the acquisition of AGH Leasing and AGHI and allocations to minority interests in the Spin-Off. HISTORICAL MARCH 31, 1998 COMPARED WITH HISTORICAL DECEMBER 31, 1997 Total assets increased by $0.3 million to $84.7 million at March 31, 1998 from $84.4 million at December 31, 1997. Total liabilities decreased by $0.5 million to $39.2 million at March 31, 1998 from $39.7 million at December 31, 1997. There were no material changes in the Company's financial condition. 27 RESULTS OF OPERATIONS PRO FORMA FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH HISTORICAL FOR THE THREE MONTHS ENDED MARCH 31, 1998 Total revenue increased by $216.1 million to $246.6 million for the three- month period ended March 31, 1998 on a pro forma basis compared to $30.1 million for the three-month period ended March 31, 1998 on a historical basis. Operating expenses increased to $251.2 million for the three-month period ended March 31, 1998 on a pro forma basis from $28.8 million for the three- month period ended March 31, 1998 on a historical basis. These increases result primarily from the increase in total leased and managed hotels on a pro forma basis, as compared to a historical basis. Net operating income (loss) decreased to $(6.7) million for the three-month period ended March 31, 1998 on a pro forma basis from $0.8 million for the three-month period ended March 31, 1998 on a historical basis and EBITDA decreased to $(3.5) million for the three-month period ended March 31, 1998 on a pro forma basis from $1.8 million for the three-month period ended March 31, 1998 on a historical basis. These decreases relate primarily to the seasonal nature of operations of the leased hotels (whose operations are included in the Company's financial statements) on a pro forma basis. Net interest expense increased by $1.5 million to $2.0 million for the three-month period ended March 31, 1998 on a pro forma basis from $0.5 million for the three-month period ended March 31, 1998 on a historical basis. This increase results from the interest expense on the pro forma outstanding balance on the credit facility. Minority interest decreased by $1.1 million to $(1.0) million for the three- month period ended March 31, 1998 on a pro forma basis due to the allocation of a proportionate amount of loss to the minority interests. The pro forma statement of operations for 1998 reflects income tax expense at an effective rate of 40 percent, as a result of the change in tax status to a C-Corporation. HISTORICAL FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH HISTORICAL FOR THE THREE MONTHS ENDED MARCH 31, 1997 Total revenue increased by $29.0 million or 2,636% to $30.1 million in the three-month period ended March 31, 1998 compared to $1.1 million in the three- month period ended March 31, 1997. This increase results from revenue of $26.0 million from hotels leased subsequent to March 31, 1997 and an increase of $3.0 million in management fees and other revenue. The Company did not lease any hotels as of March 31, 1997. The increase in revenue from leased hotels is primarily due to the increase in the number of leased hotels in 1998. The increase in management fees and other revenue is primarily due to the increase in number of managed hotels in 1998. Hotel management and other revenue earned by the Company from hotels owned by CapStar were $3.1 million or 10% of total revenue in the three-month period ended March 31, 1998, and $0.3 million or 27% of total revenue in the three-month period ended March 31, 1997. Operating expenses increased to $28.8 million in the three-month period ended March 31, 1998 compared to $2.3 million in the three-month period ended March 31, 1997. The increase reflects the increase in the number of managed hotels and the hotel leases acquired subsequent to March 31, 1997, which resulted in and includes the costs of additional personnel and other administrative costs incurred in conjunction with the Company's growth. Net operating income increased by 215% to $1.3 million in the three-month period ended March 31, 1998 compared to a net operating loss of $1.2 million in the three-month period ended March 31, 1997 and earnings before interest EBITDA grew to $1.8 million in the three-month period ended March 31, 1998 from $(1.1) million in the three-month period ended March 31, 1997. These increases resulted primarily from the increase in the number of managed hotels and the hotel leases acquired subsequent to March 31, 1997, offset partially by the costs of additional personnel and other administrative costs incurred as described above. 28 Equity in loss of affiliates was $0.5 million in the three-month period ended March 31, 1998, due to the Company's share of net loss of affiliates accounted for using the equity method. The Company acquired all such investments in affiliates subsequent to March 31, 1997. PRO FORMA YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE HISTORICAL YEAR ENDED DECEMBER 31, 1997 Total revenue increased by $925.3 million to $949.1 million in 1997 on a pro forma basis compared to $23.8 million in 1997 on a historical basis. Operating expenses increased to $937.7 million in 1997 on a pro forma basis from $20.9 million in 1997 on a historical basis. Net operating income increased to $6.2 million in 1997 on a pro forma basis compared to $3.0 million in 1997 on a historical basis, and earnings before interest expense, income taxes, depreciation and amortization ("EBITDA") increased to $16.1 million in 1997 on a pro forma basis from $3.6 million in 1997 on a historical basis. These increases result primarily from the increase in total leased and managed hotels on a pro forma basis, as compared to a historical basis. Net interest expense increased by $5.2 million in 1997 on a pro forma basis from $0.01 million in 1997 on a historical basis. This increase results from the interest expense on the pro forma outstanding balance on the credit facilities. Minority interest increased by $0.9 million in 1997 on a pro forma basis from $0.1 million in 1997 on a historical basis as a result of the net effect of the changes described above and the issuance of the REIT OP Units in connection with the acquisition of AGH Leasing and AGHI. The pro forma statement of operations for 1997 reflects income tax expense at an effective rate of 40 percent, as a result of the change in tax status to a C-Corporation. HISTORICAL YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE HISTORICAL YEAR ENDED DECEMBER 31, 1996 Total revenue increased by $16.7 million or 235% to $23.8 million in 1997 compared to $7.1 million in 1996. The increase results from revenue of $11.8 million from hotel leases acquired in 1997 and an increase of $4.9 million in management fees and other revenue. The Company did not lease any hotels in 1996. The increase in management fees and other revenue is primarily due to the increase in the number of managed hotels in 1997 and additional fees resulting from improved operations of the managed hotels. Hotel management and other revenue earned by the Company from hotels owned by CapStar were $7.2 million or 30% of total revenue in 1997, and $2.6 million or 37% of total revenue in 1996. Operating expenses increased to $20.9 million in 1997 from $6.5 million in 1996. This increase reflects the increase in the number of managed hotels and the hotel leases acquired in 1997, which resulted in includes the costs of additional personnel and other administrative costs incurred in conjunction with the Company's growth. Net operating income increased by 430% to $3.0 million in 1997 compared to $0.6 million in 1996 and EBITDA grew to $3.7 million in 1997 from $0.9 million in 1996. These increases resulted primarily from the increase in the number of managed hotels and the hotel leases acquired in 1997, offset partially by the costs of additional personnel and other administrative costs incurred as described above. Minority interests of $0.1 million in 1997 are due to the Company's allocated portion of minority interests related to the REIT OP Units issued to third parties in 1997. 29 HISTORICAL YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE HISTORICAL YEAR ENDED DECEMBER 31, 1995 Total revenue increased to $7.1 million in 1996 from $5.4 million in 1995. The growth in management fees and other revenues between 1995 and 1996 reflects the increase in the number of hotel rooms managed and additional fees resulting from improved operations of the managed hotels and new services offered, such as tour and travel services. Hotel management and other revenue earned by the Company from hotels owned by CapStar were $2.6 million or 37% of total revenue in 1996, and $0.9 million or 17% of total revenue in 1995. Operating expenses increased to $6.5 million in 1996 from $4.9 million in 1995. This increase reflects the increase in the number hotel rooms under management, which resulted in costs of additional personnel and other administrative costs incurred in conjunction with the Company's current and anticipated growth. Net operating income increased to $0.6 million in 1996 compared to $0.5 million in 1995 and EBITDA grew to $0.9 million in 1996 from $0.6 million in 1995. These increases resulted primarily from the increase in the number of hotel rooms under management and additional fees earned as described above, offset partially by the costs of additional personnel and other administrative costs incurred as described above. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity have been cash on hand, cash generated from operations, capital contributions from CapStar and the issuance of OP Units by CapStar's operating partnership subsidiaries. The Company's continuing operations have been funded through cash generated from management and hotel leasing operations. Business acquisitions and investments in affiliates are financed through capital contributions and the issuance of OP Units by CapStar's operating partnership subsidiaries. At December 31, 1997, the Company had $2.5 million in cash and cash equivalents, an increase of $2.2 million from $0.3 million at December 31, 1996. Net cash provided by operations increased to $4.5 million compared to $1.2 million in 1996, mainly due to the increase in managed hotels and the hotel leases acquired in 1997. The Company used $6.5 million of cash in investing activities in 1997, primarily for investments in notes receivable, investments in affiliates and purchases of fixed assets. Net cash provided by financing activities was $4.2 million in 1997. Non-cash capital contributions of $34.6 million were made to the Company related to the acquisition of Winston and its investments in affiliates. CapStar has conducted a review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and has initiated an implementation plan to resolve the issue. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of CapStar's and the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. CapStar presently believes that, with modifications to existing software and converting to new software, the Year 2000 problem will not pose significant operational problems for the computer systems of CapStar or the Company as so modified and converted. Additionally, CapStar does not expect the Year 2000 problem to have a material effect on CapStar's or the Company's financial position or results of operations. However, if such modifications and conversions are not completed timely, the Year 2000 problem may have a material impact on the financial position and operations of CapStar and the Company. As described more fully elsewhere in this document (see "The Merger and the Spin-Off"), the Company is expected to be spun-off from CapStar in anticipation of CapStar's proposed Merger with AGH. To initially capitalize itself after the Spin-Off, the Company will draw $30.0 million from its credit facilities to be provided by the REIT and certain third-party lenders and receive a net cash contribution of $18.4 million from CapStar upon forgiveness of certain amounts due to CapStar as of the date of the Spin-Off. In conjunction with the Merger, the Company has entered into the Lessee- Manager Acquisition Agreement to acquire substantially all of the assets and liabilities of AGHI and AGH Leasing for a combined purchase price consisting of approximately $83.8 million in cash and approximately $11.2 million in the form of OP Units of 30 Hotels OP which are convertible into Common Stock. The $83.8 million in cash will consist of a combination of $65.0 million drawn on MeriStar Hotels' credit facilities plus $18.8 of available cash. Specifically, the acquisitions will comprise (i) substantially all of the assets and certain liabilities of AGHI for a cash purchase price of $10 million; and (ii) 100% of the partnership interests in AGH Leasing for a purchase price of $85 million, consisting of approximately $73.8 million in cash and $11.2 million in OP Units of Hotels OP. Upon consummation of the transactions contemplated by the Lessee-Manager Acquisition Agreement, the Company will become the lessee and manager of all of the AGH Hotels and certain other hotels, in addition to currently acting as manager for the CapStar Hotels and other third party arrangements. It is a condition to the closing of the Merger that the transactions set forth in the Lessee-Manager Acquisition Agreement are consummated. To finance the transactions set forth in the Lessee-Manager Acquisition Agreement, the Company expects to enter into two $50 million revolving credit facilities, one through the REIT and the other through third-party lenders, at an interest rate no greater than LIBOR plus 350 basis points, with other customary terms and conditions. It is a condition to the closing of the Merger that the Company receive a commitment from the REIT's Operating Partnership for such a credit facilities. In addition to funding the Lessee-Manager Acquisition Agreement transactions, the available capacity under the new credit facilities are expected to be used by the Company to pursue investments in additional joint ventures and to secure additional third-party management arrangements, as discussed above. Following the Merger, pursuant to the Intercompany Agreement the Company will have a right of first refusal to become the lessee of any real property acquired by the REIT. In addition, the Intercompany Agreement prohibits the Company from making certain acquisitions or investments in real estate unless such acquisitions or investments are first offered to the REIT and the REIT elects not to pursue such acquisitions or investments. As a result of these provisions, the Company's future operations immediately following the Spin-Off and the Merger are expected to rely significantly on the REIT to identify business opportunities for the Company. There is no assurance that MeriStar will identify opportunities for the Company or that any opportunities that either identifies will be within the Company's financial, operational or management parameters. Also, the Company's current operations after the Merger are predominantly with its affiliate, the REIT; based on pro-forma operating results for 1997, approximately 89% of the Company's revenue is expected to come from hotels owned by and leased from the REIT. Accordingly, the Company's current operations are highly dependent upon the performance of the REIT Owned Hotels. Following the Spin-Off, Merger and related transactions described above, the Company believes cash generated by operations, together with its new borrowing capacity under its credit facility, will be sufficient to fund its existing working capital, ongoing capital expenditures, debt service requirements, and future acquisitions and investment opportunities. The Company believes these sources of capital are sufficient to provide for the Company's short-term capital needs. Under the terms of the Participating Leases between the Company and the REIT, the REIT will generally be required to fund significant capital expenditures at the Hotels. Consequently, the Company's ongoing capital expenditures are likely to be substantially reduced from the levels of such expenditures prior to the Formation Transactions. Additionally, the Company expects to finance future acquisitions and investments though a combination of cash generated by operations, borrowing capacity under the credit facility, and the issuance of OP Units and/or Common Stock. The Company believes these sources of capital will be sufficient to provide for the Company's long-term capital needs. SEASONALITY Demand in the lodging industry is affected by recurring seasonal patterns. Demand is lower in the winter months due to decreased travel and higher in the spring and summer months during peak travel season. 31 Therefore, the Company's operations are seasonal in nature. Assuming other factors remain constant, the Company has lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters. INFLATION The rate of inflation has not had a material effect on the revenues or operating results of the Company during the three most recent fiscal years. 32 THE COMPANY The Company has been formed to become the lessee, manager and operator of various hotel assets, including those currently owned, leased and managed by CapStar and its affiliates. Immediately following the Spin-Off, the Company will acquire 100% of the partnership interests in the third-party lessee of most of the hotels owned by AGH and substantially all of the assets and certain liabilities of the third-party manager of most of the hotels owned by AGH, pursuant to an Acquisition Agreement, dated as of March 15, 1998 (the "Lessee-Manager Acquisition Agreement"). See "The Merger and the Spin-Off--The Lessee-Manager Acquisition Agreement." CapStar and AGHI have been two of the fastest growing operators of upscale, full-service hotels in North America based on rooms under management. Following consummation of the Formation Transactions, the Company is expected to be one of the largest independent hotel management companies in the United States based on rooms under management. The Company will be the successor-in-interest and will assume all of the rights and liabilities with respect to hotel management contracts and operating leases of CapStar, AGHI and AGH Leasing. Pursuant to the Formation Transactions, the Company will lease and/or manage 201 Hotels containing 42,476 rooms. Of the Hotels, MeriStar Hotels will (i) lease and manage 99 REIT Owned Hotels, containing 25,854 rooms, (ii) lease 47 (of which they managed 36) hotels (that are not REIT Owned Hotels) containing 6,800 rooms, (the "Leased Hotels") and (iii) manage an additional 55 hotels (that are not REIT Owned Hotels) containing 9,822 rooms (the "Managed Hotels"). The Hotels are located throughout the United States and Canada including most major metropolitan areas and rapidly growing secondary cities. The Hotels include hotels operated under nationally recognized brand names such as Hilton(R), Sheraton(R), Westin(R), Marriott(R), Doubletree(R) and Embassy Suites(R). The Company's business strategy will be to renovate, reposition and operate each hotel according to a business plan specifically tailored to the characteristics of the hotel and its market. MeriStar Hotels will capitalize on its management experience and expertise by continuing to secure additional management contracts and improving the operating performance of the hotels under its management. The Company's senior management team, with an average of 20 years of lodging industry experience, has successfully managed hotels in all segments of the lodging industry, with particular emphasis on upscale, full-service hotels. Management attributes its management success to its ability to analyze each hotel as a unique property and identify those particular cash flow growth opportunities which each hotel presents. The Company's principal operating objectives will be to continue to analyze each hotel as a unique property, to generate higher revenue per available room ("RevPAR"), to increase average daily rates ("ADR") and to increase net operating income while providing its hotel guests with high-quality service and value. In addition to assuming the rights and obligations under all of the operating leases and management agreements of CapStar, AGHI and AGH Leasing, MeriStar Hotels will assume the interest of CapStar in two joint ventures. The Company expects to form additional strategic alliances with institutional and private hotel owners and to secure additional fee management arrangements. From time to time, the Company may also acquire certain hotel assets that the REIT could not, or for strategic reasons does not wish to, own. Management believes that the upscale, full-service segment of the lodging industry is the most attractive segment in which to lease and manage hotels and therefore intends to focus its efforts on attaining management contracts for such properties. The upscale, full-service segment is attractive for several reasons. First, upscale, full-service hotels appeal to a wide variety of customers, thus reducing the risk of decreasing demand from any particular customer group. Secondly, such hotels have particular appeal to both business executives and upscale leisure travelers, customers who are generally less price sensitive than travelers who use limited-service hotels. Finally, full- service hotels require a greater depth of management expertise than limited- service hotels, and the Company believes that its superior management skills provide it with a significant competitive advantage in their operation. THE INTERCOMPANY AGREEMENT RIGHTS OF FIRST REFUSAL The Company believes that the Intercompany Agreement represents an attractive opportunity because (i) the REIT Owned Hotels are upscale, full- service hotels under nationally recognized brand names located in major metropolitan or growing secondary markets and (ii) they have attractive current returns and potential for significant revenue and cash flow growth through implementation of the Company's operating strategy. 33 Pursuant to the Intercompany Agreement, subject to certain exceptions, the Hotel Parties will have a right of first refusal to become the lessee of any real property acquired by the REIT Parties if the REIT Parties determine that, consistent with the REIT's status as a real estate investment trust, the REIT Parties are required to enter into such a lease arrangement; provided that the Hotel Parties or an entity controlled by the Hotel Parties is, as determined by the REIT in its sole discretion, qualified to be the lessee based on experience in the industry and financial and legal qualifications. As to opportunities for the Hotel Parties to become the lessee of any assets under a lease arrangement, the Intercompany Agreement provides that the REIT Parties must provide the Hotel Parties with written notice of the lessee opportunity. During the 30 days following such notice, the Hotel Parties have a right of first refusal with regard to the offer to become a lessee and the right to negotiate with the REIT Parties on an exclusive basis regarding the terms and conditions of the lease. If a mutually satisfactory agreement cannot be reached within the 30-day period, or if the Hotel Parties indicate that they are not interested in pursuing the lessee opportunity, the REIT Parties may offer the opportunity to others for a period of one year thereafter, at a price and on terms and conditions that are not more favorable to such other parties than the price and terms and conditions proposed by the REIT Parties to the Hotel Parties, before it must again offer the opportunity to the Hotel Parties in accordance with the procedures specified above. The REIT Parties and the Hotel Parties will each establish, following the closing of the Merger, a leasing committee which will review all hotel leases to be entered into between the REIT Parties and the Hotel Parties. The REIT Parties' leasing committee will consist of directors of the REIT that are not also directors of MeriStar Hotels and the Hotel Parties' leasing committee will consist of directors of MeriStar Hotels that are not also directors of the REIT. The Hotel Parties will agree not to acquire or make (i) investments in real estate which, for purposes of the Intercompany Agreement, includes the provision of services related to real estate and investments in hotel properties, real estate mortgages, real estate derivatives or entities that invest in real estate assets or (ii) any other investments that may be structured in a manner that qualifies under the federal income tax requirements applicable to real estate investment trusts unless in either case they have provided written notice to the REIT Parties of the material terms and conditions of the acquisition or investment opportunity, and the REIT Parties have determined not to pursue such acquisitions or investments either by providing written notice to the Hotel Parties rejecting the opportunity within 20 days from the date of receipt of notice of the opportunity or by allowing such 20-day period to lapse. The Hotel Parties also have agreed to assist the REIT Parties in structuring and consummating any such acquisition or investment which the REIT Parties elect to pursue, on terms determined by the REIT Parties. PROVISION OF SERVICES The Hotel Parties will provide the REIT Parties with certain services as the REIT Parties may reasonably request from time to time, including administrative, corporate, accounting, financial, insurance, legal, tax, data processing, human resources and operational services. The REIT Parties will compensate the Hotel Parties for services provided in an amount determined in good faith by the Hotel Parties as the amount an unaffiliated third party would charge the REIT Parties for comparable services. EQUITY OFFERINGS If either the REIT Parties or the Hotel Parties desire to engage in a securities issuance (the "Issuing Party"), then such Issuing Party will give notice to such other party (the "Non-Issuing Party") as promptly as practicable of their desire to engage in a securities issuance. The Non- Issuing Party will cooperate with the Issuing Party to effect any securities issuance of the Issuing Party by assisting in the preparation of any registration statement or other document required in connection with such issuance and, in connection therewith, providing the Issuing Party with such information as may be required to be included in such registration statement or other document. TERM The Intercompany Agreement will terminate upon the earlier of (a) the tenth anniversary of the date of the Intercompany Agreement, and (b) a change in ownership or control of MeriStar Hotels. 34 USE OF PROCEEDS The Company's net proceeds from the Rights Offering will depend on the number of Rights exercised and the Subscription Price. The number of Rights exercised will range from a minimum of zero to a maximum of 8,310,638; the Subscription Price will be equal to 95% of the average of the daily high and low prices of the Common Stock for the period of five consecutive trading days immediately following the third Trading Day after the date the Common Stock opens for trading. The Company also reserves the right, at its sole option, to cancel the Rights Offering if the Subscription Price is less than . . Based on an assumed Subscription Price of $2.85 per share, the net proceeds (net of transaction expenses of approximately $250,000) will range from a minimum of zero to a maximum of $23.7 million. The Company currently expects to use the net proceeds from the Rights Offering to repay existing indebtedness under the Company's two $50 million revolving credit facilities, which are expected to bear interest at a rate no greater than LIBOR plus 350 basis points, or for general corporate purposes. The pro forma balance outstanding on the credit facility prior to repayment of any amounts with the net proceeds of the Rights Offering is expected to be $65.0 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 35 CAPITALIZATION The following table sets forth the historical and pro forma capitalization of the Company as of March 31, 1998. The pro forma capitalization is adjusted to reflect the Formation Transactions. The information below should be read in conjunction with the historical combined financial statements and notes thereto of the Company and the Unaudited Pro Forma Financial Statements and notes thereto of the Company included elsewhere in this Prospectus.
AS OF MARCH 31, 1998 (IN THOUSANDS, EXCEPT SHARE DATA) ---------------------- PRO FORMA HISTORICAL ----------- ---------- (UNAUDITED) LIABILITIES AND MINORITY INTEREST: Credit facilities.................................. $ 65,000 $ -- Capital leases and other debt...................... 776 776 Minority interest.................................. 15,804 3,835 -------- ------- Total liabilities and minority interest.......... 81,580 4,611 -------- ------- OWNERS'/STOCKHOLDERS' EQUITY: Owners' Equity..................................... -- 41,667 Preferred Stock ($0.01 par value, 10,000,000 shares authorized, no shares issued or outstanding)...... -- -- Common Stock ($0.01 par value, 100,000,000 shares authorized 24,890,355 shares issued and outstand- ing on a pro forma basis)......................... 249 -- Additional paid-in capital and retained earnings... 59,022 -- -------- ------- Total owners'/stockholders' equity............... 59,271 41,667 -------- ------- Total capitalization............................. $140,851 $46,278 ======== =======
DIVIDEND POLICY The Company has not paid any cash dividends on the Common Stock and does not anticipate that it will do so in the foreseeable future. The Company intends to retain earnings to provide funds for the continued growth and development of the Company's business. Loan agreements and leases to be entered into by the Company may restrict the Company's ability to pay dividends on the Common Stock. Any determination to pay cash dividends in the future will be at the discretion of the Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors. 36 THE MERGER AND THE SPIN-OFF GENERAL The Company will be spun off, as further described below, to become the lessee, manager and operator of various hotel assets, including those currently owned, leased and managed by CapStar and certain of its affiliates. CapStar intends to transfer or cause to be transferred certain assets and liabilities constituting the hotel management and leasing business currently operated by CapStar and its subsidiaries to MeriStar Hotels, a wholly owned subsidiary of CapStar. CapStar then intends to distribute to its stockholders of record on the Spin-Off Record Date on a share-for-share basis all of the outstanding capital stock of MeriStar Hotels in the Spin-Off. The Spin-Off will provide the stockholders of CapStar as of the Spin-Off Record Date with the opportunity to participate in the benefits of both the ownership of real estate through the REIT, and the leasing and management operations of MeriStar Hotels. Pursuant to the Merger Agreement, CapStar, after the Spin-Off, will merge with and into AGH, with the result that (a) AGH will be the surviving corporation operating under the name MeriStar Hospitality Corporation and (b) each outstanding share of CapStar Common Stock will be converted into 1.0 share of REIT Common Stock, and each outstanding share of AGH Common Stock will be converted into 0.8475 shares of REIT Common Stock. Immediately following the Spin-Off and the effective date of the Merger, the Company will acquire 100% of the partnership interests in AGH Leasing, the third-party lessee of most of the hotels owned by AGH, and substantially all of the assets and certain liabilities of AGHI, the third-party manager of most of the hotels owned by AGH, pursuant to the Lessee-Manager Acquisition Agreement. Pursuant to the Intercompany Agreement, the Hotel Parties and the REIT Parties will provide each other with reciprocal rights to participate in certain transactions entered into by such parties. In particular, subject to certain exceptions, the Hotel Parties will have a right of first refusal to become the lessee of any real property acquired by the REIT Parties if the REIT Parties determine that, consistent with the REIT's status as a real estate investment trust, the REIT Parties are required to enter into such a lease arrangement; provided that the Hotel Parties or an entity that the Hotel Parties control is, as determined by the REIT in its sole discretion, qualified to be the lessee. In addition, the Hotel Parties intend to pursue additional opportunities with others in the future. See "The Company--The Intercompany Agreement." The Intercompany Agreement is structured to provide the REIT and the Company with mutually beneficial rights and obligations so that investors in both companies may enjoy the economic benefit of the entire enterprise. This is commonly known as the "paper-clip" REIT structure. AGH and CapStar believe that the REIT will be the first publicly-traded lodging REIT to utilize the "paper-clip" REIT structure. However, investors should be aware that because of the independent trading of the REIT and the Company, stockholders may develop divergent interests which could lead to conflicts of interest. This divergence of interests could also reduce the anticipated benefits of the relationship between the two companies. See "Risk Factors-- Paper Clip Structure Risks." BACKGROUND OF AND REASONS FOR THE SPIN-OFF In order for the REIT to maintain its status as a REIT for federal income tax purposes, it may not operate hotels. The Company will be formed to own assets that the REIT could not itself own and to succeed to CapStar's hotel management and leasing business, by becoming the lessee, manager and operator of the various hotel assets, and to perform the services more fully described in the Intercompany Agreement. The Spin-Off, together with the Rights Offering, will provide the stockholders of CapStar as of the Spin-Off Record Date with the opportunity to participate in the benefits of both the ownership of real estate through the REIT, and the leasing and management operations of MeriStar Hotels. MeriStar Hotels will function principally as a hotel leasing, management and operating company, while the REIT will focus on investment in real estate assets. The Spin-Off is designed to provide CapStar's existing stockholders with the long-term benefits of ownership in an entity devoted to the conduct of operating business 37 activities in addition to their investment interest in the REIT itself. A small number of real estate investment trusts, operating under tax provisions that no longer are available to newly formed real estate investment trusts, have shares that are "paired" or "stapled" with shares of a related operating company, and therefore cannot be owned or transferred independently. The shares of MeriStar Hotels and the REIT are not, and will not be, paired or stapled in any manner. Because the shares of the REIT and MeriStar Hotels can be owned and transferred separately and independently of each other, the REIT and MeriStar Hotels will not provide a paired investment on an ongoing basis to investors who purchase or sell shares of only one company or the other. Although the Spin-Off will not be effected unless the Merger is approved by the stockholders of CapStar and AGH and all other conditions precedent have been satisfied or waived, the Spin-Off is separate from the Merger and the shares of MeriStar Hotels to be received by holders of CapStar Common Stock in the Spin-Off do not constitute a part of the Merger consideration. The stockholders of CapStar are being asked to vote on the approval and adoption of the Merger Agreement, and are not being asked to vote on the Spin-Off. RESTRUCTURING AND SPIN-OFF GENERAL In order to effectuate the Spin-Off, CapStar will effect a series of mergers, asset and stock transfers and liability assumptions among itself and its subsidiaries (the "CapStar OP Restructuring"). The purpose and effect of the CapStar OP Restructuring is to separate substantially all of the management and leasing business of CapStar from the real estate investments of CapStar. Substantially all of CapStar's assets are currently held indirectly by and operated through CapStar Management and CapStar Management II, CapStar's subsidiary operating partnerships. CapStar is the sole general partner of CapStar Management, and CapStar, certain wholly owned subsidiaries of CapStar (the "CapStar LP Entities"), and certain third parties are the sole limited partners of CapStar Management. CapStar General Corp., a wholly-owned subsidiary of CapStar ("CapStar General"), is the sole general partner of CapStar Management II, and CapStar Limited Corp., a wholly owned subsidiary of CapStar General ("CapStar Limited"), and certain third parties are the sole limited partners of CapStar Management II. The partnership agreements of CapStar Management and CapStar Management II give the general partner full control over the business and affairs of the partnerships. THE CONTRIBUTIONS Prior to the effectiveness of the Merger, CapStar Management and CapStar Management II will effectuate the following transactions (the "Contributions"): 1. Each of the CapStar LP Entities, CapStar General and CapStar Limited will merge with and into CapStar; 2. Each of CapStar Management and CapStar Management II will convert into a limited liability company (respectively, "CapStar Management LLC" and "CapStar Management II LLC"). 3. CapStar Management LLC will contribute all of its hotel related assets together with certain other assets, subject to all of its liabilities except as set forth in the Merger Agreement, to CapStar Hotel Operating Company, L.L.C., a newly-formed Delaware limited liability company ("CapStar Hotel LLC"), in exchange for interests in CapStar Hotel LLC and CapStar Management II LLC will contribute all of its hotel related assets together with certain other assets, subject to all of its liabilities except as set forth in the Merger Agreement, to CapStar Hotel Operating Company, L.L.C., a newly-formed Delaware limited liability company ("CapStar Hotel II LLC"), in exchange for interests in CapStar Hotel II LLC; 4. CapStar Management will contribute all its management and substantially all its leasehold related assets, together with certain other assets (including cash), subject to $30 million in indebtedness and certain other liabilities, to Hotels OP in exchange for interests in Hotels OP and CapStar Management II LLC will 38 contribute all its management and substantially all its leasehold related assets, together with certain other assets (including cash), subject to $30 million in indebtedness and certain other liabilities, to MeriStar H&R Operating Company, L.P., a newly-formed Delaware limited liability company ("Hotels OP II"), in exchange for interests in Hotels OP II; 5. CapStar Management LLC will redeem CapStar's interests in CapStar Management LLC in exchange for CapStar's pro rata share of its interests in Hotels OP and CapStar Hotel LLC and CapStar Management II LLC will redeem CapStar's interests in CapStar Management II LLC in exchange for CapStar's pro rata share of its interests in Hotels OP II and CapStar Hotel II LLC; and 6. CapStar will contribute its interest (the "Interests") in, and all of its rights and title in and to substantially all of the assets and business of, Hotels OP and Hotels OP II represented by such Interests (collectively, the "Contributed Assets") to MeriStar Hotels in exchange for 100% of the outstanding capital stock of MeriStar Hotels. 7. MeriStar Hotels will assume all of the liabilities, obligations, debt and commitments arising out of its ownership of the Interest, the Contributed Assets and the operation of the business conducted by Hotels OP and Hotels OP II (the "Assumed Liabilities"), and CapStar will retain, or will cause one of its subsidiaries to retain, all other liabilities. THE SPIN-OFF; RECORD DATE Upon completion of the Contributions, the Spin-Off will be effected by the distribution to each holder of record of CapStar Common Stock as of the close of business on the Spin-Off Record Date of one share of Common Stock for every share of CapStar Common Stock held by such holder. As a result of the Spin- Off, the stockholders of record of CapStar at the closing of business on the Spin-Off Record Date will own all of the outstanding Common Stock. Following the Spin-Off, Hotels OP II will merge with and into Hotel OP, with Hotel OP as the surviving entity. Management estimates the initial value of the Common Stock will be between $2.50 and $3.50 per share. This initial value per share estimate was derived by applying assumed market multiples to various, pro forma financial reporting measures for the Company, including earnings before interest expense, income taxes, depreciation and amortization, and net income. Management developed the assumed market multiples through discussions with financial advisors and analysis of current market multiples for comparable companies. LISTING ON THE NYSE The Common Stock to be issued pursuant to the Spin-Off has been approved for listing on the NYSE, under the symbol "MMH", subject to official notice of issuance. USE OF "MERISTAR" NAME Pursuant to the terms of the Intercompany Agreement, the Company will grant to the REIT a non-exclusive, royalty-free license to use "MeriStar Hospitality Corporation" and other names that include "MeriStar" (the "Licensed Property"). Upon termination of the Intercompany Agreement, all rights of the Hotel Parties to the Licensed Property will terminate. See "The Company --The Intercompany Agreement." EMPLOYEES AND EMPLOYEE BENEFIT PLANS On the effective date of the Spin-Off, CapStar will cause MeriStar Hotels to offer employment to certain employees of CapStar, on the same terms and conditions as were in effect immediately prior to the Spin-Off. Any such transfer of employment from CapStar to MeriStar Hotels will not constitute a termination or qualifying event under any severance policy. 39 MeriStar Hotels will establish new employee benefit plans substantially similar to the existing CapStar benefit plans, including but not limited to an Equity Incentive Plan and a Stock Purchase Plan. Employees who currently hold CapStar Stock Options will be granted new stock options in the REIT and MeriStar Hotels. CONDITIONS TO THE SPIN-OFF The obligations of CapStar to consummate the Spin-Off are subject to the satisfaction or waiver of the same conditions to the consummation of the Merger set forth in the Merger Agreement. THE LESSEE-MANAGER ACQUISITION AGREEMENT Pursuant to the Lessee-Manager Acquisition Agreement, following the Spin-Off and immediately after the effective time of the Merger, Hotels OP will acquire: (i) substantially all of the assets and certain liabilities of AGHI for a cash purchase price of $10 million; and (ii) 100% of the partnership interests in AGH Leasing for a purchase price of $85 million, consisting of approximately $73.8 million in cash and approximately $11.2 million in the form of Hotels OP Units convertible into Common Stock. Upon consummation of the transactions contemplated by the Lessee-Manager Acquisition Agreement, Hotels OP will become the lessee and manager of most of the AGH Owned Hotels that are currently leased by AGH Leasing. The REIT and MeriStar Hotels will enter into new lease agreements (the "Participating Leases") with respect to all of the CapStar Owned Hotels and amend the lease agreements with respect to most the AGH Owned Hotels. See "Business--The Participating Leases." It is a condition to the closing of the Merger that the transactions set forth in the Lessee-Manager Acquisition Agreement are consummated. INDEMNIFICATION OBLIGATIONS MeriStar Hotels will indemnify, defend and hold harmless the REIT and its affiliates and any directors, officers, employees and agents of the foregoing, from and against any losses arising out of or resulting from the Assumed Liabilities, the Contributed Assets or the business and operations of Hotels OP. The REIT will indemnify, defend and hold harmless MeriStar Hotels, its affiliates and their respective successors and any directors, officers, employees and agents of the foregoing, from and against any losses arising out of any assets or liabilities retained by the REIT and its affiliates. 40 BUSINESS The Company seeks to increase shareholder value by (i) implementing its operating strategy to improve hotel operations and increase cash flow and (ii) expanding its management business. EXPANSION STRATEGY The Company anticipates that it will continue to expand its portfolio of hotels under management and/or lease by securing additional management contracts and/or leases. The Company will also seek to expand its management operations into other hospitality-related businesses, such as time share properties and conference centers. The Company will attempt to identify promising management candidates located in markets with economic, demographic and supply dynamics favorable to hotel lessees and operators. Through its extensive due diligence process, the Company will select those expansion targets where it believes selective capital improvements and intensive management will increase the hotel's ability to attract key demand segments, enhance hotel operations and increase long-term value. In order to evaluate the relative merits of each investment opportunity, senior management and individual operations teams will create detailed plans covering all areas of renovation and operation. These plans will serve as the basis for the Company's expansion decisions and guide subsequent renovation and operating plans. The Company will seek to lease and/or manage hotels that meet the following criteria: MARKET CRITERIA Economic Growth. The Company will focus on metropolitan areas that are approaching, or have already entered, periods of economic growth. Such areas generally show above average growth in the business community as measured by (i) job formation rates, (ii) population growth rates, (iii) tourism and convention activity, (iv) airport traffic volume, (v) local commercial real estate occupancy, and (vi) retail sales volume. Markets that exhibit these characteristics typically have strong demand for hotel facilities and services. Supply Constraints. The Company will seek lodging markets with favorable supply dynamics for hotel owners and operators, including an absence of current new hotel development and barriers to future development such as zoning constraints, the need to undergo lengthy local development approval processes and a limited number of suitable sites. Other factors limiting the supply of new hotels are the current lack of financing available for new development and the inability to generate adequate returns on investment to justify new development. Geographic Diversification. The Hotels are located in 34 states across the nation, the District of Columbia, the U.S. Virgin Islands and Canada. See "Properties" for additional information regarding the Hotels. The Company will seek to maintain a geographically diverse portfolio of managed hotels to offset the effects of regional economic cycles. HOTEL CRITERIA Location and Market Appeal. The Company will seek to operate hotels that are situated near both business and leisure centers which generate a broad base of demand for hotel accommodations and facilities. These demand generators include (i) airports, (ii) convention centers, (iii) business parks, (iv) shopping centers and other retail areas, (v) sports arenas and stadiums, (vi) major highways, (vii) tourist destinations, (viii) major universities, and (ix) cultural and entertainment centers with nightlife and restaurants. The confluence of nearby business and leisure centers will enable the Company to attract both weekday business travelers and weekend leisure guests. Attracting a balanced mix of business, group and leisure guests to the Hotels helps to maintain stable occupancy rates and high ADRs. Size and Facilities. The Company will seek to operate hotels that contain 200 to 500 guest rooms and include accommodations and facilities that are, or are capable of being made, attractive to key demand segments 41 such as business, group and leisure travelers. These facilities typically include large, upscale guest rooms, food and beverage facilities, extensive meeting and banquet space, and amenities such as health clubs, swimming pools and adequate parking. Potential Performance Improvements. The Company seeks to operate underperforming hotels where intensive management and selective capital improvements can increase revenue and cash flow. These hotels represent opportunities where a systematic management approach and targeted renovations should result in improvements in revenue and cash flow. The Company expects that its relationships throughout the industry will continue to provide it with a competitive advantage in identifying, evaluating and managing hotels that meet its criteria. Management has a record of successfully renovating and repositioning hotels, in situations with varying levels of service, room rates and market types, and the Company plans to continue such renovation programs as its acquires new leases and management contracts. OPERATING STRATEGY The Company's principal operating objectives will be to generate higher RevPAR and to increase net operating income while providing its hotel guests with high-quality service and value. The Company will seek to achieve these objectives by creating and executing management plans that are specifically tailored for each individual Hotel rather than by implementing an operating strategy that is designed to maintain a uniform corporate image or brand. Management believes that custom-tailored business plans are the most effective means of addressing the needs of a given hotel or market. The Company believes that skilled management of hotel operations is the most critical element in maximizing revenue and cash flow in hotels, especially in upscale, full- service hotels. The Company's corporate headquarters will carry out financing and investment activities and provide services to support as well as monitor the Company's on-site hotel operating executives. Each of the Company's executive departments, including Sales and Marketing, Human Resources and Training, Food and Beverage, Technical Services, Development and Corporate Finance, will be headed by an executive with significant experience in that area. These departments will support decentralized decision-making by the hotel operating executives by providing accounting and budgeting services, property management software and other resources which cannot be economically maintained at the individual Hotels. Key elements of the Company's management programs include the following: Comprehensive Budgeting and Monitoring. The Company's operating strategy begins with an integrated budget planning process that is implemented by individual on-site managers and monitored by the Company's corporate staff. Management sets targets for cost and revenue categories at each of the Hotels based on historical operating performance, planned renovations, operational efficiencies and local market conditions. On-site managers coordinate with the central office staff to ensure that such targets are realistic. Through effective and timely use of its comprehensive financial information and reporting systems, the Company will be able to monitor actual performance and rapidly adjust prices, staffing levels and sales efforts to take advantage of changes in the market and to improve yield. Targeted Sales and Marketing. The Company will employ a systematic approach toward identifying and targeting segments of demand for each Hotel in order to maximize market penetration. Executives at the Company's corporate headquarters and property-based managers will divide such segments into smaller subsegments, typically ten or more for each Hotel, and develop narrowly tailored marketing plans to suit each such segment. The Company will support each Hotel's local sales efforts with corporate sales executives who will develop new marketing concepts and monitor and respond to specific market needs and preferences. These executives will be active in implementing on-site marketing programs developed in the central management office. The Company will employ computerized revenue yield management systems to manage each Hotel's use 42 of the various distribution channels in the lodging industry. Management control over those channels, which include franchisor reservation systems and toll-free numbers, travel agent and airline global distribution systems, corporate travel offices and office managers, and convention and visitor bureaus, will enable the Company to maximize revenue yields on a day-to-day basis. Sales teams will be recruited locally and receive incentive-based compensation bonuses. All of the Company's sales managers will complete a highly developed sales training program. Strategic Capital Improvements. The Company and the REIT (through the Intercompany Agreement) will plan renovations primarily to enhance a Hotel's appeal to targeted market segments, thereby attracting new customers and generating increased revenue and cash flow. For example, in many of the Hotels, the banquet and meeting spaces have been or are intended to be renovated and guest rooms have been upgraded with computer ports and comfortable work spaces to better accommodate the needs of business travelers and to increase ADRs. Capital spending decisions will be based on both strategic needs and potential rate of return on a given capital investment. Pursuant to the Intercompany Agreement, the REIT will be primarily responsible for funding capital expenditures. Selective Use of Multiple Brand Names. Management believes that the selection of an appropriate franchise brand is essential in positioning a hotel optimally within its local market. The Company will select brands based on local market factors such as local presence of the franchisor, brand recognition, target demographics and efficiencies offered by franchisors. Management believes that its relationships with many major hotel franchisors places the Company in a favorable position when dealing with those franchisors and allows it to negotiate favorable franchise agreements with franchisors. Management believes that its growth in acquiring management contracts will further strengthen its relationship with franchisors. 43 The following chart summarizes certain information with respect to the national franchise affiliations of the Hotels:
REIT THIRD-PARTY THIRD-PARTY OWNED HOTELS LEASED HOTELS MANAGED HOTELS ------------------- ------------------ ------------------ GUEST % OF GUEST % OF GUEST % OF FRANCHISE ROOMS HOTELS ROOMS ROOMS HOTELS ROOMS ROOMS HOTELS ROOMS - --------- ------ ------ ----- ----- ------ ----- ----- ------ ----- Hilton ................. 5,499 21 21% -- -- -- 225 1 2% Sheraton ............... 2,978 9 11% -- -- -- 167 1 2% Radisson(R) ............ 2,712 9 10% -- -- -- 756 4 8% Doubletree ............. 2,055 6 8% 388 1 6% 363 2 4% Marriott ............... 1,494 4 5% -- -- -- -- -- -- Holiday Inn(R).......... 2,571 12 10% 367 2 5% 1,763 9 18% Embassy Suites ......... 728 3 3% -- -- -- 248 1 3% Westin ................. 1,296 4 5% -- -- -- -- -- -- Wyndham................. 1,122 3 4% 219 1 3% -- -- -- Independent ............ 674 6 3% -- -- -- 1,151 10 12% Four Points(R).......... 213 1 1% -- -- -- 400 1 4% Doubletree Guest Suites(R) ............. 292 2 1% -- -- -- -- -- -- Ramada(R) .............. 665 3 3% -- -- -- 1,037 5 10% Crowne Plaza(R) ........ 715 3 3% -- -- -- 730 2 7% Courtyard(R) ........... 1,044 5 4% 490 3 7% 455 2 5% Hilton Garden Inn....... -- -- -- 474 3 7% -- -- -- Hilton Suites........... -- -- -- -- -- -- 174 1 2% Comfort Suites(R) ...... -- -- -- 277 2 4% 359 3 4% Clarion(R) ............. -- -- -- -- -- -- 432 2 4% Quality Suites(R) ...... -- -- -- 168 1 2% 177 1 2% Residence Inn(R) ....... -- -- -- -- -- -- 391 3 4% Quality Inn(R) ......... -- -- -- -- -- -- 265 2 3% Days Inn(R) ............ -- -- -- -- -- -- 96 1 1% Holiday Inn Express(R).. 159 1 1% 208 2 3% 78 1 1% Best Western(R) ........ -- -- -- -- -- -- 355 2 4% Hampton Inn(R) ......... 292 2 1% 1,965 16 29% -- -- -- Comfort Inn(R) ......... -- -- -- 1,293 9 19% -- -- -- Holiday Inn Select(R) .. 1,245 4 5% 244 1 4% -- -- -- HomewoodSuites(R) ...... -- -- -- 461 4 7% -- -- -- Howard Johnson.......... 100 1 1% -- -- -- -- -- -- Hampton Inn & Suites(R).............. -- -- -- 136 1 2% -- -- -- Fairfield Inn(R) ....... -- -- -- 110 1 2% 200 1 2% ------ --- ----- ----- --- ----- ----- --- --- Total.................. 25,854 99 100.0% 6,800 47 100.0% 9,822 55 100% ====== === ===== ===== === ===== ===== === ===
Emphasis on Food and Beverage. Management believes popular food and beverage ideas are a critical component in the overall success of a hotel. The Company utilizes its food and beverage operations to create local awareness of its hotel facilities, to improve the profitability of its hotel operations and to enhance customer satisfaction. The Company is committed to competing for patrons with restaurants and catering establishments by offering high-quality restaurants that garner positive reviews and strong local and/or national reputations. The Company has engaged food and beverage experts to develop several proprietary restaurant concepts. The REIT Owned Hotels contain restaurants ranging from Michel Richard's highly acclaimed CITRONELLE(R), to Morgan's(R), a CapStar-designed concept which offers popular, moderately- priced American cuisine. CapStar has also successfully placed national food franchises such as Starbuck's Coffee(R) and "TCBY"(R) Yogurt in casual, delicatessen-style restaurants in several of the REIT Owned Hotels. Popular food concepts will strengthen the Company's ability to attract business travelers and group meetings and improve the name recognition of the Hotels. Commitment to Service and Value. The Company is dedicated to providing exceptional service and value to its customers on a consistent basis. The Company conducts extensive employee training programs to ensure personalized service at the highest levels. Programs such as "Be A Star" have been created and implemented by 44 the Company to ensure the efficacy and uniformity of its employee training. The Company's practice of tracking customer comments, through the recording of guest comment cards and the direct solicitation (during check-in and check- out) of guest opinions regarding specific items, allows investment in services and amenities where they are most effective. The Company's focus on these areas has enabled it to attract lucrative group business. Distinct Management Culture. The Company will have a distinct management culture that stresses creativity, loyalty and entrepreneurship. Management believes in realistic solutions to problems, and innovation is always encouraged. Incentive programs and awards have been established to encourage individual property managers to seek new ways of increasing revenues and operating cash flow. This creative, entrepreneurial spirit is prevalent from the corporate staff and the general managers down to the operations staff. Individual general managers work closely with the corporate staff and they and their employees are rewarded for achieving target operating and financial goals. Computerized Reporting Systems. The Company will employ computerized reporting systems at each of the Hotels and at its corporate offices to monitor the financial and operating performance of the Hotels. Management information services have been fully integrated through the installation of Novell and Unix networks. Management also utilizes programs like Data Plus(R) and cc:Mail(R) to facilitate daily communication. Such programs will enable the Company to create and implement detailed reporting systems at each of the Hotels and its corporate headquarters. Corporate executives will utilize information systems that track each Hotel's daily occupancy, ADR, and revenue from rooms, food and beverage. By having the latest hotel operating information available at all times, management will be better able to respond to changes in the market of each hotel. 45 PROPERTIES The Company maintains its corporate headquarters in Washington, D.C., satellite offices in California, North Carolina and Texas and leases and/or manages hotel properties throughout the United States and Canada. The Company leases its offices. No one hotel property is material to the operation of the Company. A typical Hotel has meeting and banquet facilities, food and beverage facilities and guest rooms and suites. The REIT Owned Hotels feature, or after contemplated renovation programs have been completed will feature, comfortable, modern guest rooms, extensive meeting and convention facilities and full-service restaurant and catering facilities that attract meeting and convention functions from groups and associations, upscale business and vacation travelers as well as banquets and receptions from the local community. The following table sets forth the 1997 operating information with respect to the hotels owned by the REIT and leased and managed by the Company:
GUEST AVERAGE DAILY AVERAGE HOTEL LOCATION ROOMS RATE ("ADR") OCCUPANCY REV PAR - ----- -------- ----- ------------- --------- ------- Sheraton Hotel.......... Mesa, AZ 273 $ 89.49 53.6% 47.97 Crowne Plaza Phoenix.... Phoenix, AZ 249 72.83 63.7 46.29 Embassy Suites.......... Tucson, AZ 204 74.39 78.5 58.40 Courtyard by Marriott Century City........... Century City, CA 134 106.02 84.1 89.13 Orange County Airport Hilton................. Irvine, CA 290 85.87 73.0 62.69 Marriott Hotel.......... Los Angeles, CA 469 118.56 60.5 71.73 Courtyard by Marriott Marina del Rey......... Marina del Rey, CA 276 79.78 90.4 72.04 Monterey Hilton......... Monterey, CA 204 107.33 66.4 71.29 DoubleTree Resort....... Palm Springs, CA 289 97.45 66.9 65.19 Sacramento Hilton....... Sacramento, CA 326 86.74 74.4 64.53 Holiday Inn Select Mis- sion Valley............ San Diego, CA 317 71.99 72.6 52.25 Sheraton Fisherman's Wharf.................. San Francisco, CA 524 133.28 84.5 112.62 Crowne Plaza Park Center ....................... San Jose, CA 239 111.80 70.2 78.48 Wyndham San Jose Airport Hotel.................. San Jose, CA 356 115.93 59.3 68.76 San Pedro Hilton........ San Pedro, CA 226 61.66 76.3 47.05 Santa Barbara Inn....... Santa Barbara, CA 71 139.35 79.7 111.06 Holiday Inn............. Colorado Springs, CO 201 67.16 70.7 47.48 Sheraton Hotel.......... Colorado Springs, CO 502 74.15 72.1 53.46 Embassy Suites Denver... Englewood, CO 236 103.75 76.2 79.06 Mystic Hotel............ Mystic, CT 77 77.63 58.0 45.06 DoubleTree Bradley Air- port................... Windsor Locks, CT 200 84.27 67.4 56.80 Embassy Row Hilton...... Washington, DC 195 119.63 73.5 87.93 Georgetown Inn.......... Washington, DC 95 137.95 72.4 99.88 The Latham Hotel........ Washington, DC 143 113.32 81.1 91.90 DoubleTree Resort Surfside Clearwater Beach.................. Clearwater Beach, FL 426 101.12 70.9 71.72 Ramada Inn Gulfview Clearwater Beach....... Clearwater Beach, FL 289 72.85 60.7 44.19 Hilton Hotel Cocoa Beach.................. Cocoa Beach, FL 296 83.31 72.2 60.11 Holiday Inn Fort Lauder- dale Beach............. Fort Lauderdale, FL 240 75.95 77.2 58.66 Westin Resort Key Largo. Key Largo, FL 200 126.87 76.8 97.19 Howard Johnson Resort Key Largo.............. Key Largo, FL 100 86.06 83.4 71.77 Courtyard by Marriott Disney Village......... Lake Buena Vista, FL 323 105.41 93.8 98.89 Holiday Inn Madeira Beach.................. Madeira Beach, FL 149 77.36 55.8 43.16 Radisson Twin Towers Or- lando.................. Orlando, FL 742 81.10 78.5 63.34 Wyndham Safari Resort Lake Buena Vista....... Orlando, FL 490 73.67 66.3 48.81 DoubleTree Hotel Tampa Airport................ Tampa, FL 496 64.05 68.3 43.73 DoubleTree Guest Suites Atlanta................ Atlanta, GA 155 104.90 61.4 64.42 Westin Atlanta Airport.. Atlanta, GA 496 79.18 75.5 59.78 Jekyll Inn.............. Jekyll Island, GA 265 63.15 46.6 29.43 Radisson Hotel Arlington Heights................ Arlington Heights, IL 201 81.72 74.5 60.88 Radisson Hotel & Suites. Chicago, IL 341 134.71 81.2 109.38 Holiday Inn Chicago O'Hare International Airport................ Rosemont, IL 507 99.15 78.6 77.89 Radisson Hotel.......... Schaumburg, IL 202 83.59 75.9 63.44
46
GUEST AVERAGE HOTEL LOCATION ROOMS ADR OCCUPANCY REV PAR - ----- -------- ----- ------ --------- ------- DoubleTree Guest Suites...... Indianapolis, IN 137 87.05 71.0 61.81 Radisson Plaza............... Lexington, KY 367 77.76 62.1 48.29 Seelbach Hilton.............. Louisville, KY 321 109.73 62.9 69.02 Holiday Inn Select New Or- leans International Airport. Kenner, LA 304 84.29 74.8 63.03 Lafayette Hilton & Towers.... Lafayette, LA 328 73.65 72.8 53.62 Hotel Maison de Ville........ New Orleans, LA 23 260.56 68.7 179.09 Holiday Inn Annapolis........ Annapolis, MD 220 82.51 59.4 49.00 Radisson Cross Keys.......... Baltimore, MD 146 89.63 72.6 65.07 Sheraton Columbia............ Columbia, MD 289 90.72 69.8 63.32 Holiday Inn Express BWI Air- port........................ Hanover, MD 159 65.10 83.0 54.02 Hampton Inn Ocean City....... Ocean City, MD 168 85.21 47.3 40.32 Metro Airport Hilton Suites.. Detroit, MI 151 81.37 85.7 69.73 Hilton Airport Hotel Grand Rapids...................... Grand Rapids, MI 226 84.38 64.7 54.61 Holiday Inn Sports Complex... Kansas City, MO 163 68.96 71.8 49.51 Holiday Inn Forest Park St. Louis....................... St. Louis, MO 120 70.63 75.3 53.21 Sheraton Airport Plaza....... Charlotte, NC 226 88.79 69.8 61.98 Courtyard by Marriott Durham. Durham, NC 146 78.98 73.2 57.82 Hilton Hotel Durham.......... Durham, NC 194 89.23 70.4 62.80 Four Points Hotel............ Cherry Hill, NJ 213 73.72 60.7 44.75 Westin Morristown............ Morristown, NJ 201 126.04 59.3 74.74 Courtyard by Marriott Meadowlands................. Secaucus, NJ 165 103.25 85.9 88.67 Marriott Hotel............... Somerset, NJ 434 111.62 75.0 83.72 Holiday Inn.................. Tinton Falls, NJ 171 78.89 72.2 56.96 DoubleTree Hotel............. Albuquerque, NM 294 80.50 67.2 54.10 Wyndham Albuquerque Airport Hotel....................... Albuquerque, NM 276 60.67 75.3 45.70 Radisson Inn Rochester....... Rochester, NY 171 65.23 72.0 46.95 Radisson Hotel Southwest..... Cleveland, OH 237 78.06 66.6 51.99 Hilton Hotel Toledo.......... Toledo, OH 213 67.80 67.4 45.71 Westin Oklahoma.............. Oklahoma City, OK 399 80.29 47.8 38.38 Great Valley Sheraton........ Frazer, PA 154 100.44 76.3 76.64 Embassy Suites Center City... Philadelphia, PA 288 127.64 73.6 93.94 Holiday Inn Select Bucks County...................... Trevose, PA 215 89.89 74.4 66.87 Arlington Hilton............. Arlington, TX 310 85.92 72.2 62.03 Austin Hilton & Towers....... Austin, TX 320 75.64 72.9 55.14 DoubleTree Hotel............. Austin, TX 350 88.08 74.9 65.97 Holiday Inn Dallas DFW Air- port West................... Bedford, TX 243 62.53 81.1 50.70 Dallas Renaissance........... Dallas, TX 289 92.94 53.4 49.63 Radisson Hotel............... Dallas, TX 305 61.07 74.1 45.25 Sheraton Hotel............... Dallas, TX 348 64.61 61.4 39.67 Houston Southwest Hilton..... Houston, TX 293 71.43 68.5 48.93 Marriott Houston West Loop... Houston, TX 302 103.60 72.6 75.25 Sheraton Houston Brookhollow. Houston, TX 382 76.85 61.0 46.88 Westchase Hilton & Towers.... Houston, TX 295 95.72 79.5 76.10 Holiday Inn Select Dallas DFW Airport South............... Irving, TX 409 77.92 73.9 57.59 Midland Hilton & Towers...... Midland, TX 249 71.14 54.2 38.56 Salt Lake Airport Hilton..... Salt Lake City, UT 287 80.05 78.6 62.92 Holiday Inn Historic District Alexandria.................. Alexandria, VA 178 101.20 71.8 72.68 Ramada Old Town Alexandria... Alexandria, VA 258 94.47 62.8 59.36 Arlington Hilton............. Arlington, VA 209 110.31 78.3 86.37 National Airport Hilton...... Arlington, VA 386 96.78 67.3 65.13 Hampton Inn Richmond Airport. Richmond, VA 124 66.63 81.8 54.51 Holiday Inn Richmond West.... Richmond, VA 280 59.67 60.9 36.36 Bellevue Hilton.............. Bellevue, WA 180 110.38 79.3 87.53 Crowne Plaza Madison......... Madison, WI 227 91.48 74.3 67.98 Holiday Inn Calgary Airport.. Calgary, Alberta 170 51.34 72.2 37.07 Sheraton Hotel............... Guildford, B.C. 280 72.85 74.8 54.49 Holiday Inn-Metrotown........ Vancouver, B.C. 100 75.03 87.8 65.88 Ramada Vancouver Centre...... Vancouver, B.C. 118 75.00 81.8 61.35
47 THE PARTICIPATING LEASES Prior to the effective date of the Merger, MeriStar Hotels, operating through Hotels OP, will enter into a lease with the REIT or its respective subsidiary (a "Participating Lease") for each CapStar Owned Hotel. In addition, the Company will enter into amended and restated Participating Leases with the REIT for each of the AGH Owned Hotels that is currently leased by AGH Leasing, which will conform the Participating Leases for the applicable AGH Owned Hotels with the Participating Leases for the CapStar Owned Hotels, except that (a) the base rent and percentage rent for each Participating Lease of an applicable AGH Owned Hotel will not be modified and (b) the initial term of each Participating Lease of an applicable AGH Owned Hotel will not be modified. The obligations of Hotels OP under each Participating Lease will be guaranteed by MeriStar Hotels. TERM Each Participating Lease of an AGH Owned Hotel provides for an initial term of 12 years commencing on the date on which the hotel was acquired. Each Participating Lease of a CapStar Owned Hotel provides for an initial term of 12 years commencing on the effective date of the Merger. Each Participating Lease of an AGH Owned Hotel will be modified to provide, and each Participating Lease of a CapStar Owned Hotel will provide, MeriStar Hotels with three renewal options of five years each (except in the case of Properties with ground leases having a remaining term of less than 40 years) provided that (a) MeriStar Hotels will not have the right to a renewal if there shall have occurred a change in the tax law which would permit the REIT to operate the hotel directly; (b) if MeriStar Hotels shall elect not to renew a Participating Lease for any REIT Owned Hotel, then the REIT shall have the right to reject the exercise of a renewal right on a Participating Lease of a comparable hotel; and (c) the rent for each renewal term shall be adjusted to reflect the then fair market rental value of the hotel. If the REIT and MeriStar Hotels are unable to agree upon the then fair market rental value of the hotel, the Participating Lease will terminate upon the expiration of the then current term and MeriStar Hotels shall thereupon have a right of first refusal to lease the hotel from the REIT on such terms as the REIT may have agreed upon with a third-party lessee. BASE RENT; PARTICIPATING RENT; ADDITIONAL CHARGES Each Participating Lease requires the lessee to pay (i) fixed monthly base rent, (ii) on a monthly basis, the excess of participating rent over base rent, with participating rent based on certain percentages of room revenue, food and beverage revenue and telephone and other revenue at each hotel, and (iii) certain other amounts, including interest accrued on any late payments or charges ("Additional Charges"). Base rent and participating rent departmental thresholds (departmental revenue on which the rent percentage is based) are increased annually by a percentage equal to the percentage increase in the consumer price index ("CPI") (CPI percentage increase plus 0.75% in the case of the participating rent departmental revenue threshold) compared to the price year. Base rent is payable monthly in arrears. Participating rent is payable in arrears based on a monthly schedule adjusted to reflect the seasonal variations in the hotel's revenue. Participating rent payments during each calendar quarter will be adjusted at the end of each quarter to reflect actual results. Other than real estate and personal property taxes and assessments, rent payable under ground leases, casualty insurance, including loss of income insurance, capital impositions and capital replacements and refurbishments (determined in accordance with generally accepted accounting principles), which are obligations of the REIT, the Participating Leases require the Lessee to pay rent, liability insurance, all costs and expenses and all utility and other charges incurred in the operation of the hotels. The Participating Leases also provide for rent reductions and abatements in the event of damage or destruction or a partial taking of any hotel. The Participating Leases also provide for a rental adjustment under certain circumstances in the event of (a) a major renovation of the hotel, (b) a change in the franchisor of the hotel or (c) a major change in operations at the hotel. 48 LESSEE CAPITALIZATION The Participating Leases require Hotels OP (or MeriStar Hotels as guarantor of the Participating Leases) to maintain a book net worth of not less than $25,000,000. Further, commencing January 1, 1999, for so long as the tangible net worth of Hotels OP (or MeriStar Hotels as guarantor of the Participating Leases) is less than 17.5% of the aggregate rents payable under the Participating Leases for the prior calendar year, Hotels OP (or MeriStar Hotels as guarantor of the Participating Leases) is prohibited from paying dividends or making distributions other than dividends or distributions made for the purpose of permitting the partners of Hotels OP to pay taxes on the taxable income of Hotels OP attributable to its partners plus any required preferred distributions to partners. TERMINATION The REIT will have the right to terminate the applicable Participating Lease upon the sale of a hotel to a third-party or, upon the REIT's determination not to rebuild after a casualty, upon payment to MeriStar Hotels of the fair market value of the leasehold estate. The fair market value of the leasehold estate will be determined by discounting to present value at a discount rate of 10% per annum the cash flow for each remaining year of the then current lease term, which cash flow will be deemed to be the cash flow realized by MeriStar Hotels under the applicable Participating Lease for the 12-month period preceding the termination date. The REIT will receive a credit against any such termination payments an amount equal to any outstanding "New Lease Credits" which shall mean the projected cash flow (determined on the same basis as the termination payment) of any new Participating Leases entered into between the REIT and Hotels OP or MeriStar Hotels after the Effective Date for the initial term of such new Participating Lease amortized on a straight-line basis over a period of 72 months commencing on the commencement of the new Participating Lease. PERFORMANCE STANDARDS The REIT will have the right to terminate the applicable Participating Lease if, in any calendar year, the gross revenues from a hotel are less than 95% of the projected gross revenues for such year as set forth in the applicable budget unless (a) MeriStar Hotels can reasonably demonstrate that the gross revenue shortfall was caused by general market conditions beyond MeriStar Hotels' control or (b) MeriStar Hotels "cures" the shortfall by paying to the REIT the difference between the rent that would have been paid to the REIT had the property achieved gross revenues of 95% of the budgeted amounts and the rent paid based on actual gross revenues. MeriStar Hotels will not have such cure right for more than two consecutive years. The Participating Leases also require that Hotels OP spend in each calendar year at least 95% of the amounts budgeted for marketing expenses and for repair and maintenance expenses. ASSIGNMENT AND SUBLEASING MeriStar Hotels will not have the right to assign a Participating Lease or sublet a hotel without the prior written consent of the REIT. For purposes of the Participating Lease, a change in control of MeriStar Hotels will be deemed an assignment of the Participating Lease and will require the REIT's consent, which may be granted or withheld in its sole discretion. LEGAL PROCEEDINGS In the course of the Company's normal business activities, various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company. Based on currently available facts, management believes that the disposition of matters that are pending or asserted will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. 49 THE RIGHTS OFFERING MeriStar Hotels is distributing the Rights to holders of record of (a) the REIT Common Stock and/or (b) the REIT OP Units (other than REIT OP Units held by the REIT or any of its subsidiaries) as of the Record Date. Each Rightholder will receive one sixth of a Right for each share of REIT Common Stock and/or each REIT OP Unit so held. Each whole Right will be exercisable for one share of Common Stock. Although fractional Rights will be issued to Rightholders, the Company reserves the right, in its sole discretion, to pay cash in lieu of fractional shares of Common Stock that would otherwise be issued or issuable in respect of fractional Rights exercised by Rightholders, based on a value per whole share of Common Stock equal to the closing price of the Common Stock on the Principal Market on the Expiration Date. Any such cash payment will be made to the applicable Rightholder at the same time that shares of Common Stock are issued in respect of whole Rights exercised by Rightholders. Fractional Rights can only be exercised concurrently with the exercise of whole Rights. The Company intends to pay cash in lieu of all such fractional shares of Common Stock. EXPIRATION DATE The Rights will be exercisable at any time following 5:00 p.m., New York City time, on the last day of the Measurement Period until the Expiration Date. After the Expiration Date, unexercised Rights will be null and void. The Company will not be obligated to honor any purported exercise of Rights received by the Subscription Agent after the Expiration Date, regardless of when the documents relating to such exercise were sent, except pursuant to the Guaranteed Delivery Procedures described below. Notice of any extension of the Expiration Date will be made through a press release issued by the Company. SUBSCRIPTION PRIVILEGE Each whole Right will entitle the Rightholder (but not a subsequent transferee of the REIT Common Stock and/or REIT OP Units held by such Rightholder on the Record Date) to purchase one share of Common Stock at the Subscription Price. Certificates representing shares of Common Stock purchased pursuant to the Subscription Privilege will be delivered to subscribers as soon as practicable after the fourth business day following the Expiration Date. CONDITIONS TO SALE OF SHARES The issuance of shares of Common Stock pursuant to the exercise of the Subscription Privilege is conditioned upon the consummation of the Spin-Off, the Merger and the transactions contemplated by the Lessee-Manager Acquisition Agreement prior to the closing of the Rights Offering. See "The Merger and the Spin-Off." The Company also reserves the right, at its sole option, to cancel the Rights Offering if the Subscription Price is less than .. All amounts received by the Subscription Agent pursuant to the exercise of Rights will be held in a non-interest-bearing escrow account until the completion of the Rights Offering. If the Rights Offering is not completed, all funds received by the Subscription Agent in payment of the Subscription Price and held in escrow by the Subscription Agent will be returned by mail without interest or deduction as soon as practicable following the termination or expiration of the Rights Offering. EXERCISE OF RIGHTS Rights may be exercised by Rightholders by delivering to the Subscription Agent, at or prior to the Expiration Date, the properly completed and executed Subscription Certificate evidencing such Rights with any required signatures guaranteed, together with payment in full of the Subscription Price for each share subscribed for pursuant to the Subscription Privilege. Such payment in full must be by (a) check or bank draft drawn upon a United States bank or postal, telegraphic or express money order payable to Continental Stock Transfer & Trust Company, as Subscription Agent, or (b) wire transfer of funds to the account maintained by the Subscription Agent for such purpose at 2 Broadway, New York, New York 10004, The Chase Manhattan Bank Account No. 001021389; ABA No. 021000021. Any wire transfer of funds should clearly indicate the identity of the subscriber who is paying the Subscription Price by the wire transfer. The Subscription Price will be deemed to 50 have been received by the Subscription Agent only upon (i) clearance of any uncertified check, (ii) receipt by the Subscription Agent of any certified check or bank draft drawn upon a United States bank or of any postal, telegraphic or express money order or (iii) receipt of good funds in the Subscription Agent's account designated above. IF PAYING BY UNCERTIFIED PERSONAL CHECK, PLEASE NOTE THAT THE FUNDS PAID THEREBY MAY TAKE UP TO FIVE BUSINESS DAYS TO CLEAR. ACCORDINGLY, RIGHTHOLDERS WHO WISH TO PAY THE SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE URGED TO MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE THAT SUCH PAYMENT IS RECEIVED AND CLEARS BY SUCH DATE AND ARE URGED TO CONSIDER PAYMENT BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS. The address to which the Subscription Certificates and payment of the Subscription Price should be delivered is: Continental Stock Transfer & Trust Company 2 Broadway New York, New York 10004 Telephone: (212) 509-4000 If a Rightholder wishes to exercise Rights, but time will not permit such Rightholder to cause the Subscription Certificate or Subscription Certificates evidencing such Rights to reach the Subscription Agent on or prior to the Expiration Date, such Rights may nevertheless be exercised if all of the following conditions (the "Guaranteed Delivery Procedures") are met: (1) such Rightholder has caused payment in full of the Subscription Price for each share being subscribed for pursuant to the Subscription Privilege to be received (in the manner set forth above) by the Subscription Agent on or prior to the Expiration Date; (2) the Subscription Agent receives, on or prior to the Expiration Date, a guarantee notice (a "Notice of Guaranteed Delivery"), substantially in the form provided with the Instructions as to Use of Subscription Certificates and International Holder Subscription Forms (the "Instructions") distributed with the Subscription Certificates, from a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. (the "NASD"), or from a commercial bank or trust company having an office or correspondent in the United States (each, an "Eligible Institution"), stating the name of the exercising Rightholder, the number of Rights represented by the Subscription Certificate or Subscription Certificates held by such exercising Rightholder, the number of shares being subscribed for pursuant to the Subscription Privilege, and guaranteeing the delivery to the Subscription Agent of any Subscription Certificate evidencing such Rights within three Trading Days following the date of the Notice of Guaranteed Delivery; and (3) the properly completed Subscription Certificate evidencing the Rights being exercised, with any required signatures guaranteed, is received by the Subscription Agent within three Trading Days following the date of the Notice of Guaranteed Delivery relating thereto. The Notice of Guaranteed Delivery may be delivered to the Subscription Agent in the same manner as Subscription Certificates at the address set forth above, or may be transmitted to the Subscription Agent by telegram or facsimile transmission (telecopy no. (212) 509-4000. Additional copies of the form of Notice of Guaranteed Delivery are available upon request from the Subscription Agent, at the address set forth above. A Rightholder who purchases less than all of the shares of Common Stock represented by such Rightholder's Subscription Certificate will receive from the Subscription Agent a new Subscription Certificate representing the balance of the unsubscribed Rights, to the extent the Subscription Agent is able to reissue a Subscription Certificate prior to the Expiration Date. Unless a Subscription Certificate (1) provides that the shares of Common Stock to be issued pursuant to the exercise of Rights represented thereby are to be delivered to the Rightholder or (2) is submitted for the account of an Eligible Institution, signatures on such Subscription Certificate must be guaranteed by an Eligible Institution. 51 Rightholders who hold Rights for the account of others, such as brokers, trustees or depositaries for securities, should provide a copy of this Prospectus to the respective beneficial owners of such Rights as soon as possible, ascertain such beneficial owners' intentions and obtain instructions with respect to the Rights. If the beneficial owner so instructs, the record Rightholder should complete Subscription Certificates and submit them to the Subscription Agent with the proper payment. In addition, beneficial owners of Rights held through such a Rightholder should contact the Rightholder and request the Rightholder to effect transactions in accordance with the beneficial owner's instructions. Beneficial holders should be aware that brokers or other record Rightholders may establish deadlines for receiving instructions from beneficial holders significantly in advance of the Expiration Date. The instructions accompanying the Subscription Certificates should be read carefully and followed in detail. The Company anticipates that the exercise of the Subscription Privilege may be effected through the facilities of The Depository Trust Company. DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE COMPANY, AGH, CAPSTAR OR ANY OF THEIR AFFILIATES, BUT RATHER SEND THEM TO THE SUBSCRIPTION AGENT AS REFERENCED ABOVE. THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF THE RIGHTHOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT AT OR PRIOR TO THE EXPIRATION DATE. BECAUSE UNCERTIFIED, PERSONAL CHECKS MAY TAKE UP TO FIVE BUSINESS DAYS TO CLEAR, RIGHTHOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS. All questions concerning the timeliness, validity, form and eligibility of any exercise of Rights will be determined by the Company, whose determinations will be final and binding. The Company in its sole discretion may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine, or reject the purported exercise of any Right. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as the Company determines in its sole discretion. The Company reserves the right to reject any purchases not properly submitted or the acceptance of which would, in the opinion of its counsel, be unlawful. Neither the Company nor the Subscription Agent will be under any duty to give notification of any defect or irregularity in connection with the submission of Subscription Certificates or incur any liability for failure to give such notification. Any questions or requests for assistance concerning the method of exercising Rights or requests for additional copies of this Prospectus, the Instructions or the Notice of Guaranteed Delivery should be directed to the Subscription Agent. NO REVOCATION ONCE A RIGHTHOLDER HAS EXERCISED THE SUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED. RIGHTS NOT TRANSFERABLE The Rights may be not be transferred. The Rights will entitle only a Rightholder (but not a subsequent transferee of the REIT Common Stock and/or REIT OP Units held by such Rightholder on the Record Date) to purchase shares of Common Stock at the Subscription Price. In the event that Rightholders transfer REIT Common Stock and/or REIT OP Units owned by them as of the Record Date, they will remain the owners of Rights issued in respect of such shares of REIT Common Stock and/or such REIT OP Units. 52 None of the Company nor the Subscription Agent nor any of their affiliates will have any liability to a purported transferee or transferor of Rights in connection with any purported transfer. Except for the fees charged by the Subscription Agent (which will be paid by the Company), all commissions, fees and other expenses (including brokerage commissions and transfer taxes) incurred in connection with the exercise of Rights will be for the account of the Rightholder, and none of such commissions, fees or expenses will be paid by the Company or the Subscription Agent. FOREIGN AND CERTAIN OTHER RIGHTHOLDERS Subscription Certificates will not be mailed to Rightholders whose addresses are outside the United States or who have an APO or FPO address, but will be held by the Subscription Agent for their account. To exercise or sell Rights, such Rightholders must notify the Subscription Agent by completing an International Holder Subscription Form, which will be delivered to such Rightholders (except those located in the United Kingdom) in lieu of a Subscription Certificate, and sending it by mail or telecopy to the Subscription Agent at the address and telecopy number specified above. Rightholders located in the United Kingdom will not initially be provided with International Holder Subscription Forms. The distribution of this Prospectus and the offering of the Rights and the shares of Common Stock in certain jurisdictions may be restricted by law. No action has been taken by MeriStar Hotels that would permit an offering of the Rights or such shares or the circulation or distribution of this Prospectus or any offering material in relation to the Company, the Rights or such shares in any country outside the United States where action for that purpose is required. Persons into whose possession this Prospectus comes are required by the Company to inform themselves about and to observe any such restrictions. FEDERAL INCOME TAX CONSEQUENCES The following summary describes the material United States federal income tax considerations affecting Rightholders in the Rights Offering. This summary is based upon laws, regulations, rulings, and decisions currently in effect. This summary does not discuss all aspects of federal taxation that may be relevant to a particular investor or to certain types of investors subject to special treatment under the federal tax laws (for example, banks, dealers in securities, life insurance companies, tax-exempt organizations, and foreign persons), nor does it discuss any aspect of state, local, or foreign tax laws. In the opinion of Paul, Weiss, Rifkind, Wharton & Garrison ("Special Tax Counsel"), the following discussion accurately reflects the material federal income tax consequences of the Rights Offering to the Rightholders. RIGHTHOLDERS SHOULD THEREFORE CONSULT THEIR OWN TAX ADVISORS CONCERNING THEIR INDIVIDUAL TAX SITUATIONS AND THE TAX CONSEQUENCES OF THE RIGHTS OFFERING UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, AND UNDER ANY APPLICABLE STATE, LOCAL, OR FOREIGN TAX LAWS. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF CAPSTAR COMMON STOCK DISTRIBUTION OF RIGHTS TO HOLDERS OF CAPSTAR COMMON STOCK Although the matter is not entirely free from doubt, in the opinion of Special Tax Counsel because the Rights Offering is an integral part of a series of related transactions culminating in the Merger, the distribution of Rights to holders of CapStar Common Stock should constitute taxable boot received in the Merger (as described in "The Merger and the Spin-Off-- Restructuring and Spin-Off"). The distribution of the Common Stock of MeriStar Hotels should also constitute taxable boot received in the Merger. As a result, holders of CapStar Common Stock will recognize gain in the Merger equal to the lesser of (i) the fair market value of the Rights and the Common Stock of MeriStar Hotels received by such stockholder and (ii) the fair market value of the Common Stock of the REIT, the Common Stock of MeriStar Hotels and the Rights received in the Merger minus the adjusted tax basis of such stockholder in its CapStar Common Stock exchanged therefor. The amount of gain recognized by holders of CapStar Common Stock that "has the effect of the distribution of a dividend" will be treated as ordinary dividend income to the extent of the stockholder's 53 ratable share of the undistributed earnings and profits of CapStar as of the effective time of the Merger, and any excess will be treated as gain from the exchange of property. Such gain will be capital gain if such shares of CapStar Common Stock were held as a capital asset at the effective time of the Merger. In general, the determination as to whether the gain recognized by a CapStar stockholder in the Merger will be treated as capital gain or dividend income depends upon whether and to what extent the transactions related to the Merger will be deemed to reduce the stockholder's percentage ownership of the REIT following the Merger. For purposes of that determination, the stockholder is treated as if it first exchanged all of its shares of CapStar Common Stock solely for Common Stock of the REIT and then the REIT immediately redeemed (the "deemed redemption") a portion of such Common Stock of the REIT in exchange for the boot the stockholder actually received. If, under section 302 of the Code, the deemed redemption is "substantially disproportionate" with respect to a CapStar stockholder, the gain recognized will be treated as capital gain. One requirement that must be met in order for the deemed redemption to be "substantially disproportionate" is that the percentage of the outstanding voting stock of the REIT following the Merger and the deemed redemption considered owned by the stockholder is less than 80% of the percentage of the outstanding voting stock of the REIT considered owned by the stockholder following the Merger but immediately before the deemed redemption. Based on calculations of the relative values of the Common Stock of the REIT, the Common Stock of MeriStar Hotels and the Rights to be received by holders of CapStar Common Stock, it is anticipated that the deemed redemption will not be "substantially disproportionate" with respect to holders of CapStar Common Stock. Accordingly, unless a CapStar shareholder qualifies for the exception described below, the gain recognized by such shareholder will be taxed as dividend income to the extent of the accumulated earnings and profits of CapStar at the time of Merger. However, section 302 of the Code also provides that if the deemed redemption is "not essentially equivalent to a dividend" with respect to the stockholder, then any gain recognized by the stockholder in the transaction will be capital gain. In general, in order for the deemed redemption to be "not essentially equivalent to a dividend", the deemed redemption must result in a "meaningful reduction" in the stockholder's deemed percentage stock ownership of the REIT following the Merger. That determination generally requires a comparison of (i) the percentage of the outstanding stock of the REIT the stockholder is considered to have owned immediately before the deemed redemption and (ii) the percentage of the outstanding stock of the REIT the stockholder owns immediately after the deemed redemption. The Internal Revenue Service has indicated in a published ruling that, in the case of a small minority holder of a publicly-held corporation who exercises no control over corporate affairs, a reduction in the holder's proportionate interest in the corporation from .0001118% to .0001081% would constitute a meaningful reduction. In applying the foregoing tests, under the attribution rules of section 318 of the Code, a stockholder is deemed to own (i) stock owned and, in some cases, constructively owned by family members, by certain estates and trusts of which the stockholder is a beneficiary and by certain affiliated entities and (ii) stock subject to an option actually or constructively owned by the stockholder or such other persons. As the determination as to whether a CapStar stockholder has recognized capital gain with respect to the receipt of the Rights is complex, each stockholder that believes that it might qualify for capital gain treatment under the above rules is urged to consult its tax advisor with respect to such determination. To the extent that the gain recognized by a holder of CapStar Common Stock "has the effect of the distribution of a dividend", the amount that will be treated as ordinary dividend income will depend on the earnings and profits of CapStar at the effective time of the Merger. Earnings and profits immediately prior to the effective time of the Merger will be increased by an amount equal to the sum of the fair market value of the Rights and the excess of the fair market value of the Common Stock of MeriStar Hotels over CapStar's tax basis in such stock. If the distribution of the Rights instead was treated as a distribution of property under Section 301 of the Code, an amount equal to the fair market value of the Rights on the date of distribution would be treated as a 54 dividend to the extent of the current and accumulated earnings and profits of CapStar on such date, including earnings and profits resulting from the distribution of the Rights, as described in the preceding paragraph. Any amount in excess of the earnings and profits of CapStar would be treated first as a tax-free return of capital, reducing the stockholder's tax basis in its CapStar Common Stock, and any amount in excess of tax basis would be taxable as gain from sale or exchange of such stockholder's shares of CapStar Common Stock. Such gain would be capital gain if such stockholder's shares of CapStar Common Stock were held as a capital asset on the date of distribution. The tax basis of a CapStar stockholder in the Rights received in the distribution will be the fair market value of such Rights, and the holding period for such Rights will begin on the date of the distribution. Whether the Rights Offering is treated as a distribution of boot in a reorganization or as a dividend, CapStar will recognize gain on the distribution of the Rights in an amount equal to the fair market value of such Rights at the time of the distribution. No gain or loss will be recognized by MeriStar as a result of the distribution of the Rights in the Rights Offering. EXERCISE OF RIGHTS BY HOLDERS OF CAPSTAR COMMON STOCK Holders of CapStar Common Stock will not recognize gain or loss upon the exercise of the Rights. Such holders who receive shares of MeriStar Hotels Common Stock upon such exercise will take a tax basis in those shares equal to the sum of the price paid on exercise and the Rightholder's tax basis in the Rights. LAPSE OF RIGHTS BY HOLDERS OF CAPSTAR COMMON STOCK Holders of CapStar Common Stock who fail to exercise their Rights prior to the Expiration Date will be deemed to have sold their Rights on that date for an amount equal to zero. Assuming the Rights are held as capital assets, such holders will recognize a short-term capital loss equal to their adjusted tax basis in the Rights upon failure to exercise such Rights. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF AGH COMMON STOCK DISTRIBUTION OF RIGHTS TO HOLDERS OF AGH COMMON STOCK Although the matter is not free from doubt, in the opinion of Special Tax Counsel, because the Rights Offering is an integral part of a series of related transactions culminating in the Merger, including the recapitalization in which the AGH shareholders exchange their shares for shares of the REIT, the distribution of Rights should constitute boot received in the AGH recapitalization. As a result, a holder of AGH Common Stock will recognize gain equal to the lesser of (i) the fair market value of the Rights received by such stockholder or (ii) the fair market value of the Common Stock of the REIT, and of the Rights minus the adjusted tax basis of such stockholder in its AGH Common Stock exchanged therefor. The amount of gain recognized by a holder of AGH Common Stock that "has the effect of the distribution of a dividend" will be treated as ordinary dividend income to the extent of the stockholder's ratable share of the undistributed earnings and profits of AGH as of the effective time of the Merger and any excess will be treated as gain from the exchange of property. Such gain will be capital gain if such shares of AGH Common Stock were held as a capital asset at the effective time of the Merger. In general, the determination as to whether the gain so recognized by an AGH stockholder will be treated as capital gain or dividend income depends upon whether and to what extent the transactions related to the Merger will be deemed to reduce the stockholder's percentage ownership of the REIT following the Merger. For purposes of that determination, the stockholder is treated as if it first exchanged all of its shares of AGH Common Stock solely for Common Stock of the REIT and then the REIT immediately redeemed (the "deemed redemption") a portion of such Common Stock of the REIT in exchange for the boot the stockholder actually 55 received. If, under section 302 of the Code, the deemed redemption is "substantially disproportionate" with respect to a AGH stockholder, the gain recognized will be treated as capital gain. One requirement that must be met in order for the deemed redemption to be "substantially disproportionate" is that the percentage of the outstanding voting stock of the REIT following the Merger and the deemed redemption considered owned by the stockholder is less than 80% of the percentage of the outstanding voting stock of the REIT considered owned by the stockholder following the Merger but immediately before the deemed redemption. Although the matter is not free from doubt, in determining whether this test is satisfied, the reduction in percentage interests of the AGH stockholder as a result of the issuance of additional shares of the REIT to former CapStar stockholders in the Merger should be taken into account. Based on calculations of the relative values of the Common Stock of the REIT, the Rights to be received by holders of AGH Common Stock and the amount of stock to be issued to former CapStar stockholders in the Merger, it is anticipated that the deemed redemption will be "substantially disproportionate" with respect to holders of AGH Common Stock. Accordingly, the gain recognized by such shareholder will be taxed as a capital gain. In applying the foregoing tests, under the attribution rules of section 318 of the Code, a stockholder is deemed to own (i) stock owned and, in some cases, constructively owned by family members, by certain estates and trusts of which the stockholder is a beneficiary and by certain affiliated entities and (ii) stock subject to an option actually or constructively owned by the stockholder or such other persons. As the determination as to whether an AGH stockholder has recognized capital gain with respect to the receipt of the Rights is complex, each stockholder that believes that it might qualify for capital gain treatment under the above rules is urged to consult its tax advisor with respect to such determination. If the distribution of the Rights instead was treated as a distribution of property under Section 301 of the Code, an amount equal to the fair market value of the Rights on the date of distribution would be treated as a dividend to the extent of the current and accumulated earnings and profits of AGH on such date, including earnings and profits resulting from the distribution of the Rights. The earnings and profits of AGH immediately prior to the effective time of the Merger would be increased by an amount equal to the fair market value of the Rights. Any amount in excess of the earnings and profits of AGH would be treated first as a tax-free return of capital, reducing the stockholder's tax basis in its AGH Common Stock, and any amount in excess of tax basis would be taxable as gain from sale or exchange of such stockholder's shares of AGH Common Stock. Such gain would be capital gain if such stockholder's shares of AGH Common Stock were held as a capital asset on the date of distribution. The tax basis of an AGH stockholder in the Rights received in the distribution will be the fair market value of such Rights, and the holding period for such Rights will begin on the date of the distribution. Whether the Rights Offering is treated as a distribution of boot in a reorganization or as a dividend, AGH will recognize gain on the distribution of the Rights in an amount equal to the fair market value of such Rights at the time of the distribution. EXERCISE OF RIGHTS BY HOLDERS OF AGH COMMON STOCK Holders of AGH Common Stock will not recognize gain or loss upon the exercise of the Rights. Such holders who receive shares of MeriStar Hotels Common Stock upon such exercise will take a tax basis in those shares equal to the sum of the price paid on exercise and the Rightholder's tax basis in the Rights. LAPSE OF RIGHTS BY HOLDERS OF AGH COMMON STOCK Holders of AGH Common Stock who fail to exercise their Rights prior to the Expiration Date will be deemed to have sold their Rights on that date for an amount equal to zero. Assuming the Rights are held as capital assets, such holders will recognize a short-term capital loss equal to their adjusted tax basis in the Rights upon failure to exercise such Rights. 56 FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF REIT OP UNITS DISTRIBUTION TO HOLDERS OF REIT OP UNITS Although the matter is not free from doubt, in the opinion of Special Tax Counsel the distribution of the Rights by MeriStar Hotels to holders of REIT OP Units in their capacity as such should not initially be a taxable event to the recipient. EXERCISE OF RIGHTS BY HOLDERS OF REIT OP UNITS Although there is not published authority directly on point, based upon internal IRS memoranda, holders of REIT OP Units who exercise their Rights will recognize ordinary taxable income in an amount equal to the fair market value of such Rights on the date of exercise. Such holders would take a tax basis in such shares received upon exercise equal to the exercise price paid under the Rights Offering and the amount of ordinary income recognized upon exercise as described herein. LAPSE OF RIGHTS BY HOLDERS OF REIT OP UNITS Holders of REIT OP Units who fail to exercise their Rights prior to the Expiration Date should recognize no income, gain or loss upon the lapse of such Rights unexercised. RISK OF RECHARACTERIZATION TO HOLDERS OF REIT OP UNITS Although MeriStar Hotels, the REIT and the REIT Operating Partnership intend to take the position that the issuance of the Rights will be characterized for federal income tax purposes as described above, it is possible that the IRS might recharacterize the Rights Offering. For example, it is possible the IRS could view the REIT Operating Partnership as the distributor of the Rights. If this were the case, the distribution of the Rights to holders of REIT OP Units would be treated as a partnership distribution of marketable securities so that such unit-holder would have to recognize capital gain to the extent that the fair market value of the Rights as of the date of distribution exceeds such holder's basis in such units. Under such a view, holders of REIT OP Units would take a basis in the Rights equal to the fair market value of the Rights as of the date of distribution. If the offering were recharacterized in this way, holders of REIT OP Units would not recognize further gain or loss upon the exercise of their Rights. Assuming such Rights were held as capital assets, holders of REIT OP Units would recognize a short-term capital loss equal to their adjusted tax basis in the Rights upon failure to exercise such Rights. 57 MANAGEMENT MeriStar Hotels was recently formed. None of the Company's executive officers has yet received compensation from or on behalf of MeriStar Hotels since its formation. The Company intends to enter into employment agreements with certain executive officers and will pay a salary and/or other compensation to such executive officers for their services in such capacities as set forth below under "Executive Compensation." Options have been, and in the future may be, granted to executive officers. See "Stock Option Grants." THE BOARD OF DIRECTORS The Board of Directors will be divided into three classes of directors. The inital term of the first, second and third classes expires in 2001, 2002 and 2003, respectively. Directors of each class will be elected for three-year terms upon the expiration of the initial class terms, and, beginning in 2001 and each year thereafter, each class of directors will be elected by the stockholders. As of the date of this Prospectus, the following individuals are expected to become directors of MeriStar Hotels:
WILL SERVE AS A DIRECTOR OF NAME, PRINCIPAL OCCUPATION MERISTAR HOTELS AND BUSINESS EXPERIENCE BEGINNING AGE CLASS -------------------------- --------------- --- ----- DANIEL L. DOCTOROFF.................................. 1998 39 I Daniel L. Doctoroff has been a Director of CapStar since 1996, a Managing Director of Oak Hill Partners, Inc., the investment advisor to several private investment funds (including Acadia Partners, L.P.), and its predecessor since August 1987; Vice President and Director of Acadia Partners MGP, Inc. since March 1992; Vice President of Keystone, Inc. since March 1992; and a Managing Partner of Insurance Partners Advisors, L.P. since February 1994. All of such entities are affiliates of Acadia Partners. Mr. Doctoroff is also a Director of Bell & Howell Holdings Company, Kemper Corporation and Specialty Foods Corporation. KENT R. HANCE........................................ 1998 55 II Kent R. Hance has been a director of AGH since July 1996. Since 1994, Mr. Hance has been a law partner in the firm Hance, Scarborough, Woodward & Weisbart, L.L.P., Austin, Texas, and from 1991 to 1994, he was a law partner in the firm of Hance and Gamble. From 1985 to 1987, he was a law partner with Boyd, Viegal and Hance. Mr. Hance also served as a member of the Texas Railroad Commission from 1987 until 1991 and as its Chairman from 1989 until 1990. From 1979 to 1985, he served as a member of the United States Congress. In addition, Mr. Hance served as a State Senator in the State of Texas from 1975 to 1979 and was a professor of business law at Texas Tech University from 1969 to 1973. STEVEN D. JORNS...................................... 1998 49 I Steven D. Jorns has been the Chairman of the Board of Directors, Chief Executive Officer and President of AGH since April 1996. Mr. Jorns is the founder of, and has served since its formation in 1981 as Chairman of the Board of Directors, Chief Executive Officer and President of, AGHI, a hotel management company. Prior to forming AGHI, Mr. Jorns spent seven years with an affiliate of General Growth Companies overseeing that company's hotel portfolio. Prior to that, Mr. Jorns was associated with Hospitality Motor Inns, a division of Standard Oil of Ohio, and held marketing positions with Holiday Inns, Inc.
58
WILL SERVE AS A DIRECTOR OF NAME, PRINCIPAL OCCUPATION MERISTAR HOTELS AND BUSINESS EXPERIENCE BEGINNING AGE CLASS -------------------------- --------------- --- ----- JOSEPH MCCARTHY..................................... 1998 65 I Joseph McCarthy has been retired since 1994 and has been a Director of CapStar since 1996. From 1993 to 1994 he served as Chairman of the Board for Motel 6. From 1985 to 1993, he served as President and Chief Executive Officer for Motel 6. From 1980 to 1985, he served as President and Chief Executive Officer of Lincoln Hotels. From 1976 to 1980, he served as President and Chief Executive Officer of Quality Inns International. Prior to that, from 1971 to 1976, he served as Senior Vice President of the Sheraton Corporation. DAVID E. MCCASLIN................................... 1998 41 III David E. McCaslin has been a Director of CapStar since 1996. He has served as Chief Operating Officer of CapStar since 1994. Mr. McCaslin joined CapStar in 1987 as a General Manager and was named Vice President of Operations in 1988. From 1985 to 1987, Mr. McCaslin served as General Manager for Lincoln Hotels. Prior to that, from 1979 to 1985, he worked for Westin Hotels in various capacities, including Assistant General Manager, Rooms Division Manager and Food & Beverage Manager. JAMES MCCURRY....................................... 1998 49 III James McCurry became a director of AGH in July 1996. Since July 1997, Mr. McCurry has been a Partner at Bain & Company, an international management consulting firm specializing in corporate strategy. Mr. McCurry served from December 1994 through December 1996 as Chief Executive Officer of NeoStar Retail Group, Inc. ("NeoStar"), a specialty retailer of consumer software. NeoStar filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in September 1996. From April 1983 to December 1994, Mr. McCurry was the Chairman of Babbage's Inc., a consumer software retailer, which merged with Software Etc. Stores, Inc. in December of 1994 to form NeoStar. PAUL W. WHETSELL.................................... 1998 47 II Paul W. Whetsell has been a Director of CapStar since 1996. He has served as President and Chief Executive Officer of CapStar and its predecessors since its founding in 1987. From 1981 to 1986, Mr. Whetsell served as Vice President of Development for Lincoln Hotels in Dallas, Texas. Prior to that, from 1973 to 1981, Mr. Whetsell worked for Quality Inns in various capacities in its franchise division, culminating in Vice President of Franchise. JAMES R. WORMS...................................... 1998 51 II James R. Worms has served as director of AGH since July 1996. Mr. Worms has served since August 1995 as a Managing Director of William E. Simon & Sons L.L.C., a private investment firm and merchant bank and President of William E. Simon & Sons Realty, through which the firm conducts its real estate activities. Prior to joining William E. Simon & Sons, Mr. Worms was employed since March 1987 by Salomon Brothers Inc., an international investment banking firm, most recently as a managing director. ADDITIONAL DIRECTOR III
[TO BE DETERMINED] 59 BOARD COMMITTEES The Board of Directors of MeriStar Hotels will have four committees: an Audit Committee, a Compensation Committee, an Investment Committee and a Leasing Committee. The Audit Committee will consist of three directors who are not employees of the Company ("Independent Directors"). The Audit Committee will be responsible for making recommendations concerning the engagement of independent auditors, reviewing with the independent auditors the plans and results of the audit engagement, approving professional services provided by the independent auditors, reviewing the independence of the independent auditors, considering the range of audit and non-audit fees and reviewing the adequacy of the Company's internal accounting controls. The Compensation Committee will consist of four Independent Directors. The Compensation Committee will be responsible for the determination of compensation of the Company's executive officers and the administration of the Company's employee incentive plans. The Investment Committee of the Company will consist of the Chairman of the Board and directors from each of MeriStar Hotels and the REIT. The Company's Investment Committee will be responsible for the review and approval of investments proposed by the Company. The Leasing Committee will consist of the Chairman of the Board and three Independent Directors. The Leasing Committee will be responsible for the review and approval of leases to be entered into between the Hotel Parties and the REIT Parties. The entire Board of Directors of the Company will act as the nominating committee for directors of the Company and will consider nominations by stockholders for directors. The Board of Directors would be pleased to receive suggestions from stockholders about persons it should consider as possible members of the Board of Directors. Any such suggestion should be mailed to the Secretary of the Company by December 31, 1998. DIRECTORS COMPENSATION Independent Directors of the Company will be paid an annual fee of $20,000. In addition, each Independent Director will be paid $1,250 for attendance at each meeting of the Board; $1,000 for attendance at each meeting of a committee of the Board of Directors of which such director is a member and $500 for each telephonic meeting of the Board or a committee thereof of which such director is a member. Directors who are employees of the Company will not receive any fees for their service on the Board of Directors or a committee thereof. The Company will reimburse directors for their out-of-pocket expenses in connection with their service on the Board of Directors. OPTIONS Pursuant to the MeriStar Hotels & Resorts, Inc. Non-Employee Incentive Plan (the "MeriStar Hotels Directors' Plan"), each director, who is not an officer or employee of MeriStar or its subsidiaries (each an "Independent Director"), will be awarded an option to purchase 7,500 shares of Common Stock upon initial commencement of service after the Spin-Off, whether by appointment or election. Thereafter, each Independent Director will be granted an option to purchase 5,000 shares of Common Stock on the first business day following the Company's annual meeting of stockholders. The exercise price of option grants will be 100% of the fair market value of the Common Stock on the date of grant, and options will vest in three annual installments. The exercise price may be paid in cash, cash equivalents acceptable to the Compensation Committee, Common Stock or a combination thereof. Options granted under the MeriStar Hotels Directors' Plan, once vested, are exercisable for ten years from the date of grant. Upon termination of service as a director, options which have not vested are forfeited and vested options may be exercised until they expire. All options accelerate upon a change in control of MeriStar Hotels. CERTAIN FEDERAL INCOME TAX CONSEQUENCES RELATING TO OPTIONS Generally, an eligible director does not recognize any taxable income, and the Company is not entitled to a deduction upon the grant of an option. Upon the exercise of an option, the eligible director recognizes ordinary 60 income equal to the excess of the fair market value of the shares acquired over the option exercise price, if any. The director will then take a basis in such shares equal to their fair market value at the time of option exercise, and any gain or loss subsequently recognized upon a sale or exchange of such shares will be treated as capital gain or loss to such director. Special rules may apply as a result of Section 16 of the Exchange Act. The Company is generally entitled to a deduction equal to the compensation taxable to the eligible director as ordinary income. Eligible directors may be subject to backup withholding requirements for federal income tax. Options are generally non-transferable. However, the MeriStar Hotels Directors' Plan authorizes the granting of options which are transferable to Permitted Family Members (as defined therein). The transfer of an option to a Permitted Family Member will have no immediate tax consequences to the Company, the director or the Permitted Family Member. Upon the subsequent exercise of the transferred option by the Permitted Family Member, the director will realize ordinary income in an amount measured by the difference between the option exercise price and the fair market value of the shares on the date of exercise, and the employer will be entitled to a deduction in the same amount. Any difference between such fair market value and the price at which the Permitted Family Member may subsequently sell such shares will be treated as capital gain or loss to the Permitted Family Member, long-term or short-term depending on the length of time the shares have been held by the Permitted Family Member. COMMON STOCK IN LIEU OF FEES Independent Directors may elect to receive all or a portion of their annual retainer in shares of Common Stock rather than cash. Unless an Independent Director elects otherwise, fees paid in stock will be paid at the same time as fees paid in cash. AMENDMENT AND TERMINATION The MeriStar Hotels Directors' Plan provides that the Board of Directors may amend or terminate the MeriStar Directors' Plan at any time. An amendment will not become effective without stockholder approval if the amendment (i) materially increases the number of shares that may be issued under the MeriStar Hotels Directors' Plan or (ii) stockholder approval would be required for compliance with stock exchange rules. No options may be granted under the MeriStar Hotels Directors' Plan after December 31, 2008. STOCK OPTION GRANTS The following table sets forth information regarding the proposed grants of options under the MeriStar Hotels Directors Plan:
NUMBER OF MERISTAR STOCK OPTIONS TO NAME AND POSITION BE GRANTED - ----------------- ------------------ Daniel L. Doctoroff--Director................................ 7,500 Kent R. Hance--Director...................................... 7,500 Joseph McCarthy--Director.................................... 7,500 James McCurry--Director...................................... 7,500 James R. Worms--Director..................................... 7,500
61 EXECUTIVE OFFICERS The following table sets forth the name, age, expected title and business experience for each person who is expected to serve as an executive officer of MeriStar Hotels. For information concerning the business experience of Messrs. Whetsell, Jorns and McCaslin, who are also expected to be members of the MeriStar Hotels Board of Directors, see "Management--The Board of Directors."
NAME AGE POSITION ---- --- -------- Paul W. Whetsell................. 47 Chairman of the Board and Chief Executive Officer Steven D. Jorns.................. 49 Vice Chairman and Chief Operating Officer David E. McCaslin................ 41 President and Director James A. Calder.................. 35 Chief Financial Officer John E. Plunket.................. 42 Executive Vice President, Finance and Development
James A. Calder James A. Calder has served as Senior Vice President of Finance of CapStar since September 1997. From May 1995 to September 1997, he served as Senior Vice President and Corporate Controller of ICF Kaiser International, Inc. Prior to that, from July 1984 to May 1995, he worked for Deloitte & Touche LLP in various capacities, culminating with Audit Senior Manager for the real estate industry. He is a Certified Public Accountant. John E. Plunket John E. Plunket has served as Executive Vice President, Finance and Development of CapStar since November 1993. From September 1991 to October 1993, Mr. Plunket served as Vice President and Principal Broker for CIG International, an investment and hotel asset management company. From February 1988 to August 1991, Mr. Plunket served as Managing Director of Cassidy & Pinkard Inc., a commercial real estate services company. From 1985 to 1987, Mr. Plunket served as Senior Vice President for Oxford Development Corporation. Prior to that, from December 1979 to April 1985, Mr. Plunket worked for Marriott Corporation in various capacities, culminating in Director of Project Finance. EXECUTIVE COMPENSATION The following table sets forth the compensation that is expected to be paid by the Company during 1998 with respect to the Chief Executive Officer and the four most highly compensated executive officers (the "Named Executive Officers").
OPTIONS TO ANNUAL COMPENSATION BE GRANTED --------------------- OTHER ANNUAL LONG-TERM NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION --------------------------- ---- -------- ------- ------------ ------------ PAUL W. WHETSELL............. 1998 $190,000 $ -- $ -- -- Chief Executive Officer and Chairman of the Board STEVEN D. JORNS.............. 1998 190,000 -- -- 250,000 Vice Chairman and Chief Op- erating Officer DAVID E. MCCASLIN............ 1998 300,000 -- -- 87,500 President and Director JAMES A. CALDER.............. 1998 200,000 -- -- 47,500(1) Chief Financial Officer JOHN E. PLUNKET.............. 1998 162,000 -- -- 10,000(2) Executive Vice President, Finance and Development
- -------- (1) Does not include 47,500 options to purchase REIT Common Stock to be granted by the REIT in consideration for services to be rendered by Mr. Calder to the REIT. (2) Does not include 12,500 options to purchase REIT Common Stock to be granted by the REIT in consideration for services to be rendered by Mr. Plunket to the REIT. 62 EMPLOYMENT AGREEMENTS The Company has agreed to enter into employment agreements with Paul W. Whetsell, Steven D. Jorns, David E. McCaslin, James A. Calder and John E. Plunket effective upon the consummation of the Formation Transactions. With respect to Messrs. Whetsell and Jorns, each agreement will be for an initial term of five years with automatic renewals on a year-to-year basis thereafter unless terminated in accordance with its terms. The other employment agreements will be for an initial term of three years, with automatic renewals on a year-to-year basis thereafter, unless terminated in accordance with their respective terms. Certain material terms of these agreements are as follows: BASE SALARY Messrs. Whetsell and Jorns will each receive a base salary of $190,000 per year (Messrs. Whetsell and Jorns will each receive a base salary of $285,000 per year as employees of the REIT). Mr. McCaslin will receive a base salary of $300,000 per year, Mr. Calder will receive a base salary of $200,000 per year and Mr. Plunket will receive a base salary of $162,000 per year. Each base salary will be subject to review annually. ANNUAL INCENTIVE BONUS Each executive shall be eligible to receive an annual incentive bonus at the following targeted amounts of base salary:
THRESHOLD MAXIMUM TARGET TARGET BONUS AMOUNT --------- ------ ------------ Paul W. Whetsell............................... 25% 125% 150% Steven D. Jorns................................ 25% 125% 150% David E. McCaslin.............................. 25% 100% 125% James A. Calder................................ 25% 85% 100% John E. Plunket................................ 25% 85% 100%
The amount of the annual bonus will be based on the achievement of predefined operating or performance goals and other criteria to be established by the Compensation Committee of the Board of Directors. LONG-TERM INCENTIVES Each executive will be eligible to participate in the MeriStar Hotels Incentive Plan. Awards will be made in the discretion of the Compensation Committee. Certain Severance Benefits If, at any time during the term of their respective employment agreements or any automatic renewal period, the employment of Messrs. Whetsell, Jorns, McCaslin, Calder or Plunket is terminated, he shall be entitled to receive the benefits described below. Termination by the Company Without Cause or by the Executive with Good Reason. In the case of Messrs. Whetsell and Jorns, if such executive is terminated without cause or voluntarily terminates with "good reason," he is entitled to a lump sum payment equal to the greater of (i) two times the sum of his total cash-compensation for the preceding year or (ii) the product of his total cash-compensation for the previous fiscal year and the number of full and fractional years remaining in his employment contract, without further extension. In addition, all of the executive's options and restricted stock will vest, effective as of the termination date. The other executives will receive (i) a lump sum payment equal to one times their then annual base salary, (ii) the amount of their bonus for the preceding year, and (iii) immediate vesting and exercisability of all unvested stock options and restricted stock awards. Termination Due to Death or Disability. Upon termination due to death or disability, the executive or his estate will receive a lump sum payment equal to the executive's base salary, plus the pro rata portion of his bonus for the fiscal year in question, in addition to payment for one year of any other compensation due the executive pursuant to his employment contract. The executive's stock options and restricted stock will vest immediately. 63 Voluntary Termination or Termination for Cause. Upon voluntary termination or termination for "cause" by the Company, the executive will receive the pro rata portion of his base salary through the termination date. Any vested options held by the executive will expire ninety (90) days after the termination date. Termination Following a Change in Control. If Mr. Whetsell or Mr. Jorns is terminated without cause or voluntarily terminates with "good reason" within 24 months following a "Change in Control," the executive will receive the following benefits: (i) a lump sum payment equal to the greater of (a) two times the sum of his total cash-compensation for the previous year and (b) the product of his cash compensation for the previous year and the number of full and fractional years remaining in his employment contract; (ii) all unvested stock options held by the executive will vest and be exercisable immediately; and (iii) the 280G Payment. In the case of the other executives, they would each be entitled to the same type of payments provided the termination occurred within 18 months of the Change in Control, except they will only receive two times the sum of their then annual base salary plus bonus. Change in Control Payments. In the case of each of the executives, in the event that any accelerated vesting of the executive's rights with respect to stock options, restricted stock or any other payment, benefit or compensation results in the imposition of an excise tax payable by the executive under Section 4999 of the Code, or any successor or other provision with respect to "excess parachute payments" within the meaning of Section 280G(b) of the Internal Revenue Code, the Company will make a cash payment to the executive in the amount of such excise tax (the "Excise Tax Payment") and shall also make a cash payment to the executive in an amount equal to the total of federal, state and local income and excise taxes for which the executive may be liable on account of such Excise Tax Payment. Termination within 24 Months of Effective Time Notwithstanding anything to the contrary, if the employment of Messrs. Whetsell or Jorns is terminated other than for cause within 24 months after the consummation of the Formation Transactions, stock options or other awards made to Messrs. Whetsell and Jorns will continue to vest and remain exercisable as if such executive's employment had not terminated. THE MERISTAR HOTELS INCENTIVE PLAN The Board of Directors adopted the MeriStar Hotels & Resorts, Inc. Incentive Plan (the "MeriStar Hotels Incentive Plan") for the purposes of (i) attracting and retaining employees, directors and other service providers with ability and initiative, (ii) providing incentives to those deemed important to the success of the Company and related entities, and (iii) associating the interests of these individuals with the interests of the Company and its stockholders through opportunities for increased stock ownership. ADMINISTRATION The MeriStar Hotels Incentive Plan is administered by the Compensation Committee. The Compensation Committee may delegate its authority to administer the MeriStar Hotels Incentive Plan. The Compensation Committee may not, however, delegate its authority with respect to grants and awards to individuals subject to Section 16 of the Exchange Act. As used in this summary, the term "Administrator" means the Compensation Committee or its delegate, as appropriate. ELIGIBILITY Each employee of the Company or of an affiliate of the Company or any other person whose efforts contribute to the Company's performance, including an employee who is a member of the Board of Directors, is eligible to participate in the MeriStar Hotels Incentive Plan ("Participants"). The Administrator may, from time to time, grant stock options, stock awards, incentive awards, or performance shares to Participants. OPTIONS Options granted under the MeriStar Hotels Incentive Plan may be incentive stock options ("ISOs") or nonqualified stock options. An option entitles a Participant to purchase shares of Common Stock from the 64 Company at the option price. The option price may be paid in cash, with shares of Common Stock, or with a combination of cash and Common Stock. The option price will be fixed by the Administrator at the time the option is granted, but the price cannot be less than 100% for existing employees (85% in connection with the hiring of new employees) of the shares' fair market value on the date of grant; provided, however, no more than 10% of the shares under the MeriStar Hotels Incentive Plan will be granted at less than 100% of fair market value. The exercise price of an ISO may not be less than 100% of the shares' fair market value on the date of grant (110% of the fair market value in the case of an ISO granted to a 10% stockholder of the Company). Options may be exercised at such times and subject to such conditions as may be prescribed by the Administrator but the maximum term of an option is ten years in the case of an ISO or five years in the case of an ISO granted to a 10% stockholder. ISOs may only be granted to employees; however, no employee may be granted ISOs (under the MeriStar Hotels Incentive Plan or any other plan of the Company) that are first exercisable in a calendar year for Common Stock having an aggregate fair market value (determined as of the date the option is granted) exceeding $100,000. In addition, no Participant may be granted options in any calendar year for more than 750,000 shares of Common Stock. STOCK AWARDS Participants also may be awarded shares of Common Stock pursuant to a stock award. A Participant's rights in a stock award will be nontransferable or forfeitable or both unless certain conditions prescribed by the Administrator are satisfied. These conditions may include, for example, a requirement that the Participant continue employment with the Company for a specified period or that the Company or the Participant achieve stated, performance-related objectives. The objectives may be stated with reference to the fair market value of the Common Stock or the Company's, a subsidiary's, or an operating unit's return on equity, earnings per share, total earnings, earnings growth, return on capital, funds from operations or return on assets or other acceptable performance criteria. A stock award, no portion of which is immediately vested and nonforfeitable, will be restricted, in whole or in part, for a period of at least three years; provided, however, that the period will be at least one year in the case of a stock award that is subject to objectives based on one or more of the foregoing performance criteria. The maximum number of stock awards that may be granted to an individual in any calendar year cannot exceed 50,000 shares of Common Stock and no more than 30% of the shares available under the plan may be issued in the form of Stock Awards. INCENTIVE AWARDS Incentive awards also may be granted under the MeriStar Hotels Incentive Plan. An incentive award is an opportunity to earn a bonus, payable in cash, upon attainment of stated performance objectives. The objectives may be stated with reference to the fair market value of the Common Stock or on the Company's, a subsidiary's, or an operating unit's return on equity, earnings per share, total earnings, earnings growth, return on capital, funds from operations or return on assets or other acceptable performance criteria. The period in which performance will be measured will be at least one year. No Participant may receive an incentive award payment in any calendar year that exceeds the lesser of (i) 100% of the Participant's base salary (prior to any salary reduction or deferral election) as of the date of grant of the incentive award or (ii) $250,000. PERFORMANCE SHARE AWARDS The MeriStar Hotels Incentive Plan also provides for the award of performance shares. A performance share award entitles the Participant to receive a payment equal to the fair market value of a specified number of shares of Common Stock if certain standards are met. The Administrator will prescribe the requirements that must be satisfied before a performance share award is earned. These conditions may include, for example, a requirement that the Participant continue employment with the Company for a specified period or that the Company or the Participant achieve stated, performance-related objectives. The objectives may be stated with reference to the fair market value of the Common Stock or on the Company's, a subsidiary's, or an operating unit's return on equity, earnings per share, total earnings, earnings growth, return on capital, funds from operations or return on assets or other acceptable performance criteria. To the extent that performance shares are earned, the obligation 65 may be settled in cash, in Common Stock, or by a combination of the two. No Participant may be granted performance shares for more than 12,500 shares of Common Stock in any calendar year. TRANSFERABILITY Awards granted under the MeriStar Hotels Incentive Plan are generally nontransferable. The Compensation Committee may, however, grant awards other than ISOs, which are transferable to Permitted Family Members. SHARE AUTHORIZATION At any given time, the maximum number of shares of Common Stock that may be issued pursuant to awards granted under the MeriStar Hotels Incentive Plan will be the total of (i) twelve (12%) percent of the number of shares of Common Stock that were outstanding as of the end of the immediately preceding calendar year (rounded downward if necessary to eliminate fractional shares), minus (ii) the number of shares subject to awards which were granted under the MeriStar Hotels Incentive Plan through the last day of the immediately preceding calendar year, plus (iii) as of the last day of the immediately preceding calendar year, the number of shares with respect to which previously granted awards have expired. For calendar year 1998, the maximum number of shares of Common Stock that may be issued pursuant to the plan will be twelve (12%) percent of the number of shares of Common Stock outstanding after the Spin-Off. In addition to the foregoing, in no event may the total number of shares of Common Stock covered by outstanding ISOs granted under the MeriStar Hotels Incentive Plan, plus the number of shares of Common Stock issued pursuant to the exercise of ISOs, whenever granted under the MeriStar Hotels Incentive Plan, exceed approximately 1.4 million shares. All awards made under the MeriStar Hotels Incentive Plan will be evidenced by written agreements between the Company and the Participant. The share limitation and the terms of outstanding awards will be adjusted, as the Compensation Committee deems appropriate, in the event of a stock dividend, stock split, combination, reclassification, recapitalization or other similar event. TERMINATION AND AMENDMENT No option or stock award may be granted and no performance shares may be awarded under the MeriStar Hotels Incentive Plan more than ten years after the earlier of the date that the MeriStar Hotels Incentive Plan is adopted by the Board of Directors or the date that it is approved by the Company's stockholders. The Board of Directors may amend or terminate the MeriStar Hotels Incentive Plan at any time, but, except as set forth in the immediately preceding paragraph, an amendment will not become effective without stockholder approval if the amendment materially (i) increases the number of shares of Common Stock that may be issued under the MeriStar Hotels Incentive Plan (other than an adjustment as described above), (ii) changes the eligibility requirements, or (iii) increases the benefits that may be provided under the MeriStar Hotels Incentive Plan. CERTAIN FEDERAL INCOME TAX CONSEQUENCES In general, a Participant will not recognize taxable income upon the grant or exercise of an ISO. However, upon the exercise of an ISO, the excess of the fair market value of the shares received on the date of exercise over the exercise price of the shares will be treated as an adjustment to alternative minimum taxable income. When a Participant disposes of shares acquired by exercise of an ISO, the Participant's gain (the difference between the sale proceeds and the price paid by the Participant for the shares) upon the disposition will be taxed as capital gain provided the Participant does not dispose of the shares within two years after the date of grant nor within one year after the date of exercise, and exercises the option while an employee of the Company or of a subsidiary of the Company or within three months after termination of employment for reasons other than death or disability. If the first condition is not met, the Participant generally will realize ordinary income in the year of the disqualifying disposition. If the second condition is not met, the Participant generally will recognize ordinary income upon exercise of the ISO. In general, a Participant who receives a nonqualified stock option will recognize no income at the time of the grant of the option. Upon exercise of a nonqualified stock option, a Participant will recognize ordinary income in an amount equal to the excess of the fair market value of the shares on the date of exercise over the exercise price of the option. Special timing rules may apply to a Participant who is subject to Section 16(a) of the Exchange Act. 66 A Participant will recognize income on account of the settlement of a performance share award or incentive award. A Participant will recognize income equal to any cash that is paid and with respect to performance share awards, which are settled in shares, will recognize the fair market value of Common Stock (on the date that the shares are first transferable or not subject to a substantial risk of forfeiture) that is received in settlement of the award. The employer (either the Company or its affiliate) will be entitled to claim a federal income tax deduction on account of the exercise of a nonqualified option, the vesting of a restricted share award, payment under an incentive award and the settlement of a performance share award. The amount of the deduction will be equal to the ordinary income recognized by the Participant. The employer will not be entitled to a federal income tax deduction on account of the grant or the exercise of an ISO. The employer may claim a federal income tax deduction on account of certain disqualifying dispositions of Common Stock acquired upon the exercise of an ISO. The transfer of a nonqualified stock option to a Permitted Family Member will have no immediate tax consequences to the Company, the Participant or the Permitted Family Member. Upon the subsequent exercise of the transferred option by the Permitted Family Member, the Participant will realize ordinary income in an amount measured by the difference between the option exercise price and the fair market value of the shares on the date of exercise, and the employer will be entitled to a deduction in the same amount. Any difference between such fair market value and the price at which the Permitted Family Member may subsequently sell such shares will be treated as capital gain or loss to the Permitted Family Member, long-term or short-term depending on the length of time the shares have been held by the Permitted Family Member. There has been no formal pronouncement on the tax consequences of the transfer of other awards. Accordingly, if such transfers are permitted, Participants will be directed to consult their own tax advisers. Section 162(m) of the Code places a limitation of $1,000,000 on the amount of compensation payable to each of the named executive officers that the Company may deduct for federal income tax purposes. The limit does not apply to certain performance-based compensation paid under a plan that meets the requirements of the Code and regulations promulgated thereunder. While the MeriStar Hotels Incentive Plan generally complies with the requirements for performance-based compensation, options granted at less than 100% of fair market value and stock awards granted under the MeriStar Hotels Incentive Plan will not satisfy those requirements. STOCK OPTIONS The following table sets forth for certain executive officers of the Company information regarding the grant of Stock Options as parity awards. See "Management" for information concerning the business experience of the proposed executive officers of the Company.
NUMBER OF STOCK OPTIONS TO BE NAME AND POSITION GRANTED(1) - ----------------- --------------- Steven D. Jorns............................................... 250,000 Vice Chairman, Chief Operating Officer David E. McCaslin............................................. 87,500 President James A. Calder............................................... 47,500 Chief Financial Officer John E. Plunket............................................... 10,000 Executive Vice President, Finance and Development
- -------- (1) The awards described herein are parity awards, such that after the Spin- Off similarly situated executives will have the same number of options to purchase Common Stock. Similar parity awards will be made by the REIT. The options will vest in three annual installments beginning on the first anniversary of the consummation of the Formation Transactions. Except as set forth above, awards granted under the MeriStar Hotels Incentive Plan are discretionary and are therefore not determinable at this time. 67 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of shares of Common Stock that would be held as of the Spin-Off Record Date by (i) each director of MeriStar Hotels, (ii) each executive officer of MeriStar Hotels, (iii) all directors and executive officers of MeriStar Hotels as a group, and (iv) persons who own more than 5% of the outstanding shares of Common Stock, assuming that each such person's beneficial interest in CapStar Common Stock as of February 15, 1998 remains unchanged on the Spin-Off Record Date. Except as otherwise described below, all shares are owned directly and the indicated person has sole voting and investment power. The number of shares of Common Stock includes the number of shares of Common Stock that such person could receive if it exchanged OP Units for shares of Common Stock under certain circumstances.
NUMBER OF SHARES BENEFICIALLY PERCENT OF NAME OF BENEFICIAL OWNER OWNED CLASS* ------------------------ ------------ ---------- Franklin Resources, Inc.(1)......................... 2,082,637 8.4% Pilgrim Baxter & Associates, Ltd.(2)................ 1,828,020 7.3% Morgan Stanley, Dean Witter, Discover & Co.(3)...... 1,608,275 6.5% Massachusetts Financial Services Company(4)......... 1,431,512 5.8% Dresdner RCM Global Investors LLC(5)................ 1,427,800 5.7% James A. Calder..................................... 2,000 * Daniel L. Doctoroff................................. 65,996 * Kent R. Hance....................................... 0 * Steven D. Jorns..................................... 0 * Joseph McCarthy..................................... 0 * David E. McCaslin................................... 63,203 * James McCurry....................................... 0 * John E. Plunket..................................... 32,719 * Paul W. Whetsell.................................... 454,407 1.8% James R. Worms...................................... 0 * Executive officers and directors as a group (10 persons)........................................... 618,325 2.5%
- -------- *Represents less than 1% of the class. (1) The business address of Franklin Resources, Inc. ("FRI") is 777 Mariners Island Blvd., San Mateo, California 94404. Such shares are owned by one or more open or closed-ended investment companies or other managed accounts which are advised by direct or indirect advisory subsidiaries of FRI. Such advisory subsidiaries may be deemed to beneficially own such shares. Charles B. Johnson and Rupert H. Johnson, Jr. each own in excess of 10% of FRI and, as such, also may be deemed to own such shares held, directly or indirectly, by FRI. (2) The business address of Pilgrim Baxter & Associates, Ltd. is 825 Duportail Road, Wayne, Pennsylvania 19087. (3) The business address of Morgan Stanley, Dean Witter, Discover & Co. is 1585 Broadway, New York, New York 10036. Such shares are owned by accounts managed on a discretionary basis by Morgan Stanley, Dean Witter, Discover & Co. No such account holds more than 5% of the class. (4) The business address of Massachusetts Financial Services Company is 500 Boylston Street, Boston, Massachusetts 02116. (5) The business address of Dresdner RCM Global Investors LLC is Four Embarcadero Center, San Francisco, California 94111. Dresdner RCM Global Investors LLC ("Dresdner RCM") is an investment advisor. RCM Limited L.P. ("RCM Limited") is the Managing Agent of Dresdner RCM. RCM Limited has beneficial ownership of such shares only to the extent that RCM Limited may be deemed to have beneficial ownership of securities beneficially owned by Dresdner RCM. RCM General Corporation ("RCM General") is the General Partner of RCM Limited. RCM General has beneficial ownership of such shares only to the extent RCM General may be deemed to have beneficial ownership of securities beneficially owned by Dresdner RCM. 68 DESCRIPTION OF CAPITAL STOCK The following summary information is qualified in its entirety by the provisions of the Charter and By-laws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. See "Available Information." The authorized capital stock of MeriStar Hotels consists of 100,000,000 shares of Common Stock, par value $0.01 per share, and 10,000,000 shares of preferred stock ("Preferred Stock"), of which 100 shares of Common Stock and no shares of Preferred Stock are outstanding. Upon completion of the Rights Offering, . shares of Common Stock and no shares of Preferred Stock will be outstanding. Prior to the Spin-Off, there has been no public market for the Common Stock and there can be no assurance that any such market will develop. See "Risk Factors--Absence of a Public Market for Common Stock." COMMON STOCK Voting Rights. Except as set forth below under "Certain Antitakeover Provisions," the Charter provides that holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders. Dividends. Each share of Common Stock is entitled to receive dividends if, as and when declared by the Board. Under Delaware law, a corporation may declare and pay dividends out of surplus, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding year. No dividends may be declared out of net profits, however, if the capital of the corporation has been diminished by depreciation in the value of its property, losses or otherwise to an amount less than the aggregate amount of capital represented by any issued and outstanding stock having a preference on the distribution of assets. See "Dividend Policy." Other Rights. Stockholders of MeriStar Hotels have no preemptive or other rights to subscribe for additional shares. Subject to any rights of the holders of any Preferred Stock, all holders of Common Stock are entitled to share equally on a share-for-share basis in any assets available for distribution to stockholders on liquidation, dissolution or winding up of MeriStar Hotels. No shares of Common Stock are subject to redemption or a sinking fund. All outstanding shares of Common Stock are, and the Common Stock to be outstanding upon completion of the Rights Offering will be, fully paid and nonassessable. PREFERRED STOCK The Board of Directors is authorized to issue, without further authorization from stockholders, up to 10,000,000 shares of Preferred Stock in one or more series and to determine, at the time of creating each series, the distinctive designation of, and the number of shares in, the series, its dividend rate, the number of votes, if any, for each share of such series, the price and terms on which such shares may be redeemed, the terms of any applicable sinking fund, the amount payable upon liquidation, dissolution or winding up, the conversion rights, if any, and such other rights, preferences and priorities of such series as the Board of Directors may be permitted to fix under the laws of the State of Delaware as in effect at the time such series is created. The issuance of Preferred Stock could adversely affect the voting power of the holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of MeriStar Hotels. 69 CERTAIN ANTITAKEOVER PROVISIONS THE CHARTER AND BY-LAWS The Charter and By-laws and applicable sections of the DGCL contain several provisions that may make the acquisition of control of the Company more difficult without the prior approval of the Board of Directors. Certain provisions of the Charter and the By-laws, among other things: (i) classify the Board of Directors into three classes, each of which serves for staggered three-year terms; (ii) provide that a director of Company may be removed by the stockholders only for cause; (iii) provide that only the Chairman of the Board, Vice Chairman, President or the Board of Directors may call special meetings of the stockholders; (iv) provide that the stockholders may take action only at a meeting of Company stockholders, not by written consent; (v) provide that stockholders must comply with certain advance notice procedures in order to nominate candidates for election to the Board of Directors or to place stockholders' proposals on the agenda for consideration at meetings of the stockholders; and (vi) provide that the stockholders may amend or repeal any of the foregoing provisions of the Charter only by a vote of 66 2/3% of the stock entitled to vote generally in the election of directors. In general, Section 203 of the DGCL prohibits publicly held Delaware corporations from engaging in a "business combination" with an "interested stockholder" for a period of three years following the time of the transaction in which the person or entity became an interested stockholder, unless (i) prior to such time, either the business combination or the transaction which resulted in the stockholder's becoming an interested stockholder is approved by the Board of Directors, (ii) upon consummation of the transaction which resulted in the stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the outstanding voting stock of the corporation (excluding for this purpose certain shares owned by persons who are directors and also officers of the corporation and by certain employee benefit plans) or (iii) on or after such date the business combination is approved by the Board of Directors and by the affirmative vote (and not by written consent) of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. For the purposes of Section 203, a "business combination" is broadly defined to include mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or, in certain cases, within the immediately preceding three years did own) 15% or more of the corporation's voting stock. The Charter authorizes the Board of Directors to issue up to 10 million shares of Preferred Stock in series, and to establish the rights and preferences (including the convertibility of such shares of Preferred Stock into shares of Common Stock) of any series of Preferred Stock so issued. The issuance of Preferred Stock could have the effect of delaying or preventing a change in control of Company, even if such a change in control were in the best interests of some, or a majority, of Company's stockholders. See "Description of Capital Stock". RESTRICTIONS ON OWNERSHIP The Charter also provides, with certain exceptions, that no person may own, either directly or under the attribution rules set forth in Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code, more than 9.9% of the shares of any class of the Company's stock (the "Ownership Limit"). The Charter provides that a transfer of Common Stock that would otherwise result in ownership of Common Stock in excess of the Ownership Limit will be void ab initio as to the Common Stock that would otherwise be owned in violation of the Ownership Limit and the intended transferee will acquire no rights or economic interest in such Common Stock. In addition, the Charter provides that Common Stock that would otherwise be owned, whether as a result of a transfer or otherwise, in violation of the Ownership Limit will automatically be designated as Excess Shares until the intended transferee does not own Common Stock in excess of the Ownership Limit. Such Excess Shares shall be transferred, by operation of law, to a special trust for the benefit of a charitable organization designated by the Board of Directors of the Company. The trustee of the special trust shall have the authority to exercise any voting rights associated with Excess Shares during the period that they are held as Excess Shares. Except as described below, any distributions on Excess Shares shall be paid to the trustee of the special trust for the benefit of the charitable organization designated by the Board of Directors of the Company. Excess Shares may be transferred only to a person 70 designated by the Board of Directors whose ownership of the Excess Shares will not result in a violation of the Ownership Limit, in which case such Excess Shares cease to be held as Excess Shares. In the event of a transfer of Excess Shares, the holder of the shares of Common Stock that were automatically exchanged for Excess Shares shall be entitled to receive, from the proceeds of the transfer of the Excess Shares, an amount equal to the lesser of (a) the proceeds from the transfer of the Excess Shares and (b) the amount paid by such holder if the automatic designation as Excess Shares resulted from a transfer for value or, if the automatic designation did not result from a transfer for value, the fair market value of the shares of Common Stock on the date of their designation as Excess Shares. In the event of a liquidation, dissolution or winding up of the Company while shares are held as Excess Shares, the holder of the shares of Common Stock that were automatically designated as Excess Shares will be entitled to receive, from the proceeds of such liquidation, dissolution or winding-up, an amount equal to the lesser of (a) the proceeds from the liquidation, dissolution or winding-up which would have been applicable to such shares if they had remained shares of Common Stock and (b) the amount paid by such holder if the automatic designation as Excess Shares resulted from a transfer for value or, if the automatic designation did not result from a transfer for value, the fair market value of the shares of Common Stock on the date of their designation as Excess Shares. Any excess proceeds from a transfer of the Excess Shares or on liquidation, dissolution or winding-up shall be paid to the trustee of the special trust for the benefit of the designated charitable organization. The Company shall also have the right to purchase any Excess Shares at a price equal to the lesser of (a) the fair market value of such shares on the date that the Company or its designee exercises such right to purchase and (b) the price per share in the transaction that resulted in designation of such Excess Shares or, if the Excess Share designation resulted from an event other than a transfer for value, the fair market value of the Common Stock designated as Excess Shares at the time of such designation. EXPERTS The balance sheet of MeriStar Hotels & Resorts, Inc. as of March 31, 1998 and the combined financial statements of the management and leasing business of CapStar Hotel Company and subsidiaries ("OpCo") as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997, included in this Prospectus, have been included herein in reliance on the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements of AGH Leasing, L.P. as of December 31, 1997 and 1996 and for the year ended December 31, 1997 and for the period from July 31, 1996 through December 31, 1996, the financial statements of American General Hospitality, Inc. as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and the balance sheets of Winston Hospitality, Inc. as of October 31, 1997 and December 31, 1996 and the statements of income, shareholders' equity, and cash flows for the ten months ended October 31, 1997 and each of the two years in the period ended December 31, 1996, included in this registration statement have been audited by Coopers & Lybrand L.L.P., independent accounts, as set forth in their reports thereon. Each of the above referenced financial statements have been included by reference herein in reliance upon the authority of said firm as expert in accounting and auditing. LEGAL MATTERS Paul, Weiss, Rifkind, Wharton & Garrison will pass on the validity of the Rights and the Common Stock to be issued in connection with the Rights Offering and certain federal income tax consequences of the Rights Offering. 71 INDEX TO FINANCIAL STATEMENTS MERISTAR HOTELS & RESORTS, INC. Independent Auditors' Report............................................. F-2 Balance Sheet as of March 31, 1998....................................... F-3 Notes to Balance Sheet................................................... F-4 OPCO Independent Auditors' Report............................................. F-5 Combined Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997 and 1996........................................................... F-6 Combined Statements of Operations for the three months ended March 31, 1998 and 1997 (unaudited) and the years ended December 31, 1997, 1996 and 1995................................................................ F-7 Combined Statements of Owner's Equity for the three months ended March 31, 1998 (unaudited) and the years ended December 31, 1997, 1996 and 1995.................................................................... F-8 Combined Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (unaudited) and the years ended December 31, 1997, 1996 and 1995................................................................ F-9 Notes to Combined Financial Statements................................... F-10 WINSTON HOSPITALITY, INC. Report of Independent Accountants........................................ F-17 Balance Sheets as of October 31, 1997 and December 31, 1996.............. F-18 Statements of Income (for the ten months ended October 31, 1997 and 1996 and the years ended December 31, 1996 and 1995)......................... F-19 Statements of Shareholders' Equity (for the ten months ended October 31, 1997 and the years ended December 31, 1996 and 1995).................... F-20 Statements of Cash Flows (for the ten months ended October 31, 1997 and 1996 and the years ended December 31, 1996 and 1995).................... F-21 Notes to Financial Statements............................................ F-22 AMERICAN GENERAL HOSPITALITY, INC. Report of Independent Accountants........................................ F-24 Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997 and 1996.................................................................... F-25 Statements of Operations for the three months ended March 31, 1998 and 1997 (unaudited) and the years ended December 31, 1997, 1996 and 1995... F-26 Statements of Stockholders' Equity for the three months ended March 31, 1998 (unaudited) and the years ended December 31, 1997, 1996 and 1995... F-27 Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (unaudited) and the years ended December 31, 1997, 1996 and 1995... F-28 Notes to Financial Statements............................................ F-29 AGH LEASING, L.P. Report of Independent Accountants........................................ F-32 Consolidated Balance Sheets as of March 31, 1998 (unaudited) December 31, 1997 and 1996........................................................... F-33 Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 (unaudited) and the year ended December 31, 1997 and the period July 31, 1996 (Inception of Operations) through December 31, 1996.................................................................... F-34 Consolidated Statements of Partners' Deficit for the period from July 31, 1996 (Inception of Operations) through December 31, 1996 and for the three months ended March 31, 1998 (unaudited) and the year ended December 31, 1997....................................................... F-35 Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (unaudited) and the year ended December 31, 1997 and for the period July 31, 1996 (Inception of Operations) through December 31, 1996................................................................ F-36 Notes to Consolidated Financial Statements............................... F-37 AGH LEASING, L.P. Proforma Consolidated Statements of Operations........................... F-42 Notes to Proforma Consolidated Statements of Operations.................. F-45
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors MeriStar Hotels & Resorts, Inc. We have audited the accompanying balance sheet of MeriStar Hotels & Resorts, Inc. as of March 31, 1998. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based upon our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of MeriStar Hotels & Resorts, Inc. as of March 31, 1998, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Washington, DC May 19, 1998 F-2 MERISTAR HOTELS & RESORTS, INC. BALANCE SHEET MARCH 31, 1998 ASSETS Cash..................................................................... $100 STOCKHOLDER'S EQUITY Common stock $.01 par value: 1,000 shares authorized; 100 issued and outstanding.................... 1 Additional paid-in-capital............................................... 99 ---- Total stockholder's equity............................................. $100 ====
See accompanying notes to balance sheet F-3 MERISTAR HOTEL & RESORTS, INC. NOTES TO BALANCE SHEET MARCH 31, 1998 1. FORMATION OF THE COMPANY CMC Operating Company was incorporated in the state of Delaware on March 13, 1998. CMC Operating Company subsequently changed its name to MeriStar Hotels & Resorts, Inc. (the "Company"). The Company has filed a registration statement on Form S-1 with the Securities and Exchange Commission with respect to a proposed distribution of common stock and a proposed public offering of non- transferable rights to acquire common stock. The Company is currently a wholly-owned subsidiary of CapStar Hotel Company ("CapStar"). The Company will be spun off by CapStar to become the lessee, manager and operator of various hotel assets, including those currently owned, leased and managed by CapStar and its affiliates. 2. PLANNED TRANSACTIONS CapStar will initially have two $50 million revolving credit facilities, one through MeriStar Hospitality Corporation, a real estate investment trust formed by the proposed merger of CapStar and American General Hospitality ("AGH") and one through third-party lenders. CapStar intends initially to capitalize the Company with approximately $48 million of cash, including approximately $18 million of forgiveness of indebtedness and a $30 million draw on the proposed revolving credit facilities. The Company intends to draw an additional $35 million from the revolving credit facilities in connection with the purchase of American General Hospitality, Inc. and AGH Leasing, L.P. currently the manager and lessee, respectively, of AGH's hotel properties. Upon consummation of the planned transactions, the Company will be the lessee/manager of substantially all of MeriStar Hospitality Corporation's hotel properties. F-4 INDEPENDENT AUDITORS' REPORT The Board of Directors CapStar Hotel Company: We have audited the accompanying combined balance sheets of the management and leasing business of CapStar Hotel Company and subsidiaries ("OpCo") as of December 31, 1997 and 1996 and the related combined statements of operations, owners' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These combined financial statements are the responsibility of OpCo's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of OpCo as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Washington, D.C. March 30, 1998 F-5 OPCO COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, MARCH 31, ---------------- 1998 1997 1996 ----------- ------- ------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents...................... $ 4,706 $ 2,477 $ 305 Cash and cash equivalents held on behalf of af- filiates...................................... 23,896 24,545 17,843 Accounts receivable, net of allowance for doubtful accounts of $134, $72, and $33, re- spectively.................................... 6,669 7,162 1,703 Prepaid expenses............................... 973 1,097 777 Deposits, inventory and other.................. 709 756 111 ------- ------- ------- Total current assets......................... 36,953 36,037 20,739 Fixed assets: Furniture, fixtures and equipment.............. 3,320 2,701 726 Accumulated depreciation....................... (439) (418) (210) ------- ------- ------- Total fixed assets, net...................... 2,881 2,283 516 Investments in affiliates........................ 7,047 8,058 1,926 Notes receivable................................. 2,100 2,100 500 Intangible assets, net of accumulated amortization of $1,041, $719 and $362, respectively.................................... 35,738 35,941 685 ------- ------- ------- $84,719 $84,419 $24,366 ======= ======= ======= LIABILITIES AND OWNERS' EQUITY Current Liabilities: Accounts payable............................... $ 1,900 $ 2,082 $ 543 Accrued expenses and other liabilities......... 11,066 8,532 1,282 Percentage lease payable....................... 6,910 5,682 -- Due to affiliates, net......................... 18,372 22,287 18,649 Advance deposits............................... 193 146 -- Long-term debt, current portion................ 315 392 336 ------- ------- ------- Total current liabilities.................... 38,756 39,121 20,810 Long-term debt................................... 461 589 549 ------- ------- ------- Total liabilities............................ 39,217 39,710 21,359 Commitments and contingencies Minority interest................................ 3,835 3,800 -- Owners' equity................................... 41,667 40,909 3,007 ------- ------- ------- $84,719 $84,419 $24,366 ======= ======= =======
See accompanying notes to combined financial statements. F-6 OPCO COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS)
THREE MONTHS ENDED YEARS ENDED DECEMBER MARCH 31, 31, -------------------- --------------------- 1998 1997 1997 1996 1995 --------- --------- ------- ------ ------ (UNAUDITED) Revenue: Leased hotels' operations: Rooms......................... $2223,404 $ -- $ 9,880 $ -- $ -- Food and beverage............. 1,357 -- 1,397 -- -- Other operating departments... 1,219 -- 474 -- -- Hotel management and other revenue........................ 4,150 1,139 12,088 7,050 5,354 --------- --------- ------- ------ ------ Total revenue............... 30,130 1,139 23,839 7,050 5,354 --------- --------- ------- ------ ------ Leased hotels' operating expenses by department: Rooms........................... 5,124 -- 2,533 -- -- Food and beverage............... 995 -- 909 -- -- Other operating departments..... 498 -- 261 -- -- Undistributed operating expenses: Administrative and general...... 6,963 2,202 10,473 6,140 4,745 Lease expense................... 10,655 -- 4,135 -- -- Property operating costs........ 4,142 -- 1,917 -- -- Depreciation and amortization... 421 96 636 349 84 --------- --------- ------- ------ ------ Total operating expenses.... 28,798 2,298 20,864 6,489 4,829 --------- --------- ------- ------ ------ Net operating income.............. 1,332 (1,159) 2,975 561 525 Equity in earnings (losses) of affiliates....................... (521) -- 46 -- -- Interest expense.................. 18 14 56 123 44 --------- --------- ------- ------ ------ Income before minority interests.. 793 (1,173) 2,965 438 481 Minority interests................ 35 -- 103 -- -- --------- --------- ------- ------ ------ Net income (loss)................. $ 758 $ (1,173) $ 2,862 $ 438 $ 481 ========= ========= ======= ====== ======
See accompanying notes to combined financial statements. F-7 OPCO COMBINED STATEMENTS OF OWNERS' EQUITY (IN THOUSANDS) Capital contributions since January 12, 1995........................... $ 398 Capital distributions.................................................. (116) Net income............................................................. 481 ------- Balance, December 31, 1995............................................. 763 Capital contributions.................................................. 1,806 Net income............................................................. 438 ------- Balance, December 31, 1996............................................. 3,007 Capital contributions.................................................. 35,040 Net income............................................................. 2,862 ------- Balance, December 31, 1997............................................. 40,909 Net income (unaudited)................................................. 758 ------- Balance, March 31, 1998 (unaudited).................................... $41,667 =======
See accompanying notes to the combined financial statements. F-8 OPCO COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, ------------------- ----------------------- 1998 1997 1997 1996 1995 --------- --------- ------ ------- ------ (UNAUDITED) Operating activities: Net income (loss).............. $ 758 $ (1,173) $2,862 $ 438 $ 481 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................ 421 96 636 349 84 Equity in earnings of affiliates.................. 521 -- (46) -- -- Minority interests........... 35 -- 103 -- -- Changes in operating assets and liabilities: Accounts receivable, net... 493 40 (5,459) (412) (1,290) Prepaid expenses........... 124 (257) (320) (724) (11) Deposits, Inventory and other..................... 47 (211) (645) (111) -- Cash and cash equivalents held on behalf of affiliates................ 649 (120) (6,702) (17,843) -- Accounts payable........... (182) 367 1,539 276 267 Due to affiliates, net..... (3,915) 484 3,638 18,344 305 Accrued expenses and other liabilities............... 2,534 1,456 7,250 909 372 Percentage lease payable... 1,228 -- 1,463 -- -- Advance deposits........... 47 -- 146 -- -- -------- --------- ------ ------- ------ Net cash provided by operating activities...................... 2,760 682 4,465 1,226 208 -------- --------- ------ ------- ------ Investing activities: Purchases of fixed assets...... (697) (234) (2,046) (382) (61) Purchases of intangible assets. (119) (355) (924) (824) -- Investments in affiliates...... -- -- (2,078) (150) -- Distributions from investments in affiliates................. 490 37 147 30 -- Additions to notes receivable.. -- (350) (1,600) (500) -- -------- --------- ------ ------- ------ Net cash used in investing activities...................... (326) (902) (6,501) (1,826) (61) -------- --------- ------ ------- ------ Financing activities: (Principal payments on) proceeds from long-term debt, net........................... (205) (85) 96 662 (38) Capital contributions.......... -- -- 4,112 -- 250 Capital distributions.......... -- -- -- -- (116) Loan from (repayments to) affiliate..................... -- -- -- (950) 950 Repayments from (loans to) management.................... -- -- -- 987 (987) -------- --------- ------ ------- ------ Net cash provided (used) by financing activities............ (205) (85) 4,208 699 59 -------- --------- ------ ------- ------ Net increase (decrease) in cash and cash equivalents............ 2,229 (305) 2,172 99 206 Cash and cash equivalents, beginning of period............. 2,477 305 305 206 -- -------- --------- ------ ------- ------ Cash and cash equivalents, end of period.......................... $4,706 $ -- $2,477 $ 305 $ 206 ======== ========= ====== ======= ======
See accompanying notes to combined financial statements. F-9 OPCO NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 1. ORGANIZATION CapStar Hotel Company and its subsidiaries ("CapStar") was formed pursuant to certain formation transactions prior to or on August 20, 1996. Prior to its August 20, 1996 initial public offering (the "IPO"), CapStar's business was conducted through its predecessor entities, EquiStar Hotel Investors, L.P. and subsidiaries (collectively, "EquiStar") and CapStar Management Company, L.P. ("CMC"). The principal activity of CapStar is to acquire, renovate, reposition and manage upscale, full-service hotels. CapStar also leases and manages certain other hotels. CapStar owns, leases and manages hotels through its two operating partnerships: CMC and CapStar Management Company II, L.P. ("CMC II"). Separate wholly-owned limited liability companies or limited partnerships directly own the hotels and leases. The owned, leased and managed hotels are located in 29 states, the District of Columbia, the U.S. Virgin Islands and Canada, and are operated under various franchise agreements. OpCo is comprised of the assets, liabilities, and related operations (collectively "OpCo") associated with the hotel management and leasing business of CapStar, and certain hotel ownership investments of CapStar which are directly owned by certain CapStar subsidiaries, as follows: . the hotel management business and certain investments in affiliates owned by CMC; . the hotel management business and 38 hotel leases owned by CapStar Winston Company, LLC "CapStar Winston" which was purchased by CapStar in 1997; . the hotel lease and investment in BoyStar Ventures, L.P. owned by CapStar BK Company, LLC "CapStar BK" which was purchased by CapStar in 1997; and . the investment in CapStar Wyandotte Company, LLC owned by CapStar KC Company, LLC "CapStar KC" which was purchased by CapStar in 1997. . the investment in Ballston Parking Associates owned by CapStar Virginia Company, LLC "CapStar Virginia" which was purchased by CapStar in 1996. The following table outlines OpCo's portfolio of managed and leased hotels:
CAPSTAR HOTELS THIRD PARTY LEASED MANAGED MANAGED HOTELS HOTELS TOTAL ------------- ----------------- ------------ ------------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ------ ------- -------- ------ ----- ------ ------ December 31, 1997.... 47 12,019 27 4,631 40 5,687 114 22,337 December 31, 1996.... 19 5,166 28 4,619 -- -- 47 9,785 December 31, 1995.... 6 2,101 41 6,089 -- -- 47 8,190
These financial statements present the financial position and operations of OpCo as of December 31, 1997 and 1996, and for each of the years in the three- year period ended December 31, 1997. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Combination- The combined financial statements include the operations of CMC, CapStar Winston, CapStar BK, CapStar KC, and CapStar Virginia, as described above. All significant intercompany transactions and balances have been eliminated in the combination. Investments in affiliates in which OpCo holds a voting interest of 50% or less and exercises significant influence are accounted for using the equity method. OpCo uses the cost method to account for its investment in an entity in which it does not have the ability to exercise significant influence. F-10 OPCO NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) Cash and Cash Equivalents--OpCo considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. OpCo invests excess cash balances on behalf of the CapStar-owned hotels it manages. This cash is recorded as cash and cash equivalents held on behalf of affiliates with the offsetting liability recorded in due to affiliates, net. Fixed Assets--Fixed assets are recorded at cost and are depreciated using the straight-line method over lives ranging from five to seven years. Intangible Assets--Intangible assets consist of the value of goodwill and lease contracts purchased, organization and franchise costs, and costs incurred to obtain management contracts. Goodwill represents the excess of cost over the fair value of the net assets of the acquired businesses. Intangible assets are amortized on a straight-line basis over the estimated useful lives of the underlying assets ranging from five to 40 years. The carrying values of long-lived intangible assets, which include fixed assets and all intangible assets, are evaluated periodically in relation to the operating performance and expected future undiscounted cash flows of the underlying assets. Adjustments are made if the sum of expected future undiscounted net cash flows is less than book value. The impairment loss to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. No impairment losses were recorded during 1997, 1996 or 1995. Income Taxes--No provision is made for income taxes as the operations of OpCo are directly owned by a partnership and four limited liability companies, and therefore, any such liability is the liability of the partners and members. Revenue Recognition--Revenue is earned through the operation and management of the hotel properties and is recognized when earned. Minority Interests--Minority interests represent OpCo's proportionate share of the value of operating partnership units ("OP Units") of CMC and CMC II issued to third parties in conjunction with CapStar's purchases of certain hotels and CapStar Winston. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Unaudited interim financial statements--The combined financial statements as of March 31, 1998 and for the three months ended March 31, 1998 and 1997 are unaudited. In the opinion of management, such financial statements reflect all adjustments necessary for a fair presentation of the results of the respective interim periods. All such adjustments are of a normal, recurring nature. F-11 OPCO NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 3. INVESTMENTS IN AFFILIATES OpCo has ownership interests in certain corporate joint ventures and affiliated companies. OpCo's investments in affiliates are summarized as follows:
DECEMBER 31, OWNERSHIP ------------- INTEREST 1997 1996 --------- ------ ------ CapStar Wyandotte Company LLC..................... 50% $3,023 $ -- HGI Holdings, LLC................................. 1,895 -- BoyStar Ventures, L.P. ........................... 9% 1,175 -- Ballston Parking Associates....................... 36% 1,629 1,776 Other............................................. 336 150 ------ ------ $8,058 $1,926 ====== ======
Combined summarized financial information of OpCo's investments in affiliates accounted for using the equity method as of and for the years ended December 31, 1997 and 1996 is as follows:
1997 1996 ------ ----- Balance Sheet data: Current assets............................................. $1,773 34 Non-current assets......................................... 32,766 5,469 Current liabilities........................................ 1,094 -- Non-current liabilities.................................... 7,000 -- Operating data: Revenue.................................................... $1,742 589 Net income (loss).......................................... (110) 141
4. NOTES RECEIVABLE Notes receivable consists of the following:
DECEMBER 31, ----------- 1997 1996 ------ ---- Loans to managed hotels....................................... $2,000 $500 Other......................................................... 100 -- ------ ---- $2,100 $500 ====== ====
In the normal course of business, OpCo makes interest bearing loans to certain managed hotels and other affiliates. These loans generally require monthly payments of interest. Of the outstanding notes receivable at December 31, 1997 and 1996, $900 and $0, respectively, of the balances are secured by a second mortgage on a certain hotel; $250 and $500 of the balances, respectively, are guaranteed by third parties; and $950 and $0, respectively, is unsecured. The loans bear interest at market rates between 8% and 9%. The loans to managed hotels mature between 2001 and 2007 while loans to other affiliates are payable on 30 days notice. OpCo earned interest income on these loans of $82 and $11 during 1997 and 1996, respectively. F-12 OPCO NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 5. INTANGIBLE ASSETS Intangible assets consist of the following:
DECEMBER 31, -------------- 1997 1996 ------- ----- Goodwill................................................... $27,605 $ -- Lease contracts............................................ 6,576 -- Organization costs......................................... 897 897 Management contracts....................................... 867 150 Other...................................................... 715 -- ------- ----- 36,660 1,047 Less accumulated amortization.............................. (719) (362) ------- ----- $35,941 $ 685 ======= =====
6. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, -------------- 1997 1996 ------ ------ Note payable............................................ $ 855 $ 665 Capital leases.......................................... 126 220 ------ ------ 981 885 Less current portion.................................... (392) (336) ------ ------ $ 589 $ 549 ====== ======
Note Payable--In June 1996, OpCo entered into a note payable to finance liability insurance premiums. This note was amended in December 1997 to increase the principal balance. The principal balance was changed to $887 and the maturity date was extended to May 2000. The note accrues interest at an annual rate of 6.4% and requires monthly payments of principal and interest. OpCo incurred interest expense of $33 and $19 during 1997 and 1996, respectively. Capital Leases--OpCo has entered into various capital leases for office equipment which expire between 1998 and 2000. The leases require monthly payments of principal and interest. Interest rates on the leases range from 6.4% to 13.3%. The Company incurred interest expense on the leases of $23 in 1997, $28 in 1996, and $18 in 1995. Future Maturities--Aggregate future maturities of the above obligations are as follows: 1998.............................................. $392 1999.............................................. 417 2000.............................................. 172 ---- $981 ====
During 1996 and 1995, OpCo incurred interest expense of $76 and $26, respectively, on the note payable to an affiliate of OpCo. F-13 OPCO NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 7. RELATED-PARTY TRANSACTIONS OpCo manages hotels owned by CapStar. Hotel management revenue associated with these hotels was $7,238, $2,625 and $917 during 1997, 1996 and 1995, respectively. Management believes these contracts are at prevailing market rates. In the normal course of business, OpCo manages cash on behalf of CapStar and its owned hotels and advances and receives amounts on behalf of CapStar and its owned hotels. At December 31, 1997 and 1996, the net amount due to CapStar and its owned hotels was $24,545 and $17,843, respectively. OpCo also manages hotels that are owned in part by affiliates or officers of CapStar. Hotel management revenue associated with these hotels was $943, $824 and $1,104 during 1997, 1996 and 1995, respectively. At December 31, 1997, 1996 and 1995, the amount due from these properties related to hotel management fees was $798, $304 and $237, respectively. Management believes these contracts are at prevailing market rates. 8. COMMITMENTS AND CONTINGENCIES OpCo leases certain hotels under non-cancelable operating leases with initial terms ranging from 5 to 15 years, expiring through 2012. OpCo also leases corporate office space. Future minimum lease payments required under these operating leases as of December 31, 1997 were as follows: 1998.................................... $ 20,533 1999.................................... 20,728 2000.................................... 20,653 2001.................................... 20,674 2002.................................... 20,701 Thereafter.............................. 189,757 --------- $ 293,046 =========
In connection with the CapStar Winston hotel leases, CapStar has guaranteed certain lease obligations of OpCo. CapStar was contingently liable for lease guarantees on 38 of the hotel leases aggregating up to a maximum of approximately $20 million at December 31, 1997. In addition, two other hotel leases are secured by CapStar BK's and CapStar KC's pledges of their interests in the affiliate companies that own those leased hotels. OpCo knows of no event of default that would require either CapStar, CapStar Winston, CapStar BK, or CapStar KC to satisfy these guarantees or pledges of security interests. OpCo operates and manages 27 hotels owned by third parties containing 4,631 rooms. OpCo's management agreements (the "Management Agreements") have remaining terms ranging from one month to nine years. Substantially all of the Management Agreements permit the hotel owners to terminate such agreements prior to the stated expiration dates if the applicable hotel is sold, and several of the Management Agreements permit the hotel owners to terminate such agreements prior to the stated expiration date without cause or by reason of the failure of the applicable hotel to obtain specified levels of performance. In the course of OpCo's normal business activities, various lawsuits, claims and proceedings have been or may be instituted or asserted against OpCo. Based on currently available facts, management believes that the disposition of matters that are pending or asserted will not have a material adverse effect on the combined financial position, results of operations or liquidity of OpCo. F-14 OPCO NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 9. ACQUISITIONS In November 1997, CapStar acquired substantially all of the assets of Winston Hospitality, Inc. ("Winston") for a purchase price of $34,000 and contributed the assets to OpCo. Winston leased 38 and managed 28 of the operating hotels of Winston Hotels, Inc., a real estate investment trust. The acquisition of Winston has been accounted for as a purchase and, accordingly, the operating results of Winston have been included in OpCo's combined financial statements since the date of acquisition. The excess of the aggregate purchase price over the fair market value of net identifiable assets acquired was approximately $27,605 and is being amortized over 40 years. The following unaudited pro forma summary presents information as if Winston had been acquired at the beginning of the periods presented. The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of OpCo. PRO FORMA INFORMATION (UNAUDITED)
1997 1996 ------- ------- Total revenue............................................. $94,911 $68,895 Net income before minority interest....................... 3,991 253 Net income................................................ 3,698 235
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the OpCo's quarterly results of operations:
1997 ------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Total revenue............................... $1,838 $2,816 $4,794 $14,391 Total operating expenses.................... 1,390 2,129 3,911 13,434 Net operating income........................ 448 687 883 957 Net income.................................. 424 650 861 927 1996 ------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Total revenue............................... $1,158 $1,812 $1,982 $ 2,098 Total operating expenses.................... 1,066 1,668 1,824 1,931 Net operating income........................ 92 144 158 167 Net income.................................. 72 113 123 130
F-15 OPCO NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 11. SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, --------------- -------------------- 1998 1997 1997 1996 1995 ------ ------ ------- ------ ---- (UNAUDITED) Cash paid for interest..... $ 18 $ 14 $ 56 $ 138 $ 18 Assets contributed (liabil- ities assigned) to OpCo: Percentage lease payable... -- -- $(4,219) $ -- $-- Investments in affiliates.. -- -- 4,155 1,806 -- Intangible assets.......... -- -- 34,689 -- -- Non-cash investing and fi- nancing activities: Capital contributions by owners.................... -- -- $30,928 $1,806 $148 Minority interests......... -- -- 3,697 -- -- Additions to equipment through capital leases.... -- -- -- -- 261
12. SUBSEQUENT EVENTS On March 15, 1998, CapStar and American General Hospitality Corporation signed a definitive agreement to merge. As part of the merger, CapStar will spin-off OpCo to its current shareholders as a C corporation to be called MeriStar Hotels & Resorts, Inc. Subsequently, CapStar will merge into American General Hospitality Corporation. The combined entity will be renamed MeriStar Hospitality Corporation and will own 108 hotels with 27,336 rooms in 27 states, the District of Columbia and Canada. As a condition of the proposed merger, MeriStar Hotels & Resorts is to acquire privately-held American General Hospitality, Inc. and AGH Leasing, L.P., which together currently operate and/or lease 44 of American General Hospitality Corporation's 53 owned hotels and manage 15 additional properties for third party owners. The aggregate purchase price for American General Hospitality, Inc. and AGH Leasing, L.P. is $95 million, payable in a mixture of cash and units of limited partnership interest. Upon completion of OpCo's spin-off and acquisitions, MeriStar Hotels & Resorts will lease and manage 201 hotels in 34 states, the U.S. Virgin Islands, the District of Columbia and Canada, 108 of which will be owned by MeriStar Hospitality Corporation. F-16 REPORT OF INDEPENDENT ACCOUNTANTS The Shareholders Winston Hospitality, Inc. We have audited the accompanying balance sheets of Winston Hospitality, Inc. as of October 31, 1997 and December 31, 1996 and the related statements of income, shareholders' equity and cash flows for the 10 months ended October 31, 1997 and the years ended December 31, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Winston Hospitality, Inc. as October 31, 1997 and December 31, 1996 and the results of its operations and its cash flows for the 10 months ended October 31, 1997 and the years ended December 31, 1996 and 1995, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Raleigh, North Carolina February 6, 1998 F-17 WINSTON HOSPITALITY, INC. BALANCE SHEETS AS OF OCTOBER 31, 1997 AND DECEMBER 31, 1996 ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 ASSETS ------- ------ Current assets: Cash and cash equivalents..................................... $ 6,926 $5,463 Accounts receivable: Trade....................................................... 2,303 1,166 Lessor...................................................... 768 1,391 Affiliates.................................................. 125 95 Shareholders................................................ -- 71 Prepaid expenses and other assets............................. 182 220 ------- ------ Total current assets...................................... 10,304 8,406 ------- ------ Furniture, fixtures and equipment: Furniture and equipment....................................... 399 323 Leasehold improvements........................................ 113 113 ------- ------ 512 436 Less accumulated depreciation and amortization................ 245 178 ------- ------ Net furniture, fixtures and equipment..................... 267 258 ------- ------ $10,571 $8,664 ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable--trade....................................... $ 1,918 $1,259 Percentage lease payable to Lessor............................ 3,882 4,661 Accounts payable--affiliates.................................. -- 146 Accrued salaries and wages.................................... 1,204 874 Accrued sales and occupancy taxes............................. 814 462 Other current liabilities..................................... 842 618 ------- ------ Total current liabilities................................... 8,660 7,970 ------- ------ Commitments (Note 3) Shareholders' equity: Common stock, $.01 par value, 100 shares authorized, issued and outstanding.............................................. 1 1 Additional paid-in capital.................................... 49 49 Retained earnings............................................. 1,861 644 ------- ------ Total shareholders' equity.................................. 1,911 694 ------- ------ $10,571 $8,664 ======= ======
The accompanying notes are an integral part of the financial statements. F-18 WINSTON HOSPITALITY, INC. STATEMENTS OF INCOME FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND 1996 AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995 ($ IN THOUSANDS)
TEN MONTHS ENDED YEARS ENDED OCTOBER 31, DECEMBER 31, ------------------- --------------- 1997 1996 1996 1995 ------- ----------- ------- ------- (UNAUDITED) Revenue: Room...................................... $67,145 $49,633 $58,956 $39,677 Food and beverage......................... 2,419 1,240 1,685 138 Other operating, net...................... 1,373 1,068 1,191 877 Interest income........................... 152 82 93 85 ------- ------- ------- ------- Total revenue........................... 71,089 52,023 61,925 40,777 ------- ------- ------- ------- Expenses: Property and operating.................... 24,112 17,388 21,550 14,124 Property repairs and maintenance.......... 3,193 2,614 3,181 1,909 Food and beverage......................... 1,715 924 1,281 189 General and administrative................ 2,090 1,603 2,050 1,526 Franchise costs........................... 6,167 4,327 5,361 3,565 Management fees........................... 1,015 1,109 1,126 784 Percentage lease payments................. 30,980 22,800 26,611 17,148 ------- ------- ------- ------- Total expenses.......................... 69,272 50,765 61,160 39,245 ------- ------- ------- ------- Net income.............................. $ 1,817 $ 1,258 $ 765 $ 1,532 ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements. F-19 WINSTON HOSPITALITY, INC. STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE TEN MONTHS ENDED OCTOBER 31, 1997, AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995 ($ IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL -------------- PAID-IN RETAINED SHAREHOLDERS' SHARES DOLLARS CAPITAL EARNINGS EQUITY ------ ------- ---------- -------- ------------- Balances at December 31, 1994................... 100 $ 1 $49 $ 15 $ 65 Net income.............. -- -- -- 1,532 1,532 Distributions........... -- -- -- (1,112) (1,112) --- --- --- ------- ------- Balances at December 31, 1995................... 100 1 49 435 485 Net income.............. -- -- -- 765 765 Distributions........... -- -- -- (556) (556) --- --- --- ------- ------- Balances at December 31, 1996................... 100 1 49 644 694 Net income.............. -- -- -- 1,817 1,817 Distributions........... -- -- -- (600) (600) --- --- --- ------- ------- Balances at December 31, 1997................... 100 $ 1 $49 $ 1,861 $ 1,911 === === === ======= =======
The accompanying notes are an integral part of the financial statements. F-20 WINSTON HOSPITALITY, INC. STATEMENTS OF CASH FLOWS FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND 1996 AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995 ($ IN THOUSANDS)
TEN MONTHS ENDED YEARS ENDED OCTOBER 31, DECEMBER 31, ------------------ --------------- 1997 1996 1996 1995 -------- -------- ------ ------- (UNAUDITED) Cash flows from operating activities: Net income.............................. $ 1,817 $ 1,258 $ 765 $ 1,532 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 67 65 83 63 Changes in assets and liabilities: Accounts receivable--trade.......... (1,137) (1,525) (330) (310) Prepaid expenses and other assets... 38 (137) (103) (65) Accounts payable--trade............. 659 547 666 132 Percentage lease payable to Lessor.. (729) 532 2,064 1,159 Accrued expenses and other liabilities........................ 906 1,045 914 30 -------- -------- ------ ------- Net cash provided by operating activities....................... 1,621 1,785 4,059 2,541 -------- -------- ------ ------- Cash flows from inventing activities: Purchases of furniture, fixtures and equipment.............................. (76) (107) (144) (67) Repayments from (advances to) Lessor, affiliates and shareholders, net....... 518 (265) (145) (1,233) -------- -------- ------ ------- Net cash provided by (used in) investing activities............. 442 (372) (289) (1,300) -------- -------- ------ ------- Cash flows from financing activities: Distributions to shareholders........... (600) (485) (556) (1,112) -------- -------- ------ ------- Net cash used in financing activities....................... (600) (485) (556) (1,112) -------- -------- ------ ------- Net increase in cash and cash equivalents. 1,463 928 3,214 129 Cash and cash equivalents at beginning of the period............................... 5,463 2,249 2,249 2,120 -------- -------- ------ ------- Cash and cash equivalents at end of the period................................... $ 6,926 $ 3,177 $5,463 $ 2,249 ======== ======== ====== =======
The accompanying notes are an integral part of the financial statements. F-21 WINSTON HOSPITALITY, INC. NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. ORGANIZATION: Winston Hospitality, Inc. ("Hospitality") was formed to lease and operate hotels owned by WINN Limited Partnership (the "Partnership") and Winston Hotels, Inc. ("WHI") (collectively, the "Company"). Approximately 90.15% of the Partnership is owned by WHI. The two shareholders of Hospitality (Robert W. Winston, III and John B. Harris, Jr.) are also shareholders of WHI and/or partners in the Partnership. The Company owned 21 hotels as of December 31, 1995, 31 hotels as of December 31, 1996 and 38 hotels as of October 31, 1997 (collectively, all 38 hotels are the "Current Hotels"). Each hotel was separately leased by the Company to Hospitality under a Percentage Lease Agreement. These leases required minimum base rental payments to be made to the Company on a monthly basis and additional quarterly payments to be made based on a percentage of gross room revenue and certain food and beverage revenues. Thirty-seven of the 38 hotels are limited-service hotels and one is a full- service hotel. All 38 hotels are operated under franchise agreements with Promus Hotels, Inc., Choice Hotels International, Inc., Holiday Inns Franchising, Inc. and Marriott International, Inc. The cost of obtaining the franchise licenses was paid by the Company and the on-going franchise fees were paid by Hospitality. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Revenue Recognition. Revenue is recognized as earned. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable which is estimated to be uncollectible. Cash Equivalents. All highly liquid investments with a maturity date of three months or less when purchased are considered to be cash equivalents. Hospitality places cash deposits with federally insured depository institutions. At October 31, 1997, bank account balances exceeded federal depository insurance limits by approximately $6,252. Fair Value of Financial Instruments. Hospitality's financial instruments consist of cash and cash equivalents whose carrying value approximates fair value because of their short maturity. Hospitality's remaining assets and liabilities are not considered financial instruments. Furniture, Fixtures and Equipment. Furniture and equipment are recorded at cost and are depreciated using the straight-line method over estimated useful lives of the assets of five and seven years. Leasehold improvements are being amortized using the straight-line method over the terms of the related leases. Upon disposition, both the asset and accumulated depreciation accounts are relieved and the related gain or loss is credited or charged to the income statement. Repairs and maintenance of hotel properties owned by the Company are paid by Hospitality and are charged to expense as incurred. Income Taxes. Hospitality has made an election under Subchapter S of the Internal Revenue Code of 1986, as amended. Any taxable income or loss is recognized by the shareholders and, therefore, no provision for income taxes has been provided in the accompanying financial statements. Reclassifications. Certain reclassifications have been made to the 1996 and 1995 financial statements to conform with the 1997 presentation. These reclassifications have no effect on net income or shareholders' equity as previously reported. Unaudited October 31, 1996 operating results. Operating results for the 10 months ended October 31, 1996, presented for comparison purposes, are unaudited. The unaudited financial statements for the period ended October 31, 1996 reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial statements. All such adjustments are normal and recurring in nature. F-22 WINSTON HOSPITALITY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) 3. COMMITMENTS: Under the terms of the Percentage Lease Agreements, Hospitality had future lease commitments to the Company through 2006. As disclosed in Note 6 below, all Percentage Leases were sold as of November 24, 1997. Hospitality incurred minimum rents of $13,535, $11,154 and $7,853 as well as percentage rents of $17,445, $15,457 and $9,295 for the ten months ended October 31, 1997 and the years ended December 31, 1996 and 1995, respectively. Hospitality had entered into separate contracts with unrelated parties for the management of 10 of the hotels. The terms of these agreements provided for management fees to be paid based on predetermined formulas for a period of ten years through 2006. The contracts were cancelable under certain circumstances as outlined in the agreements. As disclosed in Note 6 below, all such contracts were sold as of November 24, 1997. Various legal proceedings against Hospitality have arisen from time to time in the normal course of business. Management believes liabilities arising from these proceedings, if any, will have no material adverse effect on the financial positions or results of operations of Hospitality. 4. DISTRIBUTIONS: Beginning with the year ended December 31, 1996, the shareholders agreed to limit distributions by Hospitality to amounts necessary to pay their income taxes on the net income derived from Hospitality until such time as the tangible net worth of Hospitality reached $4,000. Thereafter, they agreed to invest at least 75% of their after-tax distributions of net income from Hospitality in Common Stock of the Company. These agreements terminated effective November 24, 1997, due to the sale of the leases to CapStar. 5. PROFIT SHARING PLAN: On January, 1, 1996, Hospitality adopted the Winston 401(k) Plan (the "Plan") for substantially all employees, except any highly compensated employee, as defined in the Plan, who had attained the age of 21 and completed one year of service. Under the Plan, employees were able to contribute from 1% to 15% of compensation, subject to an annual maximum as determined under the Internal Revenue Code. Hospitality made matching contributions of a specified percentage of the employee's contribution currently 3% of the first 6% of the employee's contribution, and may make additional discretionary contributions. Hospitality contributed $54, $50 (unaudited) and $61 during the 10-month periods ended October 31, 1997 and 1996, and the year ended December 31, 1996, respectively. 6. SUBSEQUENT EVENT: On November 24, 1997, Hospitality completed the sale of substantially all of its assets and all 38 existing Percentage Leases to CapStar Management Company, L.P. ("CMC") for total consideration of $34,000. The $34,000 sale price consisted of $10,000 in cash and 674,236 CMC Partnership Units. F-23 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of American General Hospitality, Inc. We have audited the accompanying balance sheets of American General Hospitality, Inc. (the "Company") as of December 31, 1997 and 1996 and the related statements of operations, stockholders' equity and cash flows for the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American General Hospitality, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand LLP Dallas, Texas April 1, 1998 F-24 AMERICAN GENERAL HOSPITALITY, INC. BALANCE SHEETS
DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1998 ASSETS ------------ ------------ ----------- (UNAUDITED) Current assets: Cash and cash equivalents............... $1,900,176 $ 455,058 $3,234,315 Accounts and management fees receivable. 1,756,317 1,731,204 1,768,463 Accounts receivable, affiliates......... 167,621 103,574 35,193 Prepaid expenses........................ 36,010 13,229 34,519 ---------- ---------- ---------- Total current assets................ 3,860,124 2,303,065 5,072,490 Investments in property and equipment, at cost: Furniture and equipment............... 1,155,220 522,696 1,317,040 Leasehold improvements................ 88,049 6,960 93,260 ---------- ---------- ---------- 1,243,269 529,656 1,410,300 Less accumulated depreciation......... 300,362 334,933 327,362 ---------- ---------- ---------- Net investments in property and equipment.......................... 942,907 194,723 1,082,938 ---------- ---------- ---------- Deposits................................ 78,860 50 78,860 Goodwill, net of accumulated amortization of $2,250, $2,000, and $2,312 (unaudited) as of December 31, 1997 and 1996 and March 31, 1998, respectively........... 7,750 8,000 7,688 Other assets............................ -- 1,477 ---------- ---------- ---------- Total assets........................ $4,889,641 $2,507,315 $6,241,976 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable........................ $ 77,499 $ 474,253 $2,366,542 Accounts payable, affiliates............ 1,275,000 42,770 1,275,000 Accrued liabilities..................... 2,795,477 1,268,895 1,507,866 Deferred revenue........................ 48,699 148,586 ---------- ---------- ---------- Total current liabilities........... 4,196,675 1,934,504 5,149,408 ---------- ---------- ---------- Commitments and contingencies (Notes 3 and 5) Stockholders' equity: Common stock, $.01 par value, 100,000 shares authorized, 600 shares issued and outstanding...................... 6 6 6 Additional paid-in capital............ 584,143 584,143 584,143 Retained earnings..................... 108,817 (11,338) 508,419 ---------- ---------- ---------- Total stockholders' equity.......... 692,966 572,811 1,092,568 ---------- ---------- ---------- Total liabilities and stockholders' equity............................. $4,889,641 $2,507,315 $6,241,976 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-25 AMERICAN GENERAL HOSPITALITY, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, 1997 1996 1995 1998 1997 ------------ ------------ ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues: Management and con- sulting fee revenue.. $7,350,851 $9,818,069 $10,070,090 $ 2,815,323 $ 1,441,670 ---------- ---------- ----------- ----------- ----------- Operating expenses: Salaries and employee benefits............. 3,705,366 4,253,358 4,498,855 1,333,768 1,138,630 Professional fees..... 520,067 412,994 562,152 18,997 10,991 Rent and related ex- pense................ 378,699 292,103 320,515 138,505 72,867 Travel and entertain- ment................. 69,328 114,110 397,740 10,542 28,783 General and adminis- trative expenses............. 130,863 82,429 227,081 30,175 28,222 Office expenses....... 113,513 139,013 190,190 38,339 28,633 Advertising and promo- tion................. 29,127 36,813 50,135 1,689 4,802 ---------- ---------- ----------- ----------- ----------- 4,946,963 5,330,810 6,246,668 1,572,015 1,312,928 ---------- ---------- ----------- ----------- ----------- Income before deprecia- tion, amortization, consulting fees and other income (expense). 2,403,888 4,487,259 3,823,422 1,243,308 128,742 ---------- ---------- ----------- ----------- ----------- Consulting fees....... 2,227,077 3,979,446 4,056,477 858,226 427,323 Depreciation expense.. 123,927 101,891 93,974 27,000 25,470 Amortization expense.. 250 250 250 62 62 ---------- ---------- ----------- ----------- ----------- 2,351,254 4,081,587 4,150,701 885,288 452,855 ---------- ---------- ----------- ----------- ----------- Income (loss) from op- erations............. 52,634 405,672 (327,279) 358,020 (324,113) ---------- ---------- ----------- ----------- ----------- Other income (expense): Interest income....... 134,931 187,750 135,600 41,582 19,945 Other expense......... (67,410) -- (189,204) -- -- ---------- ---------- ----------- ----------- ----------- 67,521 187,750 (53,604) 41,582 19,945 ---------- ---------- ----------- ----------- ----------- Net income (loss)..... $ 120,155 $ 593,422 $ (380,883) $ 399,602 $ (304,168) ========== ========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-26 AMERICAN GENERAL HOSPITALITY, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 AND THE THREE MONTHS ENDED MARCH 31, 1998
COMMON STOCK ADDITIONAL RETAINED TOTAL ------------- PAID-IN EARNINGS STOCKHOLDERS' SHARES AMOUNT CAPITAL (DEFICIT) EQUITY ------ ------ ---------- --------- ------------- Balance, December 31, 1994... 600 $ 6 $584,143 $(223,877) $ 360,272 Net loss..................... (380,883) (380,883) --- --- -------- --------- ---------- Balance, December 31, 1995... 600 6 584,143 (604,760) (20,611) Net income................... 593,422 593,422 --- --- -------- --------- ---------- Balance, December 31, 1996... 600 6 584,143 (11,338) 572,811 Net income................... 120,155 120,155 --- --- -------- --------- ---------- Balance, December 31, 1997... 600 6 584,143 108,817 692,966 Net income (unaudited)....... 399,602 399,602 --- --- -------- --------- ---------- Balance, March 31, 1998 (unaudited)................. 600 $ 6 $584,143 $ 508,419 $1,092,568 === === ======== ========= ==========
The accompanying notes are an integral part of these financial statements. F-27 AMERICAN GENERAL HOSPITALITY, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, 1997 1996 1995 1998 1997 ------------ ------------ ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income (loss).... $ 120,155 $ 593,422 $(380,883) $ 399,602 $ (304,168) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization........... 250 250 250 62 62 Depreciation........... 123,927 101,891 93,974 27,000 25,470 Loss from disposition of assets............. 33,269 -- 36,425 -- Changes in assets and liabilities: Accounts and management fees receivable.......... (25,113) (980,292) (151,928) (12,146) 443,310 Accounts receivable-- affiliates.......... (64,047) (35,071) 231,687 132,428 (135,630) Prepaid expenses..... (22,781) 4,906 11,073 1,491 5,653 Deposits............. (78,810) (20) 54,750 -- (80,257) Accounts payable..... (396,754) 152,191 (185,613) 2,289,043 (82,176) Accounts payable-- affiliates.......... 1,232,230 -- (245,691) -- 63,672 Accrued liabilities.. 1,526,582 272,663 449,100 (1,287,611) 922,178 Deferred revenue..... (99,887) 89,169 59,417 (48,699) (148,586) ---------- --------- --------- ---------- ---------- Net cash provided by (used in) operating activities.......... 2,349,021 199,109 (27,439) 1,501,170 709,528 ---------- --------- --------- ---------- ---------- Cash flows from investing activities: Proceeds from sale of investment.......... 1,477 -- -- -- 1,477 Loan to affiliates..... -- -- (25,000) -- -- Proceeds from loans to affiliates....... -- -- 282,218 -- -- Purchase of property and equipment....... (916,746) (87,076) (167,160) (167,031) (104,677) Proceeds from sale of furniture and equipment........... 11,366 -- -- -- -- ---------- --------- --------- ---------- ---------- Net cash provided by (used in) investing activities............ (903,903) (87,076) 90,058 (167,031) (103,200) ---------- --------- --------- ---------- ---------- Net increase in cash and equivalents............ 1,445,118 112,033 62,619 1,334,139 606,328 Cash and equivalents at beginning of year...... 455,058 343,025 280,406 1,900,176 455,058 ---------- --------- --------- ---------- ---------- Cash and equivalents at end of year............ $1,900,176 $ 455,058 $ 343,025 $3,234,315 $1,061,386 ========== ========= ========= ========== ==========
The accompanying notes are an integral part of theses financial statements. F-28 AMERICAN GENERAL HOSPITALITY, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION: American General Hospitality, Inc. (the "Company"), a Texas corporation, was incorporated in November 1988 and provides hotel management and consulting services to hotels throughout the United States. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS For the purposes of the statement of cash flows, the Company considers all certificates of deposit and debt instruments with original maturities of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents. INVESTMENTS IN PROPERTY AND EQUIPMENT Property and equipment consist of furniture, equipment, computer equipment and leasehold improvements and are stated at cost. Depreciation is provided by using the straight-line method over estimated useful lives of five to seven years for furniture and equipment and three years for leasehold improvements. This is considered reasonable for financial reporting purposes and is not materially different from estimated useful lives. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation accounts are removed from the accounts and the related gain or loss is included in operations. GOODWILL Goodwill in the amount of $10,000 was recorded when the S Corporation was originally formed in 1988. The goodwill is being amortized using the straight line method over a 40 year period. REVENUE RECOGNITION Revenue is recognized as earned. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable which is estimated to be uncollectible. ADVERTISING COST The Company participates in various advertising and marketing programs. All advertising costs are expensed in the period incurred. CONCENTRATIONS OF RISK The Company places cash deposits at a major bank. At December 31, 1997, bank account balances exceed Federal Deposit Insurance Corporation limits by approximately $2,330,000. Management believes credit risk related to these deposits is minimal. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and F-29 AMERICAN GENERAL HOSPITALITY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES The Company, with the consent of its shareholders, elected to be treated as a small business corporation under Subchapter S of the Internal Revenue Code. In this status, the Company is not a taxable entity, and elements of income and expense flow through and are taxed to the shareholders on an individual basis; therefore, no provision or liability for income taxes is reflected in these financial statements. The Company's tax returns and the amount of allocable income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes to income or loss, the tax liability of the shareholder could be changed accordingly. Interim Financial Information--The unaudited interim financial statements as of March 31, 1998 and for the three months ended March 31, 1998 and March 31, 1997 have been prepared pursuant to the rules and regulations of the SEC. The accompanying interim financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. 3. OPERATING LEASES: During 1997, the Company entered into a sublease agreement with Federal Home Loan Bank of Dallas to lease 18,668 square feet of office space. The agreement requires monthly rental payments of $28,780 and expires in September 2000. Federal Home Loan Bank of Dallas lease from Crescent Real Estate Funding II, L.P. The Company also has various equipment leases on office equipment expiring in future years. Future minimum lease payments under these noncancelable lease agreements are as follows:
YEAR ENDED DECEMBER 31, AMOUNT ----------------------- -------- 1998.......................................... $360,072 1999.......................................... 360,072 2000.......................................... 260,806 -------- $980,950 ========
4. EMPLOYEE BENEFIT PLANS: The Company sponsors a 401(k) retirement plan and provides discretionary matching contributions of 50% of eligible employees' contributions, up to 6% of employee compensation. During 1997, 1996 and 1995, the Company contributed $26,033, $63,933 and $53,365 to this plan, respectively. The Company has an employee stock ownership plan which covers all eligible employees meeting age and length of service requirements. Under the terms of this plan, contributions are at the discretion of the Board of Directors up to the maximum allowable for tax purposes. During 1997, 1996 and 1995, the Company contributed $71,625, $98,255 and $94,814 in cash to this plan, respectively. This approximated 3% of eligible employee compensation. No contributions of stock have been made to the plan to date. 5. CONTINGENCIES: The Company is a defendant in various litigation arising in the ordinary course of its business. No provision for liability related to this litigation has been recorded in the financial statements as the Company believes that no material uninsured loss will result. 6. CONCENTRATIONS OF CREDIT RISK: Most of the Company's business activity is with or on behalf of the hotels it manages across the United States, and substantially all of the Company's trade and management fee receivables are from these hotels. The F-30 AMERICAN GENERAL HOSPITALITY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Company employs all hotel employees for the properties and is reimbursed by the property owners. At December 31, 1997, there were approximately 7,500 employees. 7. RELATED PARTY TRANSACTIONS: Accounts receivable-affiliates represents amounts due from affiliates for property renovations, purchases, potential investments, shared expenses and other advances. Accounts payable-affiliates represents amounts due to affiliates for advances. During 1997, 1996 and 1995, the Company received fee revenue for management, consulting and accounting services provided in the amount of $866,969, $121,087 and $249,088, respectively, from entities affiliated with the Company through common ownership. In addition, the Company paid consulting fees of $2,227,077, $3,979,446 and $4,056,477 during 1997, 1996 and 1995, respectively, to an affiliated entity. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statements of Financial Accounting Standards No. 107 requires all entities to disclose the fair value of certain financial instruments in their financial statements. Accordingly, the Company reports the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities at cost, which approximates fair value due to the short maturity of these instruments. 9. SUBSEQUENT EVENTS: On March 15, 1998 American General Hospitality Corporation (the "REIT") and an affiliate and CapStar Hotel Company ("CapStar") entered into a definitive agreement (the "Merger Agreement") pursuant to which the parties agreed, subject to stockholder approval and other conditions and covenants, to merge as equals (the "Proposed Merger"). Accordingly, no assurance can be given that the Proposed Merger will be consummated. Pursuant to the Merger Agreement, CapStar will spin off (the "Spin-Off") in a taxable transaction, its hotel operations and management business to its current stockholders as a new C Corporation to be called MeriStar Hotels & Resorts, Inc. ("MeriStar Resorts"). CapStar will subsequently merge with and into the REIT, which will qualify as a reorganization under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). The REIT will be renamed MeriStar Hospitality Corporation after the Proposed Merger. In a separate transaction, which will close immediately after the closing of the Proposed Merger, MeriStar Resorts will acquire AGH Leasing (an affiliate) and the Company which acquisition is a condition to closing the Proposed Merger. If the Proposed Merger is consummated, MeriStar Resorts will become the lessee and manager of all of the Current Hotels currently leased by AGH Leasing and will have a right of first refusal to become the lessee of hotels acquired by the Company in the future except for the Prime Group II Acquisition hotels. The Merger Agreement defines the exchange ratios for both the REIT's and CapStar's stockholders. CapStar stockholders will receive one share each of MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share owned. The REIT's stockholders will receive 0.8475 shares of MeriStar Hospitality Corporation for each share of common stock owned. Both exchange ratios are fixed, with no adjustment mechanism. The REIT expects the Proposed Merger to close in June 1998. The Proposed Merger will be submitted for approval at separate meetings of the stockholders of the REIT and CapStar. Prior to such stockholder meetings, the REIT will file a registration statement with the SEC registering under the Securities Act of 1933, as amended, the shares of MeriStar Hospitality Corporation to be issued in the Proposed Merger. F-31 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners AGH Leasing, L.P. We have audited the accompanying balance sheets of AGH Leasing, L.P. (The "Partnership") as of December 31, 1997 and 1996, and the related statements of operations, changes in partners' deficit, and cash flows for the year ended December 31, 1997 and for the period from July 31, 1996 (inception of operations) through December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit of the financial statements provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AGH Leasing, L.P. as of December 31, 1997 and 1996 and its results of operations and its cash flows for the year ended December 31, 1997 and for the period from July 31, 1996 (inception of operations) through December 31, 1996 in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand l.l.p. Dallas, Texas January 30, 1998, except for Note 6, as to which the date is March 16, 1998 F-32 AGH LEASING, L.P. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1998 ------------ ------------ ----------- (UNAUDITED) ASSETS Investments in hotel properties, at cost Furniture, fixtures and equipment..... $ 315,000 $ 315,000 $ 315,000 Less accumulated depreciation......... (89,250) (26,250) (105,000) ----------- ----------- ----------- Net investment in hotel properties...... 225,750 288,750 210,000 Cash and cash equivalents............... 8,781,329 5,673,232 24,644,714 Accounts receivable, net of allowance for doubtful accounts of $73,915, $5,291 and $80,987 (unaudited) as of December 31, 1997 and 1996 and March 31, 1998, respectively................. 6,247,083 2,822,936 12,594,508 Inventories............................. 1,007,296 448,234 1,508,406 Prepaid expenses........................ 1,067,384 553,400 1,165,999 Deferred expenses....................... 159,207 194,287 148,859 Other assets............................ 283,997 47,985 457,900 ----------- ----------- ----------- Total assets........................ $17,772,046 $10,028,824 $40,730,386 =========== =========== =========== LIABILITIES AND PARTNERS' EQUITY (DEFI- CIT) Accounts payable, trade................. $ 2,642,639 $ 1,054,902 $ 5,309,072 Participating Lease payable, American General Hospitality Operating Partnership, L.P............ 7,999,122 3,979,242 17,371,456 Note payable to American General Hospi- tality Operating Partnership, L.P....................... 234,321 287,684 220,136 Accrued expenses and other liabilities.. 5,327,522 4,198,035 13,227,644 Deferred income......................... 2,100,000 730,000 2,047,500 Minority interest in Twin Towers Leas- ing, L.P............................... 1,197,442 -- 1,197,442 ----------- ----------- ----------- Total liabilities................... 19,501,046 10,249,863 39,373,250 ----------- ----------- ----------- Commitments and contingencies (Notes 1 and 2) Partner's Capital (deficit)--General Partner.............................. (17,290) (2,210) 13,571 Partner's Capital (deficit)--Limited Partners............................. (1,711,710) (218,829) 1,343,565 ----------- ----------- ----------- Total partners' (deficit)........... (1,729,000) (221,039) 1,357,136 ----------- ----------- ----------- Total liabilities and partners' (deficit).......................... $17,772,046 $10,028,824 $40,730,386 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-33 AGH LEASING, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD JULY 31, 1996 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, 1997 1996 1998 1997 ------------ ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues Room revenue............. $123,965,649 $26,725,200 $58,224,156 $19,465,968 Food and beverage reve- nue..................... 35,595,835 8,374,459 17,367,968 5,197,244 Other revenue............ 8,031,070 1,691,472 3,449,076 1,305,853 Minority interest income. 1,802,558 -- -- -- ------------ ----------- ----------- ----------- Total revenue.......... 169,395,112 36,791,131 79,041,200 25,969,065 ------------ ----------- ----------- ----------- Expenses Property operating costs and expenses............ 33,894,184 7,235,297 13,956,762 5,340,286 Food and beverage costs and expenses............ 27,646,671 6,262,071 12,238,150 4,239,312 General and administra- tive.................... 15,871,676 3,270,481 6,315,376 2,475,288 Advertising and promo- tion.................... 12,792,700 2,305,776 5,316,895 1,820,589 Repairs and maintenance.. 6,712,883 1,450,987 2,906,546 1,032,093 Utilities................ 7,258,674 1,628,490 2,872,937 1,147,891 Management fees.......... 1,691,639 947,632 1,759,353 82,854 Franchise costs.......... 4,754,285 950,307 2,300,237 676,148 Depreciation............. 63,000 26,250 15,750 15,750 Amortization............. 40,997 6,753 10,348 10,052 Interest expense......... 26,808 13,314 5,858 7,192 Other expense............ 158,113 27,093 91,628 20,746 Participating Lease ex- penses.................. 59,934,337 13,387,719 28,165,224 9,508,365 ------------ ----------- ----------- ----------- Total expenses......... 170,845,967 37,512,170 75,955,064 26,376,566 ------------ ----------- ----------- ----------- Net income (loss)...... $ (1,450,855) $ (721,039) $ 3,086,136 $ (407,501) ============ =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-34 AGH LEASING, L.P. CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT FOR THE PERIOD FROM JULY 31, 1996 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997
GENERAL LIMITED PARTNER PARTNERS 1% 99% TOTAL -------- ----------- ----------- Initial capitalization at inception........ $ 5,000 $ 495,000 $ 500,000 Net loss for the period from July 31, 1996 through December 31, 1996................. (7,210) (713,829) (721,039) -------- ----------- ----------- Balance at December 31, 1996............... (2,210) (218,829) (221,039) Partner distributions...................... (571) (56,535) (57,106) Net loss for the year ended December 31, 1997...................................... (14,509) (1,436,346) (1,450,855) -------- ----------- ----------- Balance at December 31, 1997............... $(17,290) $(1,711,710) $(1,729,000) -------- ----------- ----------- Net income for the three months ended March 31, 1998 (unaudited)............................... 30,861 3,055,275 3,086,136 -------- ----------- ----------- Balance at March 31, 1998 (unaudited)...... $ 13,571 $ 1,343,565 $ 1,357,136 ======== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-35 AGH LEASING, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD JULY 31, 1996 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, 1997 1996 1998 1997 ------------ ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flow from operating ac- tivities: Net income (loss)......... $ (1,450,855) $ (721,039) $ 3,086,136 $ (407,501) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............ 63,000 26,250 15,750 15,750 Amortization............ 40,997 6,753 10,348 10,052 Minority interest....... (1,802,558) -- -- -- Changes in assets and liabilities: Accounts receivable..... (3,424,147) (2,822,936) (6,347,425) (1,367,672) Inventories............. (559,062) (448,234) (501,110) (146,066) Prepaid expenses........ (513,984) (553,400) (98,615) 44,250 Deferred expenses....... (5,917) (201,040) -- -- Other assets............ (236,012) (47,985) (173,903) (113,119) Accounts payable, trade. 1,587,737 1,054,902 2,666,433 420,001 Participating Lease payable, American General Hospitality Operating Partnership, L.P.................... 4,019,880 3,979,242 9,372,334 419,460 Accrued expenses and other liabilities...... 1,129,487 4,198,035 7,900,122 (30,138) Deferred income......... 1,370,000 730,000 (52,500) 420,001 ------------ ---------- ----------- ---------- Net cash flow provided by operating activities........... 218,566 5,200,548 15,877,570 (734,982) ------------ ---------- ----------- ---------- Cash flow from financing activities: Capital contributions, AGH Leasing, L.P............. -- 500,000 -- -- Capital contributions, Twin Leasing, L.P........ 3,000,000 -- -- -- Partner distributions .... (57,106) -- -- -- Principal payments on borrowings............... (53,363) (27,316) (14,185) (12,851) ------------ ---------- ----------- ---------- Net cash provided by financing activities... 2,889,531 472,684 (14,185) (12,851) ------------ ---------- ----------- ---------- Net change in cash and cash equivalents....... 3,108,097 5,673,232 15,863,385 (747,833) Cash and cash equivalents at beginning of periods.. 5,673,232 -- 8,781,329 5,673,232 ------------ ---------- ----------- ---------- Cash and cash equivalents at end of periods........ $ 8,781,329 $5,673,232 $24,644,714 $4,925,399 ============ ========== =========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for interest...... $ 26,808 $ 13,314 $ 5,858 $ 7,192 ============ ========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-36 AGH LEASING, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AGH Leasing, L.P. is a Delaware limited partnership which was formed on May 29, 1996, and commenced operations on July 31, 1996. AGH Leasing is owned in part by certain executive officers of American General Hospitality Corporation (the "Company") and American General Hospitality, Inc. ("AGHI"). AGH Leasing, L.P. leases 26 of the 27 Hotels (the "December 31 Hotels") owned by American General Hospitality Operating Partnership, L.P. (the "Operating Partnership") at December 31, 1997, pursuant to operating leases ("Participating Leases") which provide for rent based on the revenues of the December 31 Hotels. During 1996, the Company acquired two of the December 31 Hotels for an aggregate acquisition price of $49 million. During 1997, the Company acquired twelve of the December 31 Hotels for an aggregate acquisition price of $289.7 million. The acquisitions were accounted for by the Company under the purchase method of accounting. Thirteen of the fourteen acquired hotels were subsequently leased to AGH Leasing, L.P. pursuant to the Participating Leases with the remaining hotel being leased to Twin Towers Leasing, L.P. The results of operations of the acquired hotels have been included in the reported results from the date of acquisition. Twin Towers Leasing, L.P. ("Twin Towers Leasing" and, together with AGH Leasing, L.P., "AGH Leasing") leases the remaining December 31 Hotel, the Radisson Twin Towers Orlando, pursuant to a Participating Lease which is substantially similar in form to the other Participating Leases. Twin Towers Leasing is a Florida limited partnership which was formed on June 1, 1997, and commenced operations on June 25, 1997. AGH Leasing is the 51% sole general partner of Twin Towers Leasing. The remaining 49% is owned by Regent Carolina Corporation ("Regent"), an affiliate of the selling entity. Based on the partnership agreement, Regent is allocated 100% of any losses generated by Twin Towers Leasing up to their capital contribution of $3 million. The operations of Twin Towers Leasing are consolidated with the operations of AGH Leasing for financial statement purposes. The consolidated financial statements of AGH Leasing include the results of operations of the December 31 Hotels leased from the Operating Partnership due to AGH Leasing's control over the operations of the December 31 Hotels during the 12-year term of the Participating Leases. AGH Leasing has complete discretion in establishing room rates and all rates for hotel goods and services. Likewise, all operating expenses of the December 31 Hotels are under the control of AGH Leasing. AGH Leasing has the right to manage or to enter into management contracts with other parties to manage the December 31 Hotels. If AGH Leasing elects to enter into management contracts with parties other than AGHI, AGH Leasing must obtain the prior written consent of the Operating Partnership, which consent may not be unreasonably withheld. AGH Leasing has entered into management agreements pursuant to which 26 of the December 31 Hotels are managed by AGHI and the remaining December 31 Hotel is managed by Wyndham Hotel Corporation. AGH Leasing's results of operations are seasonal. The aggregate room revenues in the second and third quarters of each fiscal year may be higher than room revenues in the first quarter and fourth quarter of each fiscal year. Consequently, AGH Leasing may have net income in some quarters and may have net losses in other quarters of the same year. Upon consummation of the Company's Initial Public Offering ("IPO"), the partners of AGH Leasing capitalized AGH Leasing with $500,000 cash and pledged 275,000 units of limited partnership interest in the Operating Partnership ("OP Units") to the Company to collateralize the Lessee's obligations under the Participating Leases. Twin Towers Leasing was capitalized with $3 million by the 49% limited partner upon commencement of operations. F-37 AGH LEASING, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Investment in Hotel Properties--Hotel properties consist principally of furniture, fixtures and equipment and are stated at the lower of cost or net realizable value and are depreciated using the straight-line method over estimated useful lives ranging from 3 to 7 years. Maintenance and repairs are charged to operations as incurred; major renewals and betterments are capitalized. Upon the sale or disposition of a fixed asset, the asset and the related accumulated depreciation are removed from the accounts and the gain or loss is included in operations. Cash and Cash Equivalents--All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Inventories--Inventories, consisting primarily of food and beverage items, are stated at the lower of cost (generally, first-in first-out) or market. Deferred Expenses--Deferred expenses at December 31, 1997 and 1996 include organizational costs of $5,916 and $1,041, respectively and a $200,000 payment made in connection with the Wyndham Safari Resort Lake Buena Vista cash flow guarantee. Amortization is computed using the straight-line method over five years. Deferred Income--Deferred income of $2,100,000 and $730,000 at December 31, 1997 and 1996, respectively, represents the cash received from one of the sellers of the Wyndham Safari Resort Lake Buena Vista for recurring association fee agreements with the sellers as described in Note 4. The gain will be amortized over the term of the agreements of ten years. The agreements commence January 1, 1998. Income Taxes--AGH Leasing is a Maryland limited partnership, which is not a taxable entity. The results of operations are included in the tax returns of the partners. The partnerships' tax returns and the amount of allocable income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes to income or loss, the tax liability of the partners could be changed accordingly. Revenue Recognition--Revenue is recognized as earned. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable which is estimated to be uncollectible. Advertising Cost--The December 31 Hotels participate in various advertising and marketing programs. All advertising costs are expensed in the period incurred. The Lessee recognized advertising expense of $7.4 million and $1.3 million for the years ended December 31, 1997 and 1996, respectively. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk--AGH Leasing places cash deposits at a major bank. At December 31, 1997 and 1996, bank account balances exceeded Federal Deposit Insurance Corporation limits by approximately $5.7 million and $2.5 million, respectively. Management believes the credit risk related to these deposits is minimal. Interim Financial Information--The unaudited interim financial statements as of March 31, 1998 and for the three months ended March 31, 1998 and 1997 have been prepared pursuant to the rules and regulations of the SEC. The accompanying interim financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. F-38 AGH LEASING, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. FAIR VALUE OF FINANCIAL INSTRUMENTS Statements of Financial Accounting Standards 107 requires all entities to disclose the fair value of certain financial instruments in their financial statements. Accordingly, the Lessee reports the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, participating lease payable, note payable, accrued expenses and other liabilities at cost, which approximates fair value due to the short maturity of these instruments. 4. COMMITMENTS AND RELATED PARTY TRANSACTIONS Franchise costs represent the annual expense for franchise royalties and reservation services under the terms of hotel franchise agreements, which expire from 1998 to 2013. Franchise costs are based upon varying percentages of gross room revenue ranging from 2.0% to 5.0%. These fees are paid by the Lessee. No franchise costs were incurred for the Hotel Maison de Ville. Twenty-six of the December 31 Hotels are managed by AGHI on behalf of AGH Leasing. AGH Leasing pays AGHI a base management fee of 1.5% of total revenue and an incentive fee of up to 2.0% of total revenue. The incentive fee, if applicable, is equal to 0.025% of annual total revenue for each 0.1% increase in annual total revenue over the total revenues for the preceding twelve-month period up to the maximum incentive fee. The remaining December 31 Hotel, the Wyndham Garden Hotel Marietta, is managed by Wyndham Hotel Corporation ("Wyndham") on behalf of AGH Leasing. AGH Leasing pays Wyndham a base management fee equal to 1.5% of gross revenues at the hotel plus an incentive management fee of up to 1.5% of gross revenues. The incentive fee, if applicable, will be earned if gross revenues exceed certain year over year thresholds. Each December 31 Hotel, except the Hotel Maison de Ville, is required to remit varying percentages of gross room revenue ranging from 1.0% to 5.0% to the various franchisors for sales and advertising expenses incurred to promote the hotel at the national level. Additional sales and advertising costs are incurred at the local property level. These fees are paid by AGH Leasing. The Company entered into an agreement for a license and an association membership from one of the sellers of the Wyndham Safari Lake Buena Vista, which the Company immediately assigned to AGH Leasing. Commencing January 1998, in connection with the license and the association membership, the Lessee is required to pay recurring association fees including a base monthly fee equal to 1.0% of the prior month's gross room revenues generated at the Hotel, and an additional fee of 0.5% to 1.0% of gross monthly revenues if the trailing twelve month's gross room revenues at the Hotel exceed a threshold of approximately $13 million (subject to increase based on the percentage increase in the CPI). In addition, the Lessee is obligated to pay a recurring royalty for the African Safari theme equal to an amount which ranges from 10% to 25% of net operating income in excess of $6 million (subject to adjustment if the Operating Partnership invests more than $40 million in the Hotel). AGH Leasing is also obligated to pay a marketing assistance fee equal to .25% of gross room revenues. The marketing and association fees are not expected to exceed 2.25% of gross room revenues for any twelve-month period. The association membership agreement terminates in October 2008; AGH Leasing is obligated to pay liquidated damages if the agreement is terminated earlier. In order to facilitate compliance with state and local liquor laws and regulations, AGH Leasing subleases those areas of certain of the hotels that comprise the restaurant and other areas where alcoholic beverages are served to the Beverage Corporations, 39 of which are wholly owned by a senior executive of the Company but controlled by AGH Leasing. In accordance with the terms of the Beverage Subleases, each Beverage Corporation is obligated to pay to AGH Leasing rent payments equal to 30% of each such corporation's annual gross revenues generated from the sale of alcoholic beverages generated from such areas; however, pursuant to the Participating Leases, such subleases will not reduce the Participating Rent payments to the Operating Partnership, which it is entitled to receive from such beverage sales. F-39 AGH LEASING, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AGH Leasing has future lease commitments to the Company under the Participating Leases, which have various expiration dates between July 2008 to June 2009. The Participating Lease expenses are based on percentages of room revenues, food and beverage revenues, telephone and other revenues. The departmental revenue thresholds in the Participating Leases are seasonally adjusted for interim periods and the Participating Lease formulas are adjusted annually effective January 1, by a percentage equal to the percentage increase in the CPI, plus .75% as compared to the prior year. Additionally, several of the December 31 Hotels will have further adjustments to the Participating Lease formulas due to the significant renovations expected to be completed in those hotels in 1997. Minimum future rental expense (i.e., base rents) under these noncancellable Participating Leases is as follows:
YEAR AMOUNT ---- ------------ 1998...................................... $ 48,960,000 1999...................................... 50,527,600 2000...................................... 52,143,028 2001...................................... 53,814,309 2002...................................... 55,428,738 2003 and thereafter....................... 342,549,603 ------------ Minimum future base rents $603,423,278 ============
5. PRO FORMA INFORMATION (UNAUDITED) Due to the impact of the IPO and other hotel acquisitions made by the Company as described in Note 1 and leased to AGH Leasing, the historical results of operations may not be indicative of future results of operations. The following unaudited pro forma information of AGH Leasing is presented as if the IPO and acquisition of the December 31 Hotels had occurred on January 1, 1996 and all of the Current Hotels had been leased pursuant to the Participating Leases since that date. In management's opinion, all adjustments necessary to reflect the effects of the transactions previously described have been made. The pro forma information does not purport to present what the actual results of operations of AGH Leasing would have been if the previously mentioned transactions had occurred on such date or to project the future financial position or results of operations of AGH Leasing for any future period.
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ Room revenue.................................. $151,771,990 $136,811,842 Food and beverage revenue..................... 44,882,294 44,176,435 Other revenue................................. 9,804,140 9,537,309 Minority interest income...................... 2,874,156 1,284,177 ------------ ------------ Total revenue............................... 209,332,580 191,809,763 ------------ ------------ Hotel operating expenses...................... 134,759,239 126,515,121 Depreciation and amortization................. 103,997 69,753 Interest expense.............................. 264,064 31,689 Other expenses................................ 331,229 359,009 Participating Lease expense................... 74,192,463 65,776,641 ------------ ------------ Net loss...................................... $ (318,412) $ (942,450) ============ ============
F-40 AGH LEASING, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. SUBSEQUENT EVENTS PROPOSED MERGER On March 15, 1998 the Company and CapStar Hotel Company ("CapStar") entered into a definitive agreement (the "Merger Agreement") pursuant to which the parties agreed, subject to stockholder approval and other conditions and covenants, to merge as equals (the "Proposed Merger"). Accordingly, no assurance can be given that the Proposed Merger will be consummated. Pursuant to the Merger Agreement, CapStar will spin off (the "Spin-Off") in a taxable transaction, its hotel operations and management business to its current stockholders as a new C-Corporation to be called MeriStar Hotels & Resorts, Inc. ("MeriStar Resorts"). CapStar will subsequently merge with and into the Company, which will qualify as a reorganization under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). The Company will be renamed MeriStar Hospitality Corporation after the Proposed Merger. In a separate transaction, which will close immediately after the closing of the Proposed Merger, MeriStar Resorts will acquire AGH Leasing and AGHI which is payable through the issuance of $11.2 million of units of limited partnership interests of a subsidiary owned by MeriStar Resorts and $83.8 million in cash. This acquisition is a condition to closing the Proposed Merger. If the Proposed Merger is consummated, MeriStar Resorts will become the lessee and manager of all of the Current Hotels currently leased by AGH Leasing and will have a right of first refusal to become the lessee of hotels acquired by the Company in the future except for the Prime Group II Acquisition hotels. The Merger Agreement defines the exchange ratios for both the Company's and CapStar's stockholders. CapStar stockholders will receive one share each of MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share owned. The Company's stockholders will receive 0.8475 shares of MeriStar Hospitality Corporation for each share of Common Stock owned. Both exchange ratios are fixed, with no adjustment mechanism. The Company expects the Proposed Merger to close in June 1998. The Proposed Merger will be submitted for approval at separate meetings of the stockholders of the Company and CapStar. Prior to such stockholder meetings, the Company will file a registration statement with the SEC registering under the Securities Act of 1933, as amended, the shares of MeriStar Hospitality Corporation to be issued in the Proposed Merger. F-41 AGH LEASING, L.P. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 The following unaudited Pro Forma Consolidated Statement of Operations are presented as if the Company had completed the acquisition of the 12 hotels acquired during 1997 and 15 hotels acquired during 1996 all owned as of December 31, 1997 (the "December 31 Hotels") and the 18 hotels acquired in the first quarter of 1998 (the "Acquired Hotels") and the one hotel to be acquired by the Company and leased to AGH Leasing (the "Proposed Acquisition Hotel") (collectively the "AGH Hotels") as of January 1, 1997. The Acquired Hotels include the Potomac Portfolio Acquisition Hotels, the FSA Portfolio Acquisition Hotels, the Holiday Inn O'Hare International Hotel and the Proposed Acquisition Hotel is the Madison Hotel Acquisition. The Pro Forma Consolidated Statement of Operations does not include the effects of the Proposed Merger with CapStar. In management's opinion, all material adjustments necessary to reflect the effect of these transactions have been made. The following unaudited Pro Forma Consolidated Statement of Operation are derived from AGH Leasing's Consolidated Statements of Operations as of December 31, 1997 and should be read in conjunction with the financial statements filed with American General Hospitality Corporation's Annual Report on Form 10-K for the year ended December 31, 1997. The following Pro Forma Consolidated Statement of Operations are not necessarily indicative of what the actual results of operations would have been assuming such transactions had been completed as of January 1, 1997. F-42 AGH LEASING, L.P. PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
HISTORICAL DECEMBER 31 YEAR ENDED HOTELS PROPOSED MANAGEMENT DECEMBER 31, PRO FORMA ACQUIRED ACQUISITION FEES 1997 ADJUSTMENTS HOTELS HOTEL ADJUSTMENT COMBINED (A) (B) (C) (C) (G) PRO FORMA ------------ ----------- ------------ ----------- ----------- ------------ Revenues Room revenue (D)...... $123,965,649 $27,806,341 $ 99,361,895 $1,379,556 $ -- $252,513,441 Food and beverage revenue (D).......... 35,595,835 9,286,459 31,592,242 228,514 -- 76,703,050 Other revenue (D)..... 8,031,070 1,773,070 6,446,925 76,166 -- 16,327,231 Minority interest 1,802,558 (139,150) -- -- -- 1,663,408 income (E)........... ------------ ----------- ------------ ---------- ----------- ------------ Total revenue....... $169,395,112 $38,726,720 $137,401,062 $1,684,236 -- $347,207,130 ------------ ----------- ------------ ---------- ----------- ------------ Expenses Property operating costs and expenses (F).................. 33,894,184 6,754,081 26,658,014 456,500 -- 67,762,779 Food and beverage costs and expenses (F).................. 27,646,671 6,425,715 24,731,326 135,969 -- 58,939,681 General and administrative (F)... 15,871,676 2,978,176 11,792,008 241,768 -- 30,883,628 Advertising and promotion (F)........ 12,792,700 2,489,673 8,638,295 68,533 -- 23,989,201 Repairs and maintenance (F)...... 6,712,883 1,756,796 6,399,372 95,048 -- 14,964,099 Utilities (F)......... 7,258,674 1,532,149 6,198,780 95,716 -- 15,085,319 Management fees (G)... 1,691,639 1,158,265 2,694,902 42,106 1,767,977 7,354,889 Franchise costs (H)... 4,754,285 1,041,672 3,945,161 50,095 -- 9,791,213 Depreciation.......... 63,000 -- -- -- -- 63,000 Amortization (I)...... 40,997 -- -- -- -- 40,997 Interest expense...... 26,808 237,256 -- -- -- 264,064 Other expense......... 158,113 173,116 79,997 -- -- 411,226 Participating Lease 59,934,337 14,258,118 45,298,537 637,336 -- 120,128,328 expenses (J)......... ------------ ----------- ------------ ---------- ----------- ------------ Total expenses...... 170,845,967 38,805,017 136,436,392 1,823,071 1,767,977 349,678,424 ------------ ----------- ------------ ---------- ----------- ------------ Net income (loss)... $ (1,450,855) $ (78,297) $ 964,670 $ (138,835) $(1,767,977) $ (2,471,294) ============ =========== ============ ========== =========== ============
F-43 AGH LEASING, L.P. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS The pro forma consolidated statement of operations of AGH Leasing, L.P. ("AGH Leasing") include the results of operations of the 46 hotels leased from the American General Hospitality Operating Partnership, L.P. (the "Operating Partnership") due to AGH Leasing's control over the operations of the hotels during the twelve-year term of the Participating Leases. AGH Leasing has complete discretion in establishing room rates and all rates for hotel goods and services. Likewise, all operating expenses of the hotels are under the control of AGH Leasing. AGH Leasing has the right to manage or to enter into management contracts with other parties to manage the hotels. If AGH Leasing elects to enter into management contracts with parties other than American General Hospitality, Inc. ("AGHI"), AGH Leasing must obtain the prior written consent of the Company, which consent may not be unreasonably withheld. AGH Leasing's results of operations are seasonal. Generally, hotel revenue is greater in the second and third quarters of a calendar year, although this may not be true for hotels in major tourist destinations. With the Company's acquisition and subsequent leasing of the FSA Portfolio Acquisition Hotels, which include several hotels in tourist destinations, the AGH Hotels may now produce greater revenues in the first and second quarters. (A) Represents the Company's historical statement of operations for the year ended December 31, 1997. (B) Represents the adjustments to present a statement of operations for the 12 hotels acquired by the Company and leased to AGH Leasing during 1997 prior to their acquisition by the Company based on historical balances of the previous owners. The combination of the historical statement of operations presented in column (A) and the pro forma statement of operation presented in column (B) represent the results of operations of the 27 December 31 Hotels as if all of the AGH Hotels were acquired on January 1, 1997 and leased to AGH Leasing pursuant to a Participating Lease since that date. (C) Acquired Hotels represent the acquisition of the interests in the hotels acquired by the Company and leased to AGH Leasing through March 31, 1998. The Acquired Hotels are leased pursuant to operating leases ("Participating Leases") which provide for rent based on the revenues of the Acquired Hotels. The Acquired Hotels include the FSA Portfolio Acquisition Hotels, the Potomac Portfolio Acquisition Hotels and the Holiday Inn O'Hare International Airport Hotel. Proposed Acquisition Hotel represents the acquisition of one hotel, the Madison Hotel, to be acquired by the Company and leased to AGH Leasing pursuant to a Participating Lease. The following table reflects summarized information regarding the Acquired Hotels:
POTOMAC PORTFOLIO ACQUISITION HOTELS AND THE HOLIDAY INN FSA PORTFOLIO O'HARE INTERNATIONAL ACQUISITION HOTELS AIRPORT HOTEL TOTAL ------------------ -------------------- ------------ Total Hotel revenues..... $88,539,197 $49,256,403 $137,795,600 Total expenses........... 70,978,387 44,146,771 115,125,158 ----------- ----------- ------------ Net income............... 17,560,810 5,109,632 22,670,442 Elimination of historical expenses Net income of Select Inn Bloomington............ (392,417) -- (392,417) Management fees......... 570,568 (11,292) 559,276 Depreciation............ 7,951,340 2,703,858 10,655,198 Amortization............ -- 121,242 121,242 Real estate and personal property taxes and property insurance..... 3,521,192 1,968,253 5,489,445 Interest expense........ -- 4,138,093 4,138,093 Other expense........... 2,678,741 343,187 3,021,928 ----------- ----------- ------------ Adjusted net income be- fore Participating Lease payment.......... 31,890,234 14,372,973 46,263,207 Participating Lease pay- ment................... 30,576,487 14,722,050 45,298,537 ----------- ----------- ------------ Acquired Hotels adjusted net income.............. $ 1,313,757 $ (349,077) $ 964,670 =========== =========== ============
F-44 AGH LEASING, L.P. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--(CONTINUED) (D) Represents historical room, food and beverage and other revenues of the AGH Hotels. (E) Represents the amount of AGH Leasing's minority interest investment in Twin Towers Leasing, L.P. (the "Twin Towers Lessee", together with AGH Leasing, L.P., "AGH Leasing") which leases the Radisson Orlando Twin Towers hotel from the Operating Partnership. The Twin Towers Lessee is owned 51% by AGH Leasing, which is the sole general partner, and 49% by Regent Carolina Corporation, which is the sole limited partner. Regent Carolina Corporation is not affiliated with the Company, the Operating Partnership or AGH Leasing. (F) Represents the historical expenses of the AGH Hotels. (G) Represents management fees to be incurred under the Management Agreements. The management fees payable to AGHI consist of a base fee of 1.5% of total revenue and an incentive fee of up to 2.0% of total revenue. The incentive fee, if applicable, is equal to 0.025% of annual total revenue for each 0.01% increase in annual total revenues over the total revenues for the preceding twelve month period up to the maximum incentive fee. The payment of the management fees to AGHI by AGH Leasing is subordinate to AGH Leasing's obligations to the Company under the Participating Leases. The full management fee payable during 1997 will be earned only to the extent that AGH Leasing has taxable income equal to or greater than $50,000. If AGH Leasing's taxable net operating income is below $50,000 in 1997, management fees are forfeited by AGHI to increase AGH Leasing's taxable net operating income to $50,000.
BASE INCENTIVE TOTAL MANAGEMENT FEE MANAGEMENT FEE MANAGEMENT FEE -------------- -------------- -------------- December 31 Hotels............. $2,849,904 $ -- $2,849,904 Acquired Hotels Potomac Portfolio Acquisition Hotels and the Holiday Inn O'Hare International Airport Hotel........................ 738,846 614,955 1,353,801 FSA Portfolio Acquisition Ho- tels........................ 1,341,101 -- 1,341,101 Proposed Acquisition Hotel Madison Hotel................ 25,263 16,843 42,106 Management fee adjustment...... -- 1,767,977 1,767,977 ---------- ---------- ---------- Total management fees.......... $4,955,114 $2,399,775 $7,354,889 ========== ========== ==========
(H) Represents the historical franchise fees of the AGH Hotels. Franchise fees associated with the hotel conversions are not included in the pro forma statements of operations since other impacts including possible revenue enhancements and operating expense reductions are also not included. (I) Historical deferred loan costs and the related amortization has been eliminated since AGH Leasing is not expected to incur similar costs. Amortization expense relates to the amortization of organization costs which are being amortized over a 60 month period. (J) Represents lease payments to the Operating Partnership from AGH Leasing pursuant to the Participating Leases calculated on a pro forma basis by applying the rent provisions of the Participating Leases to the revenues of the AGH Hotels. The departmental thresholds in the Participating Leases are seasonally adjusted for interim periods. The Participating Lease payments for the Acquired Hotels and the Proposed Acquisition Hotel are calculated by applying the rent provisions applicable in the first year of the respective leases executed to the historical operating revenues of the hotels prior to the acquisition by the Company. F-45 AGH LEASING, L.P. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--(CONTINUED)
EXCESS OF PARTICIPATING TOTAL RENT OVER BASE PARTICIPATING BASE RENT RENT RENT ----------- -------------- ------------- December 31 Hotels.................... $46,110,810 $28,081,645 $ 74,192,455 Base and Participating Lease payments for the Acquired Hotels Potomac Portfolio Acquisition Hotels and the Holiday Inn O'Hare International Airport Hotel......... 9,737,500 4,984,550 14,722,050 FSA Portfolio Acquisition Hotels 9 hotels owned by the Company......... 17,752,496 7,637,735 25,390,231 FSA Portfolio Acquisition Hotels 4 hotels owned by PSS I, Inc.......... 3,924,955 1,261,301 5,186,266 ----------- ----------- ------------ Total Base and Participating Lease payments for the Acquired Hotels.... 31,414,951 13,883,586 45,298,537 ----------- ----------- ------------ Base and Participating Lease payments for the Proposed Acquisition Hotel Madison Hotel........................ 637,336 0 637,336 ----------- ----------- ------------ Total Base and Participating Lease payments for the Proposed Acquisition Hotel................... $78,163,097 $41,965,231 $120,128,328 =========== =========== ============
F-46 AGH LEASING, L.P. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1998 The following unaudited Pro Forma Consolidated Statement of Operations is presented as if the 45 hotels which the Company and its affiliates lease to AGH Leasing (the "AGH Leasing March 31 Hotels") and one of the additional hotels to be acquired by the Company and leased to AGH Leasing (the "Proposed Acquisition Hotel", together with AGH Leasing March 31 Hotels, the "AGH Leasing Hotels") were leased pursuant to Participating Leases as of January 1, 1997. The Proposed Acquisition Hotel is the Madison Hotel Acquisition. The Pro Forma Consolidated Statement of Operations does not include the effects of the Proposed Merger with CapStar. In management's opinion, all material adjustments necessary to reflect the effect of these transactions have been made. The following unaudited Pro Forma Consolidated Statement of Operation are derived from AGH Leasing's Consolidated Statements of Operations as of March 31, 1998 and should be read in conjunction with the financial statements filed with American General Hospitality Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. The following Pro Forma Consolidated Statement of Operations are not necessarily indicative of what the actual results of operations would have been assuming such transactions had been completed as of January 1, 1997. F-47 AGH LEASING, L.P. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
AGH LEASING HISTORICAL MARCH 31 HOTELS PROPOSED THREE MONTHS ENDED PRO FORMA ACQUISITION MARCH 31, 1998 ADJUSTMENTS HOTEL COMBINED (A) (B) (C) PRO FORMA ------------------ --------------- ----------- ----------- Revenues Room revenue (D)...... $58,224,156 $10,591,753 $ -- $68,815,909 Food and beverage rev- enue (D)............. 17,367,968 3,125,341 -- 20,493,309 Other revenue (D)..... 3,449,076 839,369 3,373 4,291,818 ----------- ----------- --------- ----------- Total revenue..... 79,041,200 14,556,463 3,373 93,601,036 ----------- ----------- --------- ----------- Expenses Property operating cost and expenses (E).................. 13,956,762 3,068,333 7,492 17,032,587 Food and beverage costs and expenses (E).................. 12,238,150 2,693,625 (411) 14,931,364 General and adminis- trative (E).......... 6,315,376 1,486,918 46,447 7,848,741 Advertising and promo- tion (E)............. 5,316,895 1,030,001 7,289 6,354,185 Repairs and mainte- nance (E)............ 2,906,546 735,838 1,135 3,643,519 Utilities (E)......... 2,872,937 694,370 9,151 3,576,458 Management fees (F)... 1,759,353 311,020 -- 2,070,373 Franchise costs (G)... 2,300,237 409,716 -- 2,709,953 Depreciation.......... 15,750 -- -- 15,750 Amortization (H)...... 10,348 -- -- 10,348 Interest expense...... 5,858 -- -- 5,858 Other expense......... 91,628 19,500 -- 111,128 Participating Lease expense (I).......... 28,165,224 5,358,517 238,997 33,762,738 ----------- ----------- --------- ----------- Total expenses.... 75,955,064 15,807,838 310,100 92,073,002 ----------- ----------- --------- ----------- Net income (loss). $ 3,086,136 $(1,251,375) $(306,727) $ 1,528,034 =========== =========== ========= ===========
The accompanying notes are an integral part of these pro forma consolidated financial statements. F-48 AGH LEASING, L.P. NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS The Pro Forma Consolidated Statement of Operations of AGH Leasing, L.P. ("AGH Leasing") include the results of operations of the 45 hotels leased from the American General Hospitality Operating Partnership, L.P. (the "Operating Partnership") due to AGH Leasing's control over the operations of the hotels during the twelve-year term of the Participating Leases. AGH Leasing has complete discretion in establishing room rates and all rates for hotel goods and services. Likewise, all operating expenses of the hotels are under the control of AGH Leasing. AGH Leasing has the right to manage or to enter into management contracts with other parties to manage the hotels. If AGH Leasing elects to enter into management contracts with parties other than American General Hospitality, Inc. ("AGHI"), AGH Leasing must obtain the prior written consent of the Company, which consent may not be unreasonably withheld. AGH Leasing's results of operations are seasonal. Generally, hotel revenue is greater in the second and third quarters of a calendar year, although this may not be true for hotels in major tourist destinations. With the Company's acquisition and subsequent leasing of the FSA Portfolio Acquisition Hotels, which include several hotels in tourist destinations, the AGH Hotels may now produce greater revenues in the first and second quarters. (A) Represents the Company's historical statement of operations for the year ended March 31, 1998. (B) Represents the adjustments to present a statement of operations for the 18 hotels acquired by the Company and leased to AGH Leasing during the first quarter of 1998 prior to their acquisition by the Company based on historical balances of the previous owners. The combination of the historical statement of operations presented in column (A) and the pro forma statement of operation presented in column (B) represent the results of operations of the 45 AGH Leasing March 31 Hotels as if all of the AGH Hotels were acquired on January 1, 1997 and leased to AGH Leasing pursuant to a Participating Lease since that date. (C) Proposed Acquisition Hotel represents the acquisition of one hotel, the Madison Hotel, to be acquired by the Company and leased to AGH Leasing pursuant to a Participating Lease. The Madison Hotel was closed for a complete renovation in September 1997 and is expected to reopen in July 1998. (D) Represents historical room, food and beverage and other revenues of AGH Hotels. (E) Represents the historical expenses of the AGH Hotels. (F) Represents management fees to be incurred under the Management Agreements. The management fees payable to AGHI consist of a base fee of 1.5% of total revenue and an incentive fee of up to 2.0% of total revenue. The incentive fee, if applicable, is equal to 0.025% of annual total revenue for each 0.01% increase in annual total revenues over the total revenues for the preceding twelve month period up to the maximum incentive fee. The payment of the management fees to AGHI by AGH Leasing is subordinate to AGH Leasing's obligations to the Company under the Participating Leases.
BASE INCENTIVE TOTAL MANAGEMENT FEE MANAGEMENT FEE MANAGEMENT FEE -------------- -------------- -------------- AGH Leasing March 31 Hotels....... $1,403,965 $666,408 $2,070,373 Proposed Acquisition Hotel Madison Hotel............................ 0 0 0 ---------- -------- ---------- Total management fees............. $1,403,965 $666,408 $2,070,373 ========== ======== ==========
(G) Represents the historical franchise fees of the AGH Hotels. Franchise fees associated with the hotel conversions are not included in the pro forma statements of operations since other impacts including possible revenue enhancements and operating expense reductions are also not included. (H) Historical deferred loan costs and the related amortization has been eliminated since AGH Leasing is not expected to incur similar costs. Amortization expense relates to the amortization of organization costs which are being amortized over a 60 month period. F-49 AGH LEASING, L.P. NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS--(CONTINUED) (I) Represents lease payments to the Operating Partnership from AGH Leasing pursuant to the Participating Leases calculated on a pro forma basis by applying the rent provisions of the Participating Leases to the revenues of the AGH Hotels. The departmental thresholds in the Participating Leases are seasonally adjusted for interim periods. The Participating Lease payments for the Acquired Hotels and the Proposed Acquisition Hotel are calculated by applying the rent provisions applicable in the first year of the respective leases to the historical operating revenues of the hotels prior to the acquisition by the Company.
EXCESS OF PARTICIPATING RENT OVER BASE TOTAL PARTICIPATING BASE RENT RENT RENT ----------- -------------- ------------------- AGH Leasing March 31 Hotels...... $20,195,193 $13,328,548 $33,523,741 Base and Participating Lease payments for the Proposed Acquisition Hotel Madison Hotel. 238,997 0 238,997 ----------- ----------- ----------- Total........................... $20,434,190 $13,328,548 $33,762,738 =========== =========== ===========
F-50 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK DISTRIBUTED PURSUANT HERETO, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ----------------- TABLE OF CONTENTS
PAGE ---- Summary................................................................... 4 Risk Factors.............................................................. 12 Selected Historical and Pro Forma Financial Information................... 20 Unaudited Pro Forma Financial Statements.................................. 22 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 27 The Company............................................................... 33 Use of Proceeds........................................................... 35 Capitalization............................................................ 36 Dividend Policy........................................................... 36 The Merger and the Spin-Off............................................... 37 Business.................................................................. 41 The Rights Offering....................................................... 50 Management................................................................ 58 Security Ownership of Certain Beneficial Owners and Management............ 68 Description of Capital Stock.............................................. 69 Certain Antitakeover Provisions........................................... 70 Experts................................................................... 71 Legal Matters............................................................. 71 Index to Financial Statements............................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MERISTAR HOTELS & RESORTS, INC. SHARES OF COMMON STOCK AND RIGHTS TO ACQUIRE UP TO OF SUCH SHARES The date of this Prospectus is , 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses payable in connection with the Rights Offering. All the amounts shown are estimates, except the Securities and Exchange Commission registration fee. All of such expenses are being borne by the Company. SEC Registration Fee............................................. $ 6,394 NYSE Listing Fee................................................. 10,000 Accounting Fees and Expenses..................................... 70,000 Legal Fees and Expenses.......................................... 100,000 Printing and Engraving Expenses.................................. 50,000 Registrar and Transfer Agent's Fees.............................. 5,000 Subscription Agent's Fees........................................ 5,000 Miscellaneous Fees and Expenses.................................. 3,606 Total........................................................ $250,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 102(b)(7) of the Delaware Law permits a provision in the certificate of incorporation of each corporation organized thereunder, eliminating or limiting, with certain exceptions, the personal liability of a director to the corporation or its stockholders for monetary damages for certain breaches of fiduciary duty as a director. The Charter eliminates the personal liability of directors to the fullest extent permitted by the Delaware Law. Section 145 of the Delaware Law ("Section 145"), in summary, empowers a Delaware corporation, within certain limitations, to indemnify its officers, directors, employees and agents against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred by them in connection with any suit or proceeding other than by or on behalf of the corporation, if they acted in good faith and in a manner reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to a criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. With respect to actions by or on behalf of the corporation, Section 145 permits a corporation to indemnify its officers, directors, employees and agents against expenses (including attorneys' fees) actually and reasonably incurred in connection with the defense or settlement of such action or suit, provided such person meets the standard of conduct described in the preceding paragraph, except that no indemnification is permitted in respect of any claim where such person has been found liable to the corporation, unless the Court of Chancery or the court in which such action or suit was brought approves such indemnification and determines that such person is fairly and reasonably entitled to be indemnified. Article Eight of the Charter provides for the indemnification of officers and directors and certain other parties (the "Indemnitees") of the Company to the fullest extent permitted under the Delaware Law; provided, that except in the case of proceedings to enforce rights to indemnification, the Company shall indemnify such Indemnitee in connection with a proceeding initiated by such Indemnitee only if such proceeding was authorized by the Board of Directors. The Charter also provides that the Company may reimburse or advance an Indemnitee funds necessary for payment of expenses, including reasonable attorneys' fees and disbursements incurred in connection with any proceeding, in advance of the final disposition of such proceeding. Each of the employment agreements described in "Management--Employment Agreements" contains provisions entitling the executive to indemnification for losses incurred in the course of service to the Company or its subsidiaries, under certain circumstances. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In connection with the formation of the Company on March 13, 1998, CapStar became the Company's sole stockholder, acquiring 100 shares of Common Stock for nominal consideration. In addition, CapStar expects initially to capitalize the Company with approximately $48 million of cash, including approximately $18 million of forgiveness of indebtedness and a $30 million draw on the Company's two $50 million revolving credit facilities. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS
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. (Incorporated by reference to Exhibit 99.4 to CapStar Hotel Company's Report on Form 8-K dated March 17, 1998, No. 1-11903) 2.3 -- Agreement and Plan of Merger dated as of March 15, 1998, among American General Hospitality Corporation, American General Hospitality Operating Partnership, L.P., CapStar Hotel Company, CapStar Management Company, L.P. and CapStar Management Company II, L.P. (Incorporated by reference to Exhibit 99.4 to CapStar Hotel Company's Report on Form 8-K dated March 17, 1998, No. 1-11903) Amended and Restated Certificate of Incorporation of the 3.1** -- Company 3.2** -- By-laws of the Company 4.1** -- Specimen Common Stock certificate 4.2** -- Specimen Subscription Certificate 5.1* -- Opinion as to Validity of Common Stock and Rights 8.1* -- Opinion as to Certain Tax Matters Form of Employment Agreement between the Company and Paul W. 10.1**+ -- Whetsell Form of Employment Agreement between the Company and Steven D. 10.2**+ -- Jorns Form of Employment Agreement between the Company and David E. 10.3**+ -- McCaslin Form of Employment Agreement between the Company and James A. 10.4**+ -- Calder Form of Employment Agreement between the Company and John E. 10.5**+ -- Plunket 10.6**+ -- Form of Equity Incentive Plan of the Company 10.7**+ -- Form of Employee Stock Purchase Plan of the Company 10.8**+ -- Form of Management Bonus Plan of the Company 10.9 -- Form of Intercompany Agreement among MeriStar Hotels & Resorts, Inc., MeriStar H&R Operating Company, L.P., MeriStar Hospitality Corporation and MeriStar Hospitality Operating Partnership, L.P. (Incorporated by reference to Exhibit 99.4 to CapStar Hotel Company's Report on Form 8-K dated March 17, 1998, No. 1-11903) 23.1* -- Consent of KPMG Peat Marwick LLP 23.2.1* -- Consent of Coopers & Lybrand L.L.P. (Dallas Office) 23.2.2* -- Consent of Coopers & Lybrand L.L.P. (Raleigh Office) 23.3*** -- Consent of Daniel L. Doctoroff 23.4*** -- Consent of Kent Hance 23.5*** -- Consent of Steven D. Jorns 23.6*** -- Consent of Joseph McCarthy 23.7*** -- Consent of James McCurry 23.8*** -- Consent of James Worms Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included 23.11* -- in Exhibit 5) 27* -- Financial Data Schedule 99.1* -- Form of Subscription Agency Agreement Instructions as to use of Subscription Certificates and 99.2* -- International Holder Subscription Form 99.3* -- International Holder Subscription Form
- -------- * Filed herewith. ** To be filed by amendment. *** Previously filed. + Management contract or compensatory plan or arrangement. (B) FINANCIAL STATEMENT SCHEDULES Not applicable. II-2 ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to its Certificate of Incorporation, By-laws, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be a part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of the securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (1)(i) and (1)(ii) of this section do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3, and the information required to be included in a post- effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF WASHINGTON, DISTRICT OF COLUMBIA, ON THE 5TH DAY OF JUNE, 1998. MeriStar Hotels & Resorts, Inc. /s/ Paul W. Whetsell By:__________________________________ NAME: PAUL W. WHETSELL TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE --------- ----- /s/ Paul W. Whetsell Chief Executive Officer and Chairman - ------------------------------------- of the Board (Principal Executive PAUL W. WHETSELL Officer) /s/ James A. Calder Chief Financial Officer (Principal - ------------------------------------- Financial and Accounting Officer) JAMES A. CALDER President and Director /s/ David E. McCaslin - ------------------------------------- DAVID E. MCCASLIN DATED: JUNE 5, 1998 II-4 EX-2.1 2 ACQUISITION AGREEMENT, DATED AS OF 3/15/98 EXHIBIT 2.1 AGREEMENT, dated as of the 15/th/ day of March, 1998, by and among CMC OPERATING PARTNERSHIP, L.P., a Delaware limited partnership ("Purchaser") and AMERICAN GENERAL HOSPITALITY, INC., a Texas corporation ("Star Management"), AGHL GP, INC., a Delaware corporation ("Corporate G.P.") and each of the persons listed on Schedule A hereto (the "Shareholders"); (Star Management, Corporate G.P. and the Shareholders are sometimes hereinafter referred to collectively, as the "Sellers" or, individually, as a "Seller"). RECITALS WHEREAS: A. Star Management along with AGH Leasing, L.P., a Delaware limited partnership ("Star Leasing") and Twin Towers Leasing, L.P., a Delaware limited partnership and a subsidiary partnership of Star Leasing ("Star Sub L.P."), are jointly engaged in the business (the "Business") of managing and operating hotels, principally those leased from American General Hospitality Operating Partnership, L.P., a Delaware limited partnership (the "REIT Partnership"); (Star Management, Star Leasing and Star Sub L.P. are hereinafter sometimes referred to collectively as the "Star Companies" or, individually, as a "Star Company"); B. Corporate G.P. owns all of the general partnership interest in Star Leasing and the Shareholders own all of the limited partnership interests in Star Leasing; and C. The Purchaser desires to acquire the Business by acquisition of substantially all of the assets, business and properties of Star Management and all of the partnership interests in Star Leasing; and the Sellers desire to contribute and sell such assets and partnership interests to the Purchaser, all on the terms and subject to the conditions of this Agreement; NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I CERTAIN DEFINITIONS SECTION 1.01. CERTAIN DEFINITIONS. For purposes of this Agreement, the ------------------- following terms shall have the meanings indicated: "Affiliate" of any Person shall mean any Person controlling, controlled by --------- or under common control with such Person. "Annual Budgets" shall mean the operating and capital budgets for each -------------- Hotel for 1998 as prepared by a Star Company pursuant to the applicable Hotel Lease and approved by the Lessor under such Hotel Lease as amended or revised to the date of this Agreement. "Assignment of Leases" shall mean an Assignment of Leases in form and -------------------- substance reasonably satisfactory to the Purchaser and the Sellers. "Assumed Contract" shall mean (a) those Management Contracts listed on ---------------- Schedule 3.07(a) to this Agreement (other than those indicated on Schedule ------- 3.07(a)(viii) as not being assumed) and those excluded from such Schedule 3.07(a) but deemed to be an Assumed Contract pursuant to Section 3.07(c), (b) - ------- any additional Management Contracts entered into by Star Management after the date of this Agreement not in violation of the provisions of Section 5.02 and (c) the Included Contracts. "Assumed Liabilities" shall mean the following: ------------------- (a) all of the monetary debts, obligations and liabilities of Star Management accruing subsequent to the Closing and all of the non-monetary duties and obligations of the Star Management arising subsequent to the Closing, in each case under the Assumed Contracts; and (b) the other liabilities and obligations of or relating to Star Management specifically set forth on Schedule 1.01(a). "Assumption Agreement" shall mean an Assumption Agreement in form and -------------------- substance reasonably satisfactory to the Purchaser and the Sellers. "Bookings" shall mean contracts or reservations for the use or occupancy of -------- guest rooms, meeting rooms, banquet rooms or other facilities of a Hotel. "Business" shall have the meaning ascribed to such term in the Recitals to -------- this Agreement. "Capital" shall mean CapStar Hotel Company, a Delaware corporation. ------- "Cash Consideration" shall have the meaning ascribed to such term in ------------------ Section 2.03(a)(iii). "Closing" and "Closing Date" shall have the meanings ascribed to such terms ------- ------------ in Section 2.01. "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- "Common Stock" shall mean the common stock of Parent Corp. ------------ "Consents" shall have the meaning ascribed to such term in Section 3.02(d). -------- "Contracts" shall mean the Management Contracts and the Leasing Contracts. --------- "Corporate G.P." shall have the meaning ascribed to such term in the -------------- preamble to this Agreement. "Escrow Agreement" shall mean that certain Escrow Agreement substantially ---------------- in the form of Exhibit A annexed to this Agreement. "Escrow Agent" shall mean (i) a bank or financial institution selected by ------------ the Shareholders subject to the consent of the Purchaser or (ii) such other Person as the Shareholders and the Purchaser shall mutually select. 2 "Excluded Assets" shall mean (a) all cash, cash equivalents and accounts --------------- receivable of Star Management (including intercompany receivables), (b) Management Contracts, other than Assumed Contracts, (c) those assets and rights of Star Management described in Schedule 1.01(b) to this Agreement, (d) security deposits (and other similar amounts paid to the lessors) under the Office Leases, (e) all rights of Star Management under this Agreement and the other Seller Documents, (f) all corporate minute books, stock ledgers and stock certificate books, and corporate (but not operational) accounting and tax records of Star Management, as a corporate entity, (g) all policies of fire, liability and other forms of insurance held by a Star Company or with respect to which a Star Company is an insured or loss payee, (h) all claims and causes of action against others and proceeds and refunds under insurance policies to the extent related to an event occurring prior to the Closing and (i) the trade name and/or service mark of American General Hospitality and American General Hospitality, Inc. "Excluded Liabilities" shall mean all liabilities and obligations of all -------------------- types whatsoever (direct or indirect, known or unknown, absolute, accrued, contingent or otherwise) of Star Management other than those specifically included in clauses (a) and (b) of the definition of Assumed Liabilities. "Franchise Agreements" shall mean all franchise or license agreements -------------------- pursuant to which the Hotels are operated under their respective brand names as part of a common franchise or licensing system together with (a) all reservations, marketing, software licensing and similar agreements entered into between the franchisor or licensor and the franchisee or licensee thereunder and (b) all current property improvement plans in effect with such franchisors or licensors. "GAAP" shall mean generally accepted U.S. accounting principles. ---- "General Partner Interest" shall mean all rights and interests as the ------------------------ general partner under the partnership agreement of Star Leasing. "Hotel" shall mean any of the hotels listed in Schedule 1.01(c) to this ----- Agreement (as well as any other hotels leased and/or managed by a Star Company pursuant to agreements entered into after the date hereof and prior to the Closing not in violation of this Agreement) together with all related real property included within the definition of "Leased Property" as such term is used in the applicable Hotel Leases. "Hotel Contracts" shall mean all service and maintenance contracts, --------------- employment agreements, union contracts, purchase orders, equipment leases, and other contracts or agreements (written or oral) relating to the maintenance, operation, provisioning or equipping of any Hotel, together with all related warranties and guaranties. "Hotel Leases" shall mean all agreements pursuant to which a Star Company ------------ leases Hotels. "Hotel Management Agreements" shall mean all agreements pursuant to which --------------------------- Hotels are managed by a Star Company. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of ------- 1976, as amended, and the rules and regulations promulgated thereunder. "Included Contracts" shall have the meaning ascribed to such term in ------------------ Section 5.10. 3 "Intellectual Properties" shall have the meaning ascribed to such term in ----------------------- Section 3.12. "Knowledge" or "knowledge" of a fact or matter shall mean, as to any --------- --------- individual, that such individual has actual knowledge (rather than constructive knowledge) of such fact or other matter without due inquiry . A Star Company will be deemed to have knowledge of a fact or matter if any of Steven D. Jorns, Bruce G. Wiles or Kenneth E. Barr have actual knowledge (rather than constructive knowledge) of such fact or matter without due inquiry. "Latest Balance Sheet" with respect to Star Leasing and Star Management, -------------------- shall have the meaning ascribed to such term in Section 3.03(a), and with respect to Star Sub L.P. shall mean the Latest Balance Sheet of Star Leasing. "Lease Master Agreement" shall mean that certain Lease Master Agreement, ---------------------- dated as of July 31, 1996, by and between the REIT Partnership and Star Leasing, as amended. "Leasing Contract" all leases, agreements, contracts and other legally ---------------- binding commitments, whether written or oral, to which Star Leasing or Star Sub L.P. is a party or by which either of them or any of their respective assets are bound. "Lessee Property" shall mean all "Inventory" and "Lessee Personal Property" --------------- (as such terms are defined in the Hotel Leases) owned by the Star Companies and used in the Hotels. "Lessors" shall mean the lessors under the Hotel Leases. ------- "Liens" shall mean any and all mortgages, pledges, liens, security ----- interests, purchase options, claims, encumbrances and restrictions of every kind and nature. "Limited Partner Interest" shall mean all rights and interests as a limited ------------------------ partners under the partnership agreement of Star Leasing. "Losses" shall mean loss, damage, liability, claim, cost and expense, ------ including reasonable attorneys' and accountants' fees. "Management Contracts" shall mean all leases, agreements, contracts and -------------------- other legally binding commitments, whether written or oral, to which Star Management is a party or by which Star Management or any of its assets or properties are bound. "Management Sub" shall mean a corporation which may be formed as an -------------- Affiliate of the Purchaser to operate the hotel management business of Star Management acquired hereunder. "Merger Agreement" shall mean that certain Agreement and Plan of Merger, ---------------- dated as of the date hereof, by and among the REIT, REIT Partnership, CapStar Hotel Company, CapStar Management Company L.P. and CapStar Management Company II L.P. "Merger Transaction" shall mean the Merger and OP Reorganization as such ------------------ terms are defined in the Merger Agreement. 4 "Monthly Statements" shall mean the monthly financial statements for the ------------------ Hotels prepared and delivered by a Star Company pursuant to the Hotel Leases. "Net Working Capital" shall mean the net working capital of Star Leasing ------------------- determined in accordance with GAAP, applied on a consistent basis with the latest audited balance sheet of Star Leasing delivered to the Purchaser pursuant to Section 3.03(a), such principles to be modified as described on Schedule 1.01(d). "Office Leases" shall mean those leases described on Schedule 1.01(e). ------------ "Parent Corp." shall mean CMC Operating Company, a Delaware corporation. ------------ "Partnership Agreement" shall mean the Agreement of Limited Partnership of --------------------- the Purchaser, dated as of March 13, 1998. "Partnership Amendment" shall mean the First Amendment to Agreement of --------------------- Limited Partnership which will amend the Partnership Agreement so as to be substantially in the form of the partnership agreement of CapStar Management Company L.P. "Partnership Interests" shall mean the Limited Partner Interests and the --------------------- General Partner Interest. "Partnership Unit" shall mean a Partnership Unit as defined in the ---------------- Partnership Amendment. "Permits" shall mean all licenses, franchises, permits, certificates of ------- occupancy, authorizations and approvals used in or required in connection with the Business or the ownership, occupancy or operation of any part of any Hotel, including, without limitation, those necessary for the on-premises sale and consumption of liquor and other alcoholic beverages. "Person" shall mean any individual, corporation (including any non-profit ------ corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or governmental body. "Pro Forma Budgets" shall mean the pro form annual budget of the operations ----------------- of the Business for the 1998 calendar year provided to the Purchaser by the Sellers. "Purchaser Consents" shall have the meaning ascribed to such term in ------------------ Section 4.03. "Purchaser Documents" shall have the meaning ascribed to such term in -------------------- Section 4.02(a). "Purchaser Representatives" shall have the meaning ascribed to such term in ------------------------- Section 5.03. "REIT" shall mean American General Hospitality Corporation, a Maryland ---- corporation, operating as a real estate investment trust. "REIT Partnership" shall have the meaning ascribed to such term in the ---------------- Recitals to this Agreement. "Retained Employees" shall have the meaning ascribed to such term in ------------------ Section 10.02(a). 5 "Seller Documents" shall have the meaning ascribed to such term in Section ---------------- 3.02(b). "Shareholder" shall have the meaning ascribed to such term in the preamble ----------- to this Agreement. "Shareholder's Percentage" for any Shareholder shall mean the percentage ------------------------ set forth next to such Shareholder's name on Schedule 1.01(f). "Space Leases" shall mean all leases and agreements (written or oral) for ------------ the occupancy of office, retail or restaurant space at any Hotel. "Spin-Off Transaction" shall have the meaning ascribed to such term in the -------------------- Merger Agreement. "Star Sub L.P." shall have the meaning ascribed to such term in the ------------- Recitals to this Agreement. "Stipulation Date" shall mean the earlier of (a) the date Parent Corp. ---------------- publicly releases its earnings report for the calendar year ended December 31, 1998 and (b) February 28, 1999. "Tax" or "Taxes" shall mean all taxes, charges, fees, levies, interest, --- ----- penalties, additions to tax or other assessments, including, but not limited to, income, gross receipts, excise, property, transfer, gains, sales, use, value added, franchise, employment, payroll, withholding and other taxes, and custom duties, imposed by any domestic or foreign national, state or municipal or other local government, any subdivision, agency, commission or authority thereof, or any quasi-governmental or private body exercising any regulatory or taxing authority. "Tax Returns" shall mean any return, report, information return or other ----------- document (including any related or supporting information) filed or required to be filed in connection with the determination, assessment or collection of any Taxes or the administration of any laws, regulations or administrative requirements relating to Taxes. "Termination Date" shall have the meaning ascribed to such term in Section ---------------- 11.01(b). "Third Party Hotel Management Agreements" shall mean all agreements --------------------------------------- pursuant to which Hotels leased by the Star Companies are managed by Persons other than Star Management. "Transferred Assets" shall mean all of the assets and properties used, ------------------ owned or held by Star Management, tangible and intangible, wheresoever situated and whether or not specifically referred to herein other than Excluded Assets, including, without limitation, all Hotel Leases, Lessee Property, Permits (but only if held by a Star Company and to the extent assignable), Franchise Agreements, Hotel Contracts (to the extent they are Assumed Contracts), all other Assumed Contracts, claims and causes of action against others, proceeds under insurance policies to the extent related to another Transferred Asset or to an Assumed Liability relating to an event occurring after the Closing, customer lists, all good will, if any, as a going concern, all of the rights of Star Management with respect to Intellectual Properties and all of the books and records of Star Management. "Uniform System" shall mean the Uniform System of Accounts for Hotels (9th -------------- Revised Edition, 1997) as published by the American Hotel and Motel Association of the United States. 6 "WARN Act" shall mean the Worker Adjustment and Retraining Notification -------- Act, 29 U.S.C. Section 2101 et seq. -- --- ARTICLE II CONTRIBUTION AND SALE SECTION 2.01. CLOSING. The closing (the "Closing") of the transactions ------- set forth in Sections 2.02 and 2.03 hereof shall take place simultaneously with and at the location of the consummation of the Merger Transaction. The date on which the Closing shall take place is hereinafter referred to as the "Closing Date." SECTION 2.02. CONTRIBUTION AND SALE. On the Closing Date: --------------------- (a) each Shareholder will convey, transfer, assign and deliver to the Purchaser all of its right, title and interest in and to the Limited Partner Interest of such Shareholder as set forth on Schedule A, free and clear of all Liens, as follows: each Shareholder will (i) contribute such Limited Partner Interest to the Purchaser pursuant to Section 721(a) of the Code to the extent of the Partnership Units received by such Shareholder pursuant to Section 2.03(a) and (ii) sell such Limited Partner Interest to the Purchaser for the portion of the Cash Consideration payable to such Shareholder pursuant to Section 2.03(a); (b) Corporate G.P. will convey, transfer, assign and deliver to a corporate Affiliate of the Purchaser (the "Corporate Purchaser") all of its right, title and interest in and to the General Partner Interest, free and clear of all Liens; and (c) Star Management will convey, transfer, assign and deliver to the Purchaser all of its right, title and interest in and to the Transferred Assets, free and clear of all Liens, other than as set forth on Schedule 2.02(c); ------- and the Purchaser shall accept such contributions and sales of the Partnership Interests and the Transferred Assets from the applicable Sellers on the terms and subject to the conditions set forth in this Agreement. Such contribution and sale shall be effected by the execution and delivery to the Purchaser by the Sellers of such assignments, deeds, bills of sale and other instruments as shall be reasonably requested by counsel for the Purchaser. SECTION 2.03. CONSIDERATION. (a) In consideration for the Partnership ------------- Interests and the Transferred Assets acquired from the Sellers, the Purchaser agrees: (i) to pay to Corporate G.P. on the Closing Date, on behalf of the Corporate Purchaser, by wire transfer in immediately available funds the amount of $850,000; (ii) to pay to the Shareholders, in accordance with the Shareholders' Percentages, by delivery to the Escrow Agent under the Escrow Agreement on the Closing Date by wire transfer in immediately available funds the amount of $3,000,000; (iii) to pay to each Shareholder on the Closing Date an amount equal to such Shareholder's portion of $69,949,221 (the "Cash Consideration") set forth on Schedule 2.03(a)(iii) ------------ 7 by wire transfer in immediately available funds to an account designated by such Shareholder; (iv) to issue to each Shareholder on the Closing Date such Shareholder's portion of Partnership Units having an aggregate value of $11,200,779 set forth on Schedule 2.03(a)(iv) , the aggregate number of ------------ such Partnership Units to be determined by dividing such aggregate dollar value by the value per share of Common Stock determined by the Board of Directors of Capital in connection with the Spin-Off Transaction; (v) to pay to Star Management on the Closing Date by wire transfer in immediately available funds the amount of $10,000,000; (vi) to assume, on the Closing Date, the Assumed Liabilities by the execution and delivery to the Sellers by the Purchaser of the Assumption Agreement. (b) The consideration paid by the Purchaser to Star Management (including the Assumed Liabilities) shall be allocated to the Transferred Assets in accordance with a Schedule to be determined in good faith by the Sellers and the Purchaser before Closing and the Purchaser and the Sellers agree that such allocation shall be used by them for all purposes, including but not limited to, federal, state and local tax and financial reporting purposes including, but not limited to, the preparation and filing of Internal Revenue Service Form 8594 and any related exhibits thereto (or other forms required pursuant to Section 1060 of the Code, or other applicable laws). ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLERS Each Seller, jointly and severally, represents and warrants to the Purchaser that: SECTION 3.01. ORGANIZATION AND GOOD STANDING. (a) Each of Star Management ------------------------------ and Corporate G.P. is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and is duly licensed or qualified to do business and in good standing as a foreign corporation under the laws of each jurisdiction in which the nature of the activities conducted by it and/or the character of the assets owned or leased by it requires such qualification or license, except where the failure to be so qualified or licensed or in good standing, individually or in the aggregate, would not have a material and adverse effect on the Business. (b) Each of Star Leasing and Star Sub L.P. is a limited partnership duly formed, validly existing and in good standing under the laws of Delaware and is duly licensed or qualified to do business and in good standing as a foreign limited partnership under the laws of each jurisdiction in which the nature of the activi ties conducted by it and/or the character of the assets owned or leased by it requires such qualification or li cense, except where the failure to be so qualified or licensed or in good standing, individually or in the aggregate, would not have a material and adverse effect on the Business. SECTION 3.02. AUTHORITY; NO-CONFLICT. (a) Star Management has taken all ---------------------- corporate action (including any required shareholder approval) required to be taken to authorize the execution and delivery of this Agreement and the other agreements to be executed and delivered by Star Management under this 8 Agreement (the "Management Documents") and the transactions contemplated by this Agreement and the Management Documents. (b) Corporate G.P. has taken all corporate action (including any required shareholder approval) required to be taken to authorize the execution and delivery of this Agreement and the other agreements to be executed and delivered by Corporate G.P. under this Agreement (collectively, the "Corporate G.P. Documents") and the transactions contemplated by this Agreement and the Corporate G.P. Documents; (this Agreement, the Management Documents, the Corporate G.P. Documents and the other agreements to be executed and delivered by the Shareholders under this Agreement are hereinafter sometimes referred to collectively as the "Seller Documents"). (c) Each of Star Management and Corporate G.P. has the corporate power and authority to exe cute and deliver this Agreement and the other Seller Documents to be executed by it and to consummate the transactions contemplated hereby and thereby. This Agreement is, and the other Seller Documents when executed and delivered will be, valid and binding upon, and enforceable against, the Sellers party thereto in accordance with their respective terms except to the extent enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws relating to or affecting creditor's rights generally. Assuming, in the cases of clause(i)(C), (ii) and (iii) below that the Consents (as hereinafter defined) are obtained, neither the execution and delivery of the Seller Documents by the Sellers nor the consummation of the transactions thereby contemplated (i) will constitute any violation or breach of (A) the Articles of Incorporation or By-Laws of Star Management or Corporate G.P., (B) the partnership agreements of Star Leasing or Star Sub L.P. or (C) any order, writ, injunction, decree, statute, rule or regulation applicable to or binding upon any Seller, Star Leasing or Star Sub L.P. or their respective assets; (ii) will result in a breach of, or constitute a default under (or with notice or lapse of time, or both, result in a breach of or constitute a default under) or otherwise give any Person the right to terminate or accelerate any payment under, any Contract; or (iii) will result in the creation of any Lien on any Partnership Interest, any of the assets or properties of any Star Leasing or Star Sub L.P. or any of the Transferred Assets, except in the case of (i)(C) or (ii) to the extent that the same would not be reasonably likely to have a material adverse effect on the Business. (d) Except for those items described on Schedule 3.02(d) (the "Consents"), ------- neither any Seller nor any Star Company is required to give prior notice to, make any filing or registration with, or obtain any consent, approval or authorization of any Person or any governmental authority in connection with the execution and delivery of this Agreement or the other Seller Documents or the consummation of the transactions contemplated hereby or thereby except to the extent that the failure to give such notices, make such filings or obtain such consents, approvals or authorizations would not be reasonably likely to have a material adverse effect on the Business. SECTION 3.03. FINANCIAL STATEMENTS. (a) The Sellers have delivered to the -------------------- Purchaser the audited and unaudited financial statements of the Star Companies described in Schedule 3.03(a) hereto (the latest balance sheet included in such ------- financial statements for each Star Company is hereinafter referred to as the "Latest Balance Sheet" of such Star Company). All such statements were prepared in conformity with GAAP applied on a consistent basis during the applicable periods and fairly present, in all material respects, the financial position of the applicable Star Company and the results of such Star Company's operations as of the dates and for the periods indicated subject, in the case of such unaudited financial statements, to normal year end adjustments and the lack of footnotes and other presentation items required by GAAP. (b) Other than as set forth in its Latest Balance Sheet or as described on Schedule 3.03(b), no Star ------- 9 Company has any liabilities or obligations of any nature (known or unknown, absolute, accrued, con tingent or otherwise) other than those arising after the date of such Latest Balance Sheet in the ordinary and regular course of such Star Company's business. (c) The Sellers have delivered to the Purchaser the financial statements of each Hotel for the years ended December 31, 1996 and 1997 (to the extent a Star Company leased or managed such Hotel during such years). Such statements for each Hotel were prepared in conformity with GAAP applied on a consistent basis during the applicable periods and fairly present in all material respects the financial position of such Hotel and the results of its operations as of the dates and for the periods indicated. (d) The Sellers have made available to the Purchaser the Monthly Statements for each Hotel for 1997. All such statements were prepared in substantial compliance with the Hotel Leases and the Uniform System and fairly present in all material respects the financial position of the Hotels and the results of their operations as of the dates and for the periods indicated. (e) The Sellers have delivered to the Purchaser the Annual Budgets for each Hotel for 1998. Each Annual Budget has been approved in writing by the applicable Lessor. (f) The Sellers have delivered or made available to the Purchaser true and complete copies of all "Officer's Certificates" (as such term is defined in the Hotel Leases), if any, delivered to any Lessor with respect to any financial statements of hotel operations (as set forth in the related Hotel Lease) for the calendar years 1996 and 1997. SECTION 3.04. SHAREHOLDERS; NO SUBSIDIARIES; ETC. (a) Except as set ---------------------------------- forth on Schedule 3.04, the Shareholders are the record and beneficial holders of all of the Limited Partner Interests, free and clear of all Liens, in the respective amounts shown on Schedule A hereto. Corporate G.P is the record and beneficial holder of the General Partner Interest, free and clear of all Liens. Other than the Partnership Interests, no Person has any partnership or other equity or similar interest in or (other than as set forth in Schedule 3.04(a)), has any right to participate in the earnings or profits of Star Leasing; and Star Leasing does not have outstanding and is not bound by any subscription, option, warrant or other right, call or commitment to issue any such partnership or other equity or similar interest or any such participation. The Shareholders and Corporate G.P. will transfer to the Purchaser at the Closing good and marketable title to all of the Partnership Interests, free and clear of all Liens. (b) Star Leasing is the sole general partner of Star Sub L.P., holding a 51% interest in such limited partnership, free and clear of all Liens. Except for such interest and the 49% interest of Regent Carolina Corp., as limited partner, no Person has any partnership or other equity or similar interest in or has any right to participate in the earnings or profits of Star Sub L.P.; and Star Sub L.P. does not have outstanding and is not bound by any subscription, option, warrant or other right, call or commitment to issue any such partnership or other equity or similar interest or any such participation. Star Leasing also owns 455 shares of the common stock, $0.01 per share par value, of the REIT. (c) Other than as set forth in Section 3.04(b), no Star Company owns, of record or beneficially, directly or indirectly, any shares of stock or any other securities of any corporation or any interest in any firm, partnership, association or other entity or venture. (d) The Sellers have delivered to the Purchaser true and complete copies of the Articles of 10 Incorporation and By-Laws of Star Management and Corporate G.P., all as amended and as in full force and effect on the date hereof. (e) The Sellers have delivered to the Purchaser true and complete copies of the partnership agreements of Star Leasing and Star Sub L.P., all as amended and as in full force and effect on the date hereof. SECTION 3.05. TAXES. (a) All Tax Returns required to be filed by a Star ----- Company or with respect to a Star Company or its assets have been timely filed with the appropriate taxing authorities, are complete and correct in all material respects, and properly reflect the Taxes payable for the periods covered thereby. All Taxes required to be paid by each Star Company or with respect to its assets, including, without limitation, all Taxes withheld from employees' wages and all Taxes claimed to be due by any taxing authority have been paid. The Sellers have delivered to the Purchaser true and complete copies of all income and franchise Tax Returns filed by each Star Company. (b) There is no unsatisfied Tax deficiency in respect of any Star Company and no Star Company has any notice of any pending audit or investigation in respect of Taxes. There are no outstanding waivers of statutory periods of limitation with respect to any Tax Returns filed by or on behalf of any Star Company nor any extensions of time to file any Tax Returns and, other than as set forth on Schedule 3.05(b), none of the Tax Returns of any Star Company have ------- been audited or examined by any taxing authority. No Star Company has or is a party to any tax sharing agreement or arrangement. No Star Company has any contractual obligation to indemnify any Person with respect to Taxes. (c) Since formation, each of Star Leasing and Star Sub L.P. been classified as a partnership for federal income Tax purposes and not as a corporation or as an association taxed as a corporation. SECTION 3.06. ASSETS. (a) Star Leasing has good and marketable title to ------ all of its assets and properties which include all of the assets and properties reflected in its Latest Balance Sheet, in the amounts and categories set forth therein, and all of the assets acquired by it after the date of such Latest Balance Sheet except, in each case, for those assets disposed of since the date of such Latest Balance Sheet in the ordinary course of business. All such assets and properties are owned free and clear of all Liens other than (i) any Lessor's Lien established pursuant to the provisions of the Hotel Leases and (ii) a Lien in favor of the REIT on certain furniture, fixtures and equipment used at the Hotels to secure the obligation of Star Leasing to pay the purchase price for such assets. (b) Star Sub L.P. has good and marketable title to all of its assets and properties which include all of the assets and properties reflected in its Latest Balance Sheet, in the amounts and categories set forth therein, and all of the assets acquired by it after the date of such Latest Balance Sheet except, in each case, for those assets disposed of since the date of such Latest Balance Sheet in the ordinary course of business. All such assets and properties are owned free and clear of all Liens other than any Lessor's Lien established pursuant to the provisions of the Hotel Leases. (c) The Transferred Assets include all of the assets reflected in the Latest Balance Sheet of Star Management, in the amounts and categories set forth therein, and all of the assets acquired by Star Management after the date of such Latest Balance Sheet except, in each case, for the Excluded Assets and those assets disposed of since the date of such Latest Balance Sheet in the ordinary course of business. Star Management will have and will transfer to the Purchaser at the Closing, good and marketable title to all of the Transferred Assets, free and clear of all Liens other than any lessor's lien established pursuant to the provisions 11 of the Hotel Leases and the Liens described on Schedule 2.02(c). ------- (d) The assets and properties of Star Leasing and Star Sub L.P. and the Transferred Assets (along with the Excluded Assets and any property owned by the Lessors used by the Star Companies in operation of the Hotels) constitute all of the assets used in, and are sufficient for, the operation of the Hotels and the Business. SECTION 3.07. CONTRACTS. (a) Subject to the exceptions set forth in --------- Section 3.07(c), Schedule 3.07(a) is a complete and correct list of all ------- Management Contracts (as amended or modified) in effect as of the date hereof classifiable in one or more of the following categories: (i) Hotel Leases, (ii) Hotel Contracts (other than oral agreements for employment at-will), (iii) Office Leases, (iv) Franchise Agreements, (v) Hotel Management Agreements, (vi) Third Party Hotel Management Agreements, (vii) collective bargaining agreements and other contracts with labor unions, (viii) employment and consulting agreements (other than oral agreements for employment at-will), (ix) agreements for borrowed money and other evidences of indebt edness, (x) instruments whereby a Seller has guaranteed any indebtedness or obligation of a third party, (xi) guarantees of obligations of a Seller by third parties, (xii) tax benefit transfer or similar agreements, (xiii) commitments for capital expenditures by a Seller, (xiv) other than Space Leases and Hotel Leases, personal and real property leases with a Seller as lessor or lessee, (xv) covenants not to compete and confidentiality agreements, (xvi) all Management Contracts entered into outside of the ordinary and regular course of the Star Companies' business and (xvii) all other Management Contracts (other than those which, individually and in the aggregate, are not material to the financial condition or continued operation of a Hotel or the Business). (b) Subject to the exceptions set forth in Section 3.07(c), Schedule 3.07(b) is a complete and correct list of all Leasing Contracts (as amended or - ------- modified) in effect as of the date hereof classifiable in one or more of the following categories: (i) Hotel Leases, (ii) Hotel Contracts (other than oral agreements for employment at-will), (iii) Office Leases, (iv) Franchise Agreements, (v) Hotel Management Agreements, (vi) Third Party Hotel Management Agreements, (vii) collective bargaining agreements and other contracts with labor unions, (viii) employment and consulting agreements (other than oral agreements for employment at-will), (ix) agreements for borrowed money and other evidences of indebtedness, (x) instruments whereby a Seller has guaranteed any indebtedness or obligation of a third party, (xi) guarantees of obligations of a Seller by third parties, (xii) tax benefit transfer or similar agreements, (xiii) commitments for capital expen ditures by a Seller, (xiv) other than Space Leases and Hotel Leases, personal and real property leases with a Seller as lessor or lessee, (xv) covenants not to compete and confidentiality agreements, (xvi) all Leasing Contracts entered into outside of the ordinary and regular course of the Star Companies' business and (xvii) all other Leasing Contracts (other than those which, individually and in the aggregate, are not material to the financial condition or continued operation of a Hotel or the Business). (c) Notwithstanding anything in Section 3.07 (a) or (b) to the contrary, the Sellers may omit from listing on Schedules 3.07(a) and 3.07(b) Space Leases -------- ------- and Contracts of the type described in clauses 3.07(a)(ii), (ix), (x), (xiii) and (xiv) of such Sections which do not involve the payment or receipt of more than $50,000, in any individual case, and Hotel Contracts which may be canceled on ninety (90) days notice or less without the payment of any penalty of more than $50,000, in any individual case. Each Management Contract excluded from Schedule 3.07(a) pursuant to the exceptions set forth in the previous sentence ------- or in the parenthetical phrases in Section 3.07(a)(ii), (viii) or (xvii) shall be an Assumed Contract for purposes of this Agreement. (d) A true and complete copy of each written Contract and a complete and correct summary of 12 each oral Contract listed on Schedules 3.07(a) and 3.07(b) have been made ------- ------- available to the Purchaser by the Sellers. (e) Each Assumed Contract and each Leasing Contract is valid, binding and enforceable in accordance with its terms and is in full force and effect. Except as set forth in Schedule 3.07(e)(i), neither any Star Company nor, to the ---------- knowledge of any Star Company or Seller, any other party to an Assumed Contract or Leasing Contract is in material default under such Contract and no event has occurred which with the lapse of time or the giving of notice, or both, would constitute a material default under such Contract. Except as set forth on Schedule 3.07(e)(ii), each Assumed Contract is assignable to the Purchaser as ----------- part of the Transferred Assets without the consent of any third party. There are no renegotiations of, or attempts to renegotiate, or outstanding rights to renegotiate, any Assumed Contract or Leasing Contract and neither any Star Company nor any Shareholder has received any notice (in writing or otherwise) of any termination of or any intent to terminate any Assumed Contract or Leasing Contract. SECTION 3.08. INSURANCE. Schedule 3.08 is a true, complete and correct --------- ---- list and brief description of all policies of fire, liability, and other forms of insurance held by a Star Company or with respect to which a Star Company is an insured or loss payee on the date hereof, together with their respective termination dates. SECTION 3.09. [INTENTIONALLY OMITTED] SECTION 3.10. ACCOUNTS RECEIVABLE. All of the accounts receivable of Star ------------------- Leasing and Star Sub L.P. represent obligations arising from sales or services actually made or rendered by the Sellers in the ordinary course of business and are subject to no material adverse claims, liens, counterclaims, set-offs or defenses. SECTION 3.11. REAL ESTATE. Other than the interests represented by the ----------- Hotel Leases, the Space Leases and the Office Lease, no Star Company has any interest of any nature in real property. SECTION 3.12. INTELLECTUAL PROPERTY. The Star Companies own or possess --------------------- adequate franchises, licenses or other rights to use all patents, patent applications, trade secrets, inventions, processes, drawings, service manuals, software, and copyrights (including all renewals and extensions thereof), licenses, fran chises, trademarks, trademark registrations, trademark applications, trade names, service marks and logos (collectively, the "Intellectual Properties") used in the conduct of and necessary to conduct the Business. Schedule 3.12 to this Agreement is a complete and correct list of all ---- such Intellectual Property except for such Intellectual Properties as are licensed by the Sellers under the Franchise Agreements. Except as other wise set forth in Schedule 3.12 and except with respect to the Intellectual ---- Properties licensed under the Franchise Agreements and off-the-shelf software, (a) each Star Company has filed all material certificates, affidavits and other documents and taken all other actions necessary to obtain and evidence its title to each of the Intellectual Properties, (b) no Star Company has granted to any individual, firm, partnership, cor poration, association or other entity any interest in any Intellectual Properties, as licensee or otherwise, (c) all of such Intellectual Properties are valid and (d) to the knowledge of any Star Company or Shareholder, no such Intellectual Property infringes on the property rights of any third party and no third party is in fringing any of the rights of any Star Company to any Intellectual Property. SECTION 3.13. LITIGATION. Except as set forth in Schedule 3.13, there is ---------- ---- no action, suit or pro ceeding pending or, to the knowledge of any Star Company or Shareholder, threatened against a Star Company or any Hotel or relating to or affecting the Business or any Transferred Asset in any court, before any arbitrator or 13 before or by any governmental authority, agency or other instrumentality, domestic or foreign (other than such actions, suits or preceding arising out of the ordinary and usual course of business and the defense and other costs of which are adequately covered by insurance). Except as set forth in Schedule 3.13, there is no outstanding judgment, order or decree of any court, any - ---- arbitrator or arbitration tribunal or any governmental authority, agency or other instrumentality against a Star Company or any Hotel or relating to or affecting the Business or any Transferred Asset nor is any such company nor any Hotel in default under or with respect to any item set forth on such Schedule. SECTION 3.14. COMPLIANCE WITH LAW. Except as set forth on Schedule 3.14, ------------------- ---- each Star Company and Hotel is in compliance in all material respects with all laws, regulations and orders applicable to such Star Companies or Hotels or to the Business and the Transferred Assets. SECTION 3.15. PERMITS. All material Permits are in full force and effect. ------- The Star Companies, the Hotels and the Business are in material compliance with the terms of such Permits and there are no material violations of any such Permit. SECTION 3.16. EMPLOYEES. Other than (a) liabilities that may become --------- payable under the WARN Act, (b) unemployment compensation and (c) severance with respect to those employees who will not be given the opportunity to become Retained Employee as described in Section 10.02(a) (and which severance will not be an Assumed Liability and will be satisfied by the Sellers) the consummation of the transactions contemplated by the Agreement will not entitle any employee of any Star Company or Hotel to any severance pay or any other payment from any Star Company or the Purchaser. The Sellers shall indemnify and hold harmless the Purchaser and its Affiliates from and against any liability or claim by any employees of Star Management for severance or separation pay (other than pursuant to the WARN Act) arising out of their termination of employment with Star Management or otherwise by virtue of the consummation of the transactions contemplated hereby. SECTION 3.17. LABOR DISPUTES. Except as set forth on Schedule 3.17, (a) -------------- ---- no Star Company is a party to any labor union contract or collective bargaining agreement, (b) there are no labor unions or other organizations representing or purporting to represent or , to the knowledge of any Star Company or Seller, attempting to represent any such employees, (c) there is no labor strike, slowdown, work stoppage, lockout disturbances or arbitration pending or, to the knowledge of any Star Company or Seller, threatened, in connection with such employees and (d) there is no unfair labor practice charge or complaint pending or, to the knowledge of any Star Company or Shareholder, threatened against any Star Company or Hotel in connection with its present or former employees. SECTION 3.18 EMPLOYEE BENEFIT PLANS. ---------------------- (a) Definitions. ----------- (i) "Employee Plan" means (i) any "employee benefit plan," as defined in Section 3(3) of ERISA, that (a) is subject to any provision of ERISA, (b) is maintained, administered or contributed to, by any Star Company or any of their ERISA Affiliates and (c) covers any employee or former employee of any Star Company or any of their ERISA Affiliates, and (ii) any employment, severance or similar contract or arrangement (whether or not written) or any plan, policy, fund, program or contract or arrangement (whether or not written) providing for compensation, bonus, profit-sharing, stock option, or other stock related rights or other forms of incentive or deferred compensation, vacation benefits, insurance coverage (including any self- 14 insured arrangements) health or medical benefits, disability benefits, worker's compensation, supplemental unemployment benefits, severance benefits, post- employment or retirement benefits (including compensation, pension, health, medical or life insurance or other benefits) that is entered into, maintained, administered or contributed to, as the case may be, by any Star Company or any of their ERISA Affiliates, and covers any employee or former employee of any Star Company or any of their ERISA Affiliates. (ii) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. (iii) "ERISA Affiliate" shall mean all members of a controlled group --------------- of corporations and all trades and businesses (whether or not incorporated) under common control and all other entities which, together with any Star Company, are treated as a single employer under any or all of Sections 414(b), (c), (m) or (n) of the Code at any time prior to the Closing Date. (iv) "Multiemployer Plan" means each Employee Plan that is a multiemployer plan, as defined in Section 3(37)of ERISA. (b) Employee Plans. -------------- (i) Schedule 3.18 identifies each Employee Plan which is not a ------------- Multiemployer Plan or otherwise provided for in a collective bargaining agreement referred to in Schedule 3.17. The Sellers shall, no later than ten ---- (10) business days prior to the Closing Date make available to the Purchaser copies of all Employee Plans listed on Schedule 3.18 (and, if applicable, ---- related trust agreements) and all amendments thereto together with the three most recent annual reports (Forms 5500 including, if applicable, Schedule B thereto) and the most recent actuarial valuation report, if any, prepared in connection with any Employee Plan listed on Schedule 3.18. The Sellers will ---- make available to the Purchaser complete age, salary, service and related data for all employees and former employees covered under the Employee Plans. (ii) Other than as set forth in Schedule 3.17, neither any Seller ---- nor Star Management nor any of their ERISA Affiliates has any obligation to contribute to a Multiemployer Plan; and no Employee Plan listed on Schedule 3.18 is or will be subject to Title IV of ERISA. (iii) Each Employee Plan listed on Schedule 3.18 has been established ---- and administered in all material respects in compliance with its terms and all applicable laws, statutes, orders, rules and regulations, including, but not limited to, ERISA and the Code. Each Employee Plan listed on Schedule 3.18 that is intended to be qualified under Section 401(a) of the Code has received a favorable letter of determination from the Internal Revenue Service that the form of such Employee Plan meets the requirements of Section 401(a) of the Code and that the form of the corresponding trust meets the requirements for exemption under Section 501(a) of the Code and to the knowledge of any Star Company, nothing has occurred since the date of each such letter that could result in the disqualification of such plans. No Star Company or Seller has knowledge that any of the Multiemployer Plans to which it or any of their respective ERISA Affiliates contributes on behalf of its employees has been established or administered in violation of any provisions of ERISA or the Code, or the regulations promulgated thereunder. (iv) Neither any Star Company nor any or their ERISA Affiliates has any current or 15 projected liability in respect of post-employment or post-retirement health or medical or life insurance benefits for retired, former or current employees of the Sellers or any of their Affiliates, other than as may be required to avoid excise tax under Section 4980B of the Code or as a result of an obligation to contribute to a Multiemployer Plan. (v) Except as set forth in Section 3.16 and as provided for in Section 10.02(a), no employee or former employee of the Star Companies or any of their Affiliates will become entitled to any bonus, retirement, severance, job security or similar benefit or enhanced such benefit (including acceleration of vesting or exercise of an incentive award) as a result of the transactions contemplated hereby. (vi) No Star Company other than Star Management has any employees nor, other than as an ERISA Affiliate of Star Management, any obligations or liabilities related to employment or employee benefits. SECTION 3.19. ORDINARY COURSE; NO MATERIAL CHANGE. Except as set forth on ----------------------------------- Schedule 3.19, since the date of its Latest Balance Sheet each Star Company and ---- since the most recent Monthly Statements for each Hotel (a) the operation of such Star Company or such Hotel and the Business has been conducted in the ordinary and regular course thereof and (b) there has not been any material adverse change in such Star Company or Hotel or in its operations or condition, financial or otherwise or in the Business. SECTION 3.20. BROKERAGE. Neither any Star Company nor any of their --------- respective partners, directors, shareholders, employees or agents, has incurred any liability for finder's or brokerage fees or commissions in connection with this Agreement or the transactions contemplated hereby. The Sellers, jointly and severally, agree to indemnify and hold the Purchaser, Star Leasing and Star Sub L.P. harmless from any such payment resulting from the actions of any Star Company or any of their respective partners, directors, shareholders, employees or agents. SECTION 3.21. ACCREDITED INVESTOR. Each Shareholder is an "accredited ------------------- investor" as that term is defined in Rule 501 of the Securities and Exchange Commission as promulgated under the Securities Act of 1933, as amended. SECTION 3.22. NO OMISSION. No representation or warranty by the Sellers ----------- made in this Agreement or any other Seller Document or any exhibit hereto or thereto and no Schedule or certificate furnished or to be furnished to the Purchaser pursuant to or in connection with this Agreement, or any other Seller Document or any of the transactions contemplated hereby contains or will contain any statement of a material fact that was untrue as of its date or omits to state a material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances in which they are made, not misleading as of the date thereof. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser represents and warrants to the Sellers that: SECTION 4.01. ORGANIZATION AND GOOD STANDING. (a) Parent Corp. is a ------------------------------ corporation duly incorporated, validly existing and in good standing under the laws of Delaware. 16 (b) The Purchaser is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware. SECTION 4.02. AUTHORITY; NO CONFLICT. (a) Parent Corp. has taken all ---------------------- required corporate action and all action required to be taken under the Partnership Agreement to authorize the execution and delivery of this Agreement and the other agreements to be executed and delivered by the Purchaser hereunder (together with this Agreement, the "Purchaser Documents") on behalf of the Purchaser. (b) The Purchaser has taken all partnership action required to be taken to authorize the execution and delivery of the Purchaser Documents and the transactions contemplated by the Purchaser Documents. The Purchaser has the power and authority to execute and deliver the Purchaser Documents and to consummate the transactions contemplated by the Purchaser Documents. The Purchaser Documents when executed and delivered will be, valid and binding upon and enforceable against the Purchaser in accordance with their respective terms. Neither the execution and delivery of the Purchaser Documents nor the consummation of the transactions thereby contemplated will constitute any violation or breach (i) of the Partnership Agreement or the Partnership Agreement as amended by the Partnership Amendment or (ii) of (Y) any order, writ, injunction, decree, statute, rule or regulation binding upon the Purchaser or any of its assets or (Z) any contract or agreement to which the Purchaser is a party or by which the Purchaser or its assets are bound, in either case, which would materially and adversely affect the Purchaser's ability to consummate the transactions contemplated by the Purchaser Document. SECTION 4.03. CONSENTS. Except as set forth on Schedule 4.03 to this -------- ---- Agreement (the "Purchaser Consents"), no authorization, approval, order, license, permit, franchise, or consent and no registration, notice, declaration or filing to, by or with any domestic or foreign governmental authority is required on the Purchaser's part in connection with the execution and delivery by the Purchaser of the Purchaser Documents and the consummation by the Purchaser of the transactions contemplated thereby. SECTION 4.04. BROKERAGE COMMISSIONS. Neither Parent Corp. nor Purchaser --------------------- nor any of their respective partners, directors, shareholders, employees or agents has incurred any liability for finder's or brokerage fees or commissions in connection with this Agreement or the transactions hereby contemplated. The Purchaser agrees to indemnify and hold the Sellers harmless from any such payment resulting from the actions of Parent Corp. or the Purchaser or any of their respective partners, directors, shareholders, employees or agents. SECTION 4.05. PARTNERSHIP UNITS; COMMON STOCK. (a) Upon the issuance of ------------------------------- the Partnership Units as contemplated by this Agreement, (i) such Partnership Units will be duly authorized, validly issued, fully paid and non-assessable partnership interests, free of any restrictions and encumbrances, except for restrictions on transferability imposed under applicable securities laws and the terms of the Partnership Agreement as amended by the Partnership Amendment and (ii) each Shareholder receiving such Partnership Units will be a limited partner in the Purchaser and will have the full rights of a limited partner holding the Partnership Units as set forth in the Partnership Agreement as amended by the Partnership Amendment. (b) Any shares of the Common Stock issued in exchange for the Partnership Units in accordance with the terms of the Partnership Agreement as amended by the Partnership Amendment, will be duly authorized, validly issued, fully paid and non-assessable shares of the Common Stock, not issued in violation of any preemptive rights of any stockholder of Parent Corp. and free of any restrictions and encumbrances, except for restrictions on transferability imposed under applicable securities laws. 17 (c) Parent Corp. has reserved authorized but unissued shares of Common Stock or shares of Common Stock in its treasury as necessary for the Purchaser to redeem any Partnership Units issued in accordance with Section 2.03(a)(iv) for shares of Common Stock in accordance with the terms of the Partnership Agreement as amended by the Partnership Amendment. (d) Parent Corp. owns the majority of the Partnership Units. SECTION 4.06. PARTNERSHIP AGREEMENT, ETC. The Purchaser has delivered to -------------------------- the Sellers a true and complete copy of the Partnership Agreement and of Parent Corp.'s Certificate of Incorporation and By-Laws. The Partnership Agreement shall not be amended prior to the Closing without the consent of the Shareholders other than (i) by the adoption of the Partnership Amendment and (ii) in any way which would not require the consent of the Shareholders if, at such time, the Partnership Amendment had been adopted and the Shareholders were limited partners holding the maximum number of Partnership Units which may be issued to them under Section 2.03(a)(iv). SECTION 4.07. TAX CLASSIFICATION. The Purchaser is treated for federal ------------------ tax purposes as a partnership and not as a corporation or as an association taxable as a corporation. SECTION 4.08. INVESTMENT COMPANY. Parent Corp. is not an "investment ------------------ company" within the meaning of Section 351(e)(1) of the Code and the Treasury Regulations issued thereunder. ARTICLE V PRE-CLOSING COVENANTS OF SELLERS Prior to the Closing: SECTION 5.01. CONDUCT OF BUSINESS. The Star Companies will, and the ------------------- Sellers will cause the Star Companies to (a) continue to conduct the Business and operate each Hotel in the ordinary and regular course, consistent with prior practices and in accordance with the Hotel Leases, Hotel Management Agreements and the Annual Budgets; (b) maintain their books of account, records and files and those of each Hotel in a manner consistent with prior practices and the Hotel Leases and Hotel Management Agreements; (c) use all reasonable efforts to preserve their business organizations intact, to retain the services of their present employees and to preserve the good will of the Sellers' suppliers and customers, the REIT and REIT Partnership, and others having business relations with the Star Companies; (d) pay and perform all of their debts, obligations and liabilities and those of each Hotel as and when due; (e) comply in all material respects with all laws, regulations and orders applicable to the Star Companies, each Hotel and the Business; (f) maintain at each Hotel, Lessee Property approximately in those quantities and approximately at those levels present as of the date of this Agreement and in accordance with the Hotel Leases; (g) continue to enter into Bookings in the ordinary course of business; (h) continue to insure all their respective assets and properties including, without limitation, all Transferred Assets, against risks, with insurers and in amounts consistent with prior practices; (i) keep all Assumed Contracts and Leasing Contracts in full force and effect (except those that expire by their terms prior to the Closing Date) and pay and perform all of their obligations under such Contracts, (j) keep all Permits (or renewals of such Permits) in full force and effect and (k) continue to lease new hotels from the Lessors and to manage such hotels in the ordinary course of business on terms consistent with prior practices and pursuant to lease and management agreements in form and substance similar to the existing Hotel Leases and Hotel 18 Management Agreements. SECTION 5.02. CHANGES IN BUSINESS. The Star Companies will not, and the ------------------- Sellers will cause the Star Companies not to, without the prior written consent of the Purchaser (a) enter into any new Contracts (or modify or amend any Contracts) other than (i) new hotel leases and hotel management agreements relating to Hotels leased from the Lessors in form and substance similar to the existing Hotel Leases and Hotel Management Agreements, (ii) other Contracts in the ordinary course of business and in accordance with their normal prior practice and (iii) the Included Contracts; provided, that, all such Management Contracts so entered into by the Sellers shall be assignable to the Purchaser by the Sellers as Transferred Assets without the consent of any third party and without any payment or penalty; (b) increase the compensation or the annual rate of compensation or change the method of determining the compensation of any employee who, after such action, would earn in excess of $100,000 per year, or grant any general or uniform increases in the wages or rates of pay of employees, or any classification thereof except as required under any Contract; (c) sell, transfer, or otherwise dispose of any of their respective assets or property (including any Transferred Asset) except for Lessee Property which is sold or consumed in the ordinary and regular course of business; (d) create or permit to exist any Lien on any of their respective assets or properties (including any Transferred Assets); (e) authorize, undertake, expend any moneys for, or enter into any commitment with respect to, any material capital expenditure at any Hotel except in accordance with the Annual Budgets; or (f) modify any Annual Budget in any material respect. SECTION 5.03. ACCESS BY PURCHASER. During usual business hours, and as -------------------- often as may be reasonably requested, the officers, employees and representatives of the Purchaser (collectively, the "Purchaser Representatives") will be permitted reasonable access, to, and will be permitted to make copies of and extracts from, the accounts, other records, books of account, insurance policies, tax returns, documents and other instruments, records and files of each Star Company as the Purchaser shall reasonably request. The Purchaser Representatives will be permitted reasonable access, during usual business hours, and as often as may be reasonably requested, to the Hotels and other premises and physical properties used by the Star Companies, and will be permitted to discuss the affairs, finances and accounts of such companies with their respective counsel, auditors, actuaries, officers and employees. The parties hereto shall, and shall use commercially reasonable efforts to cause their respective Affiliates and their respective officers, accountants, counsel, financial advisors and other representatives to, hold any non-public information in confidence to the extent required by, and in accordance with, and will comply with the provisions of the letter agreement dated as of September 15, 1997 between Capital and the REIT as if they were parties to and bound by such letter agreement. SECTION 5.04. NOTIFICATION. The Sellers will promptly notify the ------------ Purchaser of any event which would cause or constitute a breach of any of the representations and warranties set forth in Article III. SECTION 5.05. ADDITIONAL INFORMATION. The Sellers shall promptly furnish ---------------------- to the Purchaser any and all such other financial and operating reports with respect to any Star Company or Hotel as may be prepared from time to time between the date hereof and the Closing Date, including without limitation, all Monthly Statements and Officer's Certificates delivered to any Lessors. The Sellers shall promptly make available to the Purchaser information with respect to any document, event, transaction or condition entered into or occurring after the date of this Agreement which, had it occurred or been in effect on or prior to the date of this Agreement, would have been included on the Schedules to this Agreement, and make available copies of all documents with respect thereto. No such information shall be deemed to supplement or amend any Schedule to this Agreement or to cure any breach of representation, warranty or covenant made by the Sellers unless the 19 Purchaser consents thereto in writing making specific reference to this provision. SECTION 5.06. LIQUOR LICENSES. The Sellers will cause each Star Company --------------- and its respective Affiliates to cooperate with the Purchaser in all reasonable respects in connection with the transfer of liquor licenses (or the stock of Affiliate corporations holding such liquor licenses, if appropriate) to the Purchaser or any Affiliate of the Purchaser or an application for new liquor licenses at any Hotel where the same is legally required. If the Purchaser or its Affiliate is unable to obtain the transfer of any such liquor licenses or obtain a new license by the Closing Date, then, on the Closing Date, the appropriate Star Company or its Affiliate corporation shall enter into an interim arrangement for a period not in excess of 120 days whereby such Star Company or Affiliate corporation shall operate the liquor concessions at the applicable Hotels on behalf of the Purchaser or its Affiliate pending the transfer or issuance of such liquor license; and the Purchaser shall indemnify such Star Company or such Affiliate corporation, as the case may be, against any liabilities incurred by virtue of such arrangement. SECTION 5.08. HSR ACT FILINGS. As soon as practicable, the Sellers --------------- shall cause the Star Companies to make any filing required under the HSR Act in connection with this Agreement and the transactions contemplated hereby and will comply with any subsequent requests for further information. Neither the Sellers nor the Star Companies shall be required to contest or appeal any preliminary injunction prohibiting or inhibiting the consummation of the transactions contemplated hereby. The Sellers will furnish the Purchaser with such necessary information concerning the Sellers and the Star Companies, and reasonable assistance, in written form, as the Purchaser may request in connection with its preparation of any filings by it under the HSR Act. SECTION 5.09. BEST EFFORTS. Each Seller will use, and the Sellers will ------------ cause each Star Company to use, his or its best efforts to fulfill the conditions to the Purchaser's obligations set forth in Article VII. SECTION 5.10. INCLUDED CONTRACTS. The Sellers represent and warrant that ------------------ the Pro Forma Budgets include financial effects of certain contracts pursuant to which telecommunications and purchasing services are provided to hotels and others (the "Included Contracts") as well as the operational and other expenses related thereto. Prior to the Closing, the Sellers shall cause Star Management to acquire and, the holders of such Included Contracts to convey to Star Management, the Included Contracts on terms reasonably satisfactory to the Purchaser in such a manner that, on the Closing Date, the Business acquired by the Purchaser under this Agreement will include the Included Contracts. ARTICLE VI PRE-CLOSING COVENANTS OF THE PURCHASER Prior to the Closing: SECTION 6.01. INSPECTIONS. The Purchaser shall give the Sellers ----------- reasonable prior notice of any such inspections and investigations to be made by the Purchaser pursuant to Section 5.03 and shall use its best efforts to minimize any interference with the operation of the Business and of the Hotels. Neither the Purchaser nor the Purchaser Representatives shall permit any borings, drillings or samplings to be done at any Hotel without the Sellers' prior written consent. The Purchaser agrees to indemnify, defend and hold the Sellers harmless from any actions, suits, Liens, claims, damages, expenses, losses and liabilities (including reasonable 20 attorneys fees and expenses) arising out of any access to, entry upon or inspection of any Hotel by the Purchaser or any Purchaser Representatives. SECTION 6.02. NOTIFICATION. The Purchaser will promptly give the Sellers ------------ written notice of any event which would cause or constitute a breach of any of the representations and warranties set forth in Article IV. Neither the Purchaser nor any Affiliate of the Purchaser shall take any action that would cause any such representation or warranty to be untrue. SECTION 6.03. HSR ACT FILINGS. As soon as practicable, the Purchaser --------------- will make any filing required under the HSR Act in connection with this Agreement and the transactions contemplated hereby and will comply with any subsequent requests for further information. The Purchaser shall not be required to contest or appeal any preliminary injunction prohibiting or inhibiting the consummation of the transactions contemplated hereby. The Purchaser will furnish the Sellers with such necessary information and reasonable assistance, in written form, as such companies may request in connection with the preparation of any filings by the Sellers and the Star Companies under the HSR Act. SECTION 6.04. BEST EFFORTS. The Purchaser will use its best efforts to ------------ fulfill the conditions to the Sellers' obligations set forth in Article VIII. ARTICLE VII CONDITIONS TO THE PURCHASER'S OBLIGATIONS The obligations of the Purchaser to acquire the Partnership Interests and the Transferred Assets from the Sellers and to take the other actions required to be taken by the Purchaser at the Closing are subject to the fulfillment, at the Closing, of each of the following conditions, any or all of which may be waived by the Purchaser in writing in whole or in part at or prior to the Closing: SECTION 7.01. REPRESENTATIONS AND WARRANTIES. The representations and ------------------------------ warranties contained in Article III hereof which are qualified as to materiality shall be true and correct and such representations and warranties that are not so qualified shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date, as though made on and as of the Closing Date, except to the extent that such representation and warranty is expressly limited by its terms to an earlier date. SECTION 7.02. COVENANTS. The Sellers shall have performed and complied in --------- all material respects with all agreements and conditions on their part required by this Agreement to be performed or complied with prior to or at the Closing. SECTION 7.03. OFFICER'S CERTIFICATE. The Purchaser shall have received a --------------------- certificate of the Shareholders and a certificate of an appropriate officer of Star Management, dated the Closing Date, certifying as to the fulfillment of the conditions specified in Sections 7.01 and 7.02. SECTION 7.04. LEGALITY. No change shall have occurred in any law, rule or -------- regulation that would prohibit the performance of the Purchaser's obligations under Article II hereof. SECTION 7.05. INJUNCTIONS. No court, agency or other authority shall have ----------- issued any order, decree 21 or judgment to restrain, enjoin or prevent the performance of the Purchaser's obligations under Article II hereof nor shall there be pending any suit, action or proceeding requesting such relief or remedy. SECTION 7.06. OPINION OF COUNSEL. The Purchaser shall have received, on ------------------ behalf of the Sellers, an opinion of Robinson Silverman Pearce Aronsohn & Berman LLP and local counsel for the Sellers, dated the Closing Date, in form and substance reasonably satisfactory to counsel for the Purchaser, as to the matters set forth in Sections 3.01, 3.02(a), (b), (c)(i)(A) and (c)(i)(B) and in the first two sentences of Section 3.02(c) and such other matters as counsel for the Purchaser shall reasonably request. SECTION 7.07. CONSENTS. The Sellers shall have obtained and provided to -------- the Purchaser in struments in form and substance reasonably satisfactory to counsel for the Purchaser evidencing the Consents; provided that, it shall not be a breach of this condition if, with respect to the Hotel Management Agreements listed on Schedule 3.07(a)(v), the Sellers, after using their reasonable efforts, have not obtained Consents with respect to those Contracts which are marked with an asterisk on such Schedule. SECTION 7.08. HOTEL LEASE AMENDMENTS. The Lessors shall have executed and ---------------------- delivered to the Purchaser amendments to each Hotel Lease substantially in the form annexed to the Merger Agreement, and the Lease Master Agreement shall have been terminated. SECTION 7.09. MEMORANDUM OF LEASE. A memorandum or short-form of each ------------------- Hotel Lease, as amended as required under Section 7.08, in recordable form shall have been executed by the applicable Lessor and delivered to the Purchaser. SECTION 7.10. DELIVERY OF DOCUMENTS. The Sellers shall have executed and --------------------- delivered to the Purchaser the Assignment of Leases and all other conveyances, covenants, warranties, deeds, assignments, bills of sale, confirmations, powers of attorney, approvals, consents and any and all further instruments as may be necessary to effect the transactions contemplated hereby, all in form and substance reasonably satisfactory to counsel for the Purchaser. SECTION 7.11. LEGAL MATTERS SATISFACTORY. All actions, proceedings, -------------------------- instruments and documents required by or from the Shareholders or the Sellers to carry out the transactions contemplated by this Agreement, or incidental thereto, and all other required relevant legal matters, shall be reasonably satisfactory in all respects to counsel for the Purchaser. SECTION 7.12. ESCROW AGREEMENT. All parties thereto shall have executed ---------------- and delivered the Escrow Agreement. SECTION 7.13. MERGER TRANSACTION. All conditions precedent to the Merger ------------------ Transaction (including, without limitation, the consummation of the Spin-Off Transaction) shall have been satisfied and the Merger Transaction shall have been consummated, all substantially on the terms set forth in the Merger Agreement. SECTION 7.14. SECURITIES REPRESENTATIONS. Each Shareholder shall have -------------------------- executed and delivered to the Purchaser a certificate confirming Section 3.21 and containing such other representations as may be required to confirm compliance with federal and state securities laws in connection with the issuance of Partnership Units and/or Common Stock to such Shareholder pursuant to this Agreement, such certificate to be in form and substance reasonably satisfactory to the Purchaser. 22 SECTION 7.15. HSR. The Sellers and Star Companies shall have made all --- filings required to be made by them under the HSR Act in connection with the execution, delivery and performance of this Agree ment and the consummation of the transactions hereby contemplated and all required waiting periods thereunder shall have expired or been terminated without request for additional information or, if additional information has been requested, all applicable extended waiting periods shall have expired. SECTION 7.16. INCLUDED CONTRACTS. The Included Contracts shall have been ------------------ acquired in accordance with Section 5.10. ARTICLE VIII CONDITIONS TO THE SELLERS' OBLIGATIONS The obligations of the Sellers to contribute and sell the Partnership Interests and the Transferred Assets to the Purchaser and to take the other actions required to be taken by the Sellers at the Closing are subject to the fulfillment, at the Closing, of each of the following conditions, any or all of which may be waived in whole or in part by the Sellers at or prior to the Closing: SECTION 8.01. REPRESENTATIONS AND WARRANTIES. The representations and ------------------------------ warranties contained in Article IV hereof which are qualified as to materiality shall be true and correct and such representations and warranties that are not so qualified shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date, as though made on and as of the Closing Date, except to the extent that such representation and warranty is expressly limited by its terms to an earlier date. SECTION 8.02. COVENANTS. The Purchaser shall have performed and complied --------- in all material respects with all agreements and conditions on its part required by this Agreement to be performed or complied with prior to or at the Closing. SECTION 8.03. OFFICER'S CERTIFICATE. The Sellers shall have received a --------------------- certificate of an appropriate officer of Parent Corp., dated the Closing Date, certifying to the fulfillment of the conditions specified in Sections 8.01 and 8.02. SECTION 8.04. LEGALITY. No change shall have occurred in any law, rule or -------- regulation that would prohibit the performance of the Sellers' obligations under Article II. SECTION 8.05. INJUNCTIONS. No court, agency or other authority shall have ----------- issued any order, decree or judgment to restrain, enjoin or prevent the performance of the Sellers' obligations under Article II nor shall there be pending any suit, action or proceeding requesting such relief or remedy. SECTION 8.06. OPINION OF COUNSEL. The Sellers shall have received, on ------------------ behalf of the Purchaser, an opinion of DeCampo, Diamond & Ash, counsel for the Purchaser, dated the Closing Date, in form and substance reasonably satisfactory to counsel for the Purchaser, as to the matters set forth in Sections 4.01, 4.02(a) and (b)(i), and 4.05(a) and (c) and the first three sentences of Section 4.02(b) and such other matters as counsel for the Sellers shall reasonably request. 23 SECTION 8.07. CONSENTS. The Consents shall have been executed and -------- delivered. SECTION 8.08. DELIVERY OF DOCUMENTS. The Purchaser shall have executed --------------------- and delivered to the Sellers the Assumption Agreements and such other closing certificates and documents as counsel for the Sellers shall reasonably request. SECTION 8.09. LEGAL MATTERS SATISFACTORY. All actions, proceedings, -------------------------- instruments and documents required by or from the Purchaser to carry out the transactions contemplated by this Agreement, or incidental thereto, and all other required relevant legal matters, shall be reasonably satisfactory in all respects to counsel for the Sellers. SECTION 8.10. ESCROW AGREEMENT. All parties thereto shall have executed ---------------- and delivered the Escrow Agreement. SECTION 8.11. PARTNERSHIP AGREEMENT. The Partnership Agreement shall have --------------------- been amended by the adoption of the Partnership Amendment and the Shareholders shall have been admitted as limited partners of the Purchaser. SECTION 8.12. MERGER TRANSACTION. All conditions precedent to the Merger ------------------ Transaction (including, without limitation, the consummation of the Spin-Off Transaction) shall have been satisfied and the Merger Transaction shall have been consummated, all substantially on the terms set forth in the Merger Agreement. SECTION 8.13. REGISTRATION RIGHTS AGREEMENT. Parent Corp. shall have ----------------------------- entered into a Registration Rights Agreement with the Shareholders in substantially the form of that certain Registration Rights Agreement, dated April 1, 1997, by and between Capital and the other parties thereto. SECTION 8.14. HSR. The Purchaser shall have made all filings required to --- be made by it under the HSR Act in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions hereby contemplated and all required waiting periods thereunder shall have expired or been terminated without request for additional information or, if additional information has been requested, all applicable extended waiting periods shall have expired. ARTICLE IX CERTAIN FINANCIAL MATTERS SECTION 9.01. BREAK-UP FEE. If this Agreement is terminated by the ------------ Sellers pursuant to Section 11.01(d)(ii) solely because the condition precedent to the Sellers' obligations set forth in Section 8.12 becomes impossible under circumstances which give rise to the obligation of Capital to pay a so-called "Break-Up Fee" pursuant to Section 9.2(c) of the Merger Agreement, then the Purchaser will pay to the Sellers a fee in the amount of $3,000,000, by wire transfer in immediately available funds, within two business days of a written demand therefor from the Sellers. The payment of such amount shall be compensation and liquidated damages for the loss suffered by the Sellers as a result of the Purchaser's failure to acquire the Partnership Interests and the Transferred Assets from the Sellers and to take the other actions required to be taken by the Purchaser at the Closing and to avoid the difficulty of determining damages under the circumstances and, other than the payment of such amount by the Purchaser, no party shall have any other liability to the other. 24 SECTION 9.02. CLOSING DATE NET WORKING CAPITAL. The Shareholders and -------------------------------- the Purchaser shall take the following actions to insure that the Net Working Capital as of the Closing Date shall be zero (the "Required Amount"): (i) On the Closing Date, the Shareholders and the Purchaser shall prepare, jointly and in good faith, an estimate of the Net Working Capital as of the Closing Date (the "Estimated Net Working Capital"); (ii) If the Estimated Net Working Capital exceeds the Required Amount, Star Leasing shall, immediately prior to the Closing, make a distribution to the Shareholders, in cash, of an amount equal to such excess; if the Required Amount exceeds the Estimated Net Working Capital, each Shareholder shall, immediately prior to the Closing, contribute to Star Leasing, in cash, an amount equal to the product of such excess and the Shareholder's Percentage of such Shareholder; provided, however, that no Shareholder shall be required to make a contribution to Star Leasing in excess of the aggregate distributions made to such Shareholder by Star Leasing from and after December 31, 1997; (iii) Within thirty (30) days after the date that all information is available as required to calculate the Net Working Capital as of the Closing Date, the Purchaser shall deliver to the Shareholders a written report (the "Purchaser Report") setting forth the Purchaser's calculation of the Net Working Capital as of the Closing Date; (iv) Within thirty (30) days after delivery of the Purchaser Report to the Shareholders, the Shareholders may deliver to the Purchaser a written report (the "Shareholders Report") setting forth any disagreement of the Shareholders with the Purchaser Report and showing the Shareholders' calculation of the Net Working Capital as of the Closing Date. If the Shareholders do not submit a Shareholders Report within such period, then the Net Working Capital as of the Closing Date as set forth in the Purchaser Report shall be final and binding on the Shareholders and the Purchaser. (v) If the Shareholders and the Purchaser are unable to resolve by good faith negotiations any differences between the Purchaser Report and a Shareholders Report within thirty (30) days of the Purchaser's receipt of such Shareholders Report, either the Shareholders or the Purchaser may elect to have the disagreements between the two reports resolved by a nationally recognized accounting firm mutually agreed upon by the parties hereto which shall not be the regular accountants for either the Purchaser or any Seller (the "Accounting Firm"), which shall make a final and binding resolution of the disagreements and, based on such resolution, a final and binding determination of the Net Working Capital as of the Closing Date. The Accounting Firm shall be in structed to use every reasonable effort to perform its arbitration function within thirty (30) days of submission of the matter to it and in any case, as soon as practicable after such submission to it. The fees and expenses of the Accounting Firm shall be shared 50% by the Purchaser and 50% by the Shareholders. (vi) If the Net Working Capital as of the Closing Date as established by a Purchaser Report, or by mutual agreement of the Purchaser and the Shareholders, or by the Accounting Firm, as the case may be, is less than the Estimated Net Working Capital, the Shareholders hereby, jointly and severally, agree to pay such difference to Star Leasing by wire transfer in immediately available funds within two business days of a written demand therefor from the Purchaser; provided, however, that the amount of such payment by any Shareholder shall not, when aggregated with the amount, if any, which such Shareholder is required to pay pursuant to Sections 9.02(ii) and 9.04(b) exceed the 25 aggregate distributions made to such Shareholder by Star Leasing from December 31, 1997 through the Closing Date (including any distribution made on the Closing Date pursuant to Section 9.02(ii)). (vii) If the Net Working Capital as of the Closing Date as established by a Purchaser Report, or by mutual agreement of the Purchaser and the Shareholders, or by the Accounting Firm, as the case may be, is greater than the Estimated Net Working Capital, the Purchaser hereby agrees to cause Star Leasing to pay to each Shareholder by wire transfer in immediately available funds to an account designated by such Shareholder its Shareholder's Percentage of such difference within two business days of a written demand therefor from the Shareholders. (viii) The Purchaser agrees to permit the Shareholders and their representatives (including accountants) to have full and timely access to, and to examine and make copies of, all applicable books, records and schedules which are in the possession of the Purchaser after the Closing and which are necessary to prepare the Shareholders Report. SECTION 9.03. EXPENSES. Each of the parties hereto shall pay its own -------- expenses (including attorney's fees) in connection with this Agreement and the transactions hereby contemplated. All expenses of the Shareholders and the Sellers in connection with this Agreement and the transactions hereby contemplated shall be paid by the Shareholders, and no part of such expenses shall be liabilities of Star Leasing or Star Sub L.P. or constitute Assumed Liabilities nor in any way be charged to or for the account of the Business or the Hotels or the Purchaser. The Merger Agreement provides that all amounts payable to secure the Consents relating to the Franchise Agreements shall be paid by the REIT. SECTION 9.04. FEE PAYMENT. (a) In order to compensate the Purchaser for ----------- certain management services to be performed by it and its Affiliates during the period from the Closing Date through December 31, 1998 for and on behalf of the Sellers, the Shareholders hereby agree to pay to the Purchaser, at Closing , an amount equal to the Fee Payment (as hereinafter defined). (b) At Closing or promptly thereafter, the Sellers shall pay a fee (the "Fee Payment") to the Purchaser as follows: each Shareholder shall pay to the Purchaser an amount equal to such Fee Payment multiplied by the Shareholder's Percentage of such Shareholder; provided, however that the amount of such payment by any Shareholder shall not, when aggregated with the amount, if any, which such Shareholder is required to pay pursuant to Sections 9.02(ii) and (vi), exceed the aggregate distributions made to such Shareholder by Star Leasing from December 31, 1997 through the Closing Date (including any distribution made on the Closing Date pursuant to Section 9.02(ii)). (c) Based upon the Pro Forma Budgets, Salomon Smith Barney has prepared certain pro forma projections of the operations of the Business for the calendar year ending December 31, 1998 (the "Pro Forma Annual Financial Statements"). The Sellers shall prepare a pro forma projection of the operations of the Business for such calendar year on a month-by-month basis, based upon the Pro Forma Budgets (the "Pro Forma Monthly Financial Statements"), which shall be reasonably acceptable to the Purchaser. The Fee Payment shall be the amount, if any, by which (i) an amount equal to the product of (A) the annual net operating income of the Business as shown on the Pro Forma Annual Financial Statements and (B) a fraction, the numerator of which is the number of days in the period from the Closing Date to and including December 31, 1998 and the denominator of which is 365, exceeds (ii) the aggregate net operating income of the Business for such period as shown on the Pro Forma Monthly Financial Statements (with net operating income for any partial month being included on a pro rata basis, based upon the number of days in such month included in such 26 period). ARTICLE X ADDITIONAL COVENANTS SECTION 10.01. FURTHER ASSURANCES. From and after the Closing Date, all ------------------ parties shall, at any time and from time to time, at their sole cost and expense, make, execute and deliver, or cause to be made, exe cuted and delivered, such assignments, deeds, bills of sale, drafts, checks, returns, filings and other instruments, consents and assurances and take or cause to be taken all such action as any other party may reasonably request for the effectual consummation, confirmation and particularization of this Agreement and the transactions contemplated by this Agreement. SECTION 10.02. CERTAIN EMPLOYMENT MATTERS. (a) The Purchaser shall offer -------------------------- employment as of the Closing Date to each Person (other than employees who may be included in the description set forth on Schedule 10.02(a)) who, on the --- Closing Date, is actively employed by the Star Management or who is absent from work by reason of vacation, sick leave, short-term disability or due to authorized leave of absence or military service. Such employment shall be in a position similar to the position in the Business as of the Closing Date at the same location at which such employee was employed by the Sellers immediately prior to the Closing Date. Any such employee who accepts such offer of employment shall be referred to herein as a Retained Employee. Except as provided in Section 10.02(b), (d) and (e) below, the Purchaser shall have no liability, and the Sellers shall hold the Purchaser harmless, from all liability with respect to each employee of Star Management who is included in the description set forth on Schedule 10.02(a). Nothing in this Section 10.02 shall -------- prohibit the Purchaser from terminating the employment of any Retained Employee at any time after the Closing. (b) As of the Closing Date, the Purchaser shall provide the Retained Employees coverage under benefit plans and programs similar to the benefit plans and programs provided by the Purchaser to its similarly situated employees. Such benefit plans and programs maintained by the Purchaser shall give credit to the Retained Employees to the same extent as such employees had earned credit as of such date under the Sellers' benefit plans and programs for (i) service prior to the Closing Date toward any waiting period for eligibility and (ii) in the case of group health plans, amounts paid in the year in which the Closing Date occurs toward deductibles and out of pocket limitations, and such Purchaser group health plan shall waive any preexisting condition limitation, in each case to the extent credited, paid or satisfied under the benefit plans and programs of Star Management. The Purchaser shall be liable and responsible for all accrued and unused vacation and sick pay as of the Closing Date for all Retained Employees. (c) As of the Closing Date, Star Management shall, to the extent permitted by applicable law, terminate (i) its 401(k) Plan (the "Sellers' 401(k) Plan") and (ii) its Retirement Savings Plan (the "ESOP"), and shall distribute the assets of such plans to their respective participants and beneficiaries in accordance with the relevant plan documents and applicable law. The Purchaser shall cause an individual account plan that it maintains (the "Purchaser's 401(k) Plan") to be amended, if necessary, to accept eligible rollover distributions, as defined in Code section 402(f)(2)(A), from the Sellers' 401(k) Plan and the Sellers' ESOP. As of the Closing Date, the Purchaser shall cover the Retained Employees who are participants in the Sellers' 401(k) Plan in the Purchaser's 401(k) plan. The Purchaser shall recognize accumulated service with Star Management for purposes of eligibility and vesting under the Purchaser's 401(k) Plan. 27 (d) The Purchaser hereby agrees to defend and indemnify the Sellers, the Shareholders and their respective agents from and against any and all liability, loss, claim, demand, cost, expense, including without limitation, reasonable attorneys' fees, charges and costs, and any other liability which the Sellers, the Shareholders and their respective agents may incur under, or on account of, the WARN Act or any similar state laws on account of the transactions contemplated in this Agreement. The foregoing shall in no way impair the ability of the Purchaser to modify the terms of employment of, or terminate, any employee at any time after the Closing Date, although such action may result in liability for the Purchaser under this Section 10.02(d). (e) As of the Closing Date, the Purchaser shall offer and/or provide group health plan coverage, to the extent required of Star Management or the Purchaser by the group health plan continuation coverage requirements of section 4980B of the Code and sections 601 through 608 of ERISA ("continuation coverage"), to each individual who (i) is covered by Star Management's group health plan as of the Closing Date, loses coverage under Star Management's group health plan on account of the transactions contemplated by this Agreement, and does not become an employee of the Purchaser, (ii) is an eligible dependent of an individual described in (i) above covered by Star Management's group health plan as of the Closing Date, (iii) is receiving, as of the Closing Date, continuation coverage under Star Management's group health plan, or (iv) is entitled to elect, as of the Closing Date, continuation coverage under Star Management's group health plan. (f) (i) No Star Company nor any of their respective ERISA Affiliates has any obligation to contribute to a Multiemployer Plan except as set forth on Schedule 3.17 (the "Sellers Multiemployer Plans"). ---- (ii) The Purchaser and the Sellers intend to comply with Section 4204 of ERISA so as to prevent Star Management from incurring at the Closing Date a complete or partial withdrawal in respect of the Sellers Multiemployer Plans determined as if the Purchaser is the "purchaser" referred to in such Section 4204 as follows: (A) For the first plan year of each Sellers Multiemployer Plans commencing after the Closing, and for each of the succeeding four plan years for each plan year for each plan, the Purchaser shall assume the obligation to contribute to each such plan with respect to operations conducted with the business assets acquired from Star Management for substantially the same number of contribution base units (as defined in Section 4001(a)(11) if ERISA) for which Star Management had an obligation to contribute to such plan; (B) Prior to each Sellers Multiemployer Plan's first plan year beginning after the Closing, the Purchaser shall apply to such plan for a variance from the requirement of Section 4204(a)(1)(B) of ERISA that a bond be obtained or an amount be held in escrow and provided in such Section. In the event any such plan determines that the request does not qualify for a variance, the Purchaser shall obtain any required bond or establish any required escrow within thirty (30) days after the date on which it receives notice of such plan's decision, and shall maintain such bond or escrow until the earliest of: (i) the date a variance is obtained from such plan; (ii) the date a variance or exception is obtained from the Pension Benefit Guaranty Corporation; or (iii) the last day of the fifth plan year commencing after the Closing; 28 which bond or escrow shall be paid to such plan if the Purchaser withdraws therefrom or fails to make a contribution to such plan when due at any time during the first five plan years of such plan commencing after the Closing. To the extent the Purchaser is unable to obtain any variance as set forth above, the Purchaser shall be responsible for the cost of any bond or escrow or other security required of the Purchaser under Section 4204 of ERISA. (C) In order to comply with subsection (a)(1)(C) of Section 4204 of ERISA, if the Purchaser withdraws in a complete or partial withdrawal from any Sellers Multiemployer Plan with respect to which the Purchaser has assumed an obligation to contribute pursuant to this Agreement and such withdrawal or partial withdrawal occurs during the first five plan years commencing with the first plan year after the Closing, Star Management shall be secondarily liable for any withdrawal liability it would have had to such plan on the Closing Date under Title IV of ERISA. The Purchaser agrees to provide Star Management with reasonable advance notice or its anticipated failure to pay any withdrawal liability and to furnish Star Management promptly with a copy of any notice of withdrawal liability it may receive with respect to such plan. (iii) As soon as practicable after the execution of this Agreement, Star Management shall request in writing that the plan sponsor of each Sellers Multiemployer Plan provide Star Management with an estimate of Star Management's potential withdrawal liability to such plan as of the date of this Agreement, and the Purchaser shall reimburse Star Management for the amount, if any, Star Management is required to pay for such estimates. (iv) Purchaser shall indemnify and hold harmless the Sellers and the Shareholders against any loss, liabilities, claims, damages and expenses arising out of the secondary liability assumed by Star Management under Section 10.02(f)(ii)(C). (g) Neither the Sellers nor any Star Company will take, or permit any of their respective Affiliates to take, any action which would impede, hinder, interfere or otherwise compete with the Purchaser's effort to hire the Retained Employees as contemplated above. (h) Nothing contained herein shall obligate the Purchaser to adopt or continue any particular employee benefit plan, or to continue to provide any particular level of benefits, after the Closing Date. The Purchaser shall indemnify and hold harmless the Sellers and the Shareholders against any liability or claim arising out of any changes in or terminations of such plans on and after the Closing Date, or otherwise arising with respect to the terms and conditions of employment of any Retained Employee or other employees of the Purchaser after the Closing Date. (i) The Sellers and the Shareholders hereby, jointly and severally, indemnify the Purchaser and Management Sub and their respective Affiliates against any liability of the Sellers arising under ERISA or the provisions of the Code relating to employee benefit plans solely on account of the relationship of an entity to the Sellers under Code section 414. (j) No provision of this Section 10.02 shall create any third party beneficiary rights in any employee or former employee of the Sellers, the Purchaser, the Management Sub or any other Person (including any beneficiary or dependent thereof). 29 (k) Except as expressly assumed by the Purchaser in Sections 10.02(b), (c), (d), (f) and (h) the Sellers shall retain, and the Purchaser shall not be liable for, (i) all obligations and liabilities under all Employee Plans and otherwise in respect of any employee, prior employee or independent contractor (including any beneficiary or dependent thereof) of the Sellers or any Star Company and (ii) all liabilities and obligations arising under any workers' compensation arrangement to the extent such liability or obligation relates to events occurring (whether or not reported) during the period prior to the Closing Date. For purposes of this Section, a claim shall be deemed to be incurred when (A) with respect to medical or dental benefits, the medical or dental services giving rise to such claim are performed and ( B) with respect to life, accident or disability benefits, when the event giving rise to such claim occurs. (l) The Purchaser shall have no liability or obligation arising out of or related to any Multiemployer Plan which is not listed in Schedule 3.17 or under ---- any Multiemployer Plan listed on Schedule 3.17 other than those related to the ---- operation of the Hotels. SECTION 10.03. RETENTION OF RECORDS. After the Closing, the Sellers -------------------- and the Shareholders shall, upon reasonable notice to the Purchaser, have reasonable access during usual business hours to the books and records of the Sellers for periods prior to the Closing Date delivered to it hereunder for all reasonable business and tax purposes and may make copies or extracts from such books and records for such purposes. The Purchaser agrees to retain such books and records for at least three years after the Closing Date or later upon request from the Sellers until final completion of all Internal Revenue Service and state tax audits relating to any business, sales, revenues or income of the Sellers with respect to tax periods preceding or including the Closing Date; provided, however, that if the Purchaser shall, after the first year following the Closing Date, propose to destroy or dispose of any such books and records, it shall first so advise the Sellers and, if any Seller objects in writing to such destruction or disposition, shall either continue to preserve such books and records for the requisite period or shall deliver to the Sellers, at the expense of the Sellers, such books and records as were proposed to be destroyed or disposed of. SECTION 10.04. CERTAIN HOTELS. If, prior to the Closing, the Lessor -------------- with respect to any of the Hotels listed in Schedule 10.04 sells or otherwise ----- disposes of any such Hotel and, as a result, the related Hotel Lease and any related Hotel Management Agreement or Third Party Hotel Management Agreement is terminated, such Contracts shall automatically be removed from Schedule 3.07(a) or (b) as the case may be effective as of the date of this Agreement. SECTION 10.05. TAX RETURNS. The Purchaser will file the final tax ----------- returns of Star Leasing and Star Sub L.P. that ends on the Closing Date as a result of the termination of such partnership(s) pursuant to Section 708(b)(1) of the Code subject to the approval of the Sellers which approval shall not be unreasonably delayed or withheld. ARTICLE XI TERMINATION SECTION 11.01. TERMINATION. This Agreement may be terminated at any ----------- time prior to the Closing Date: (a) by mutual written consent of the Purchaser and Sellers; 30 (b) by either the Purchaser or the Sellers if the Closing has not occurred on or before October 31, 1998 (the "Termination Date"); provided, however, this provision shall not be available to a party who fails or refuses to consummate the transactions contemplated hereby or to take any other action necessary to consummate such transactions in breach of such party's obligations under this Agreement; (c) by the Purchaser (i) if there has been a material violation or breach by a Shareholder or a Seller of any agreement, representation or warranty contained in this Agreement and such violation, breach or condition has not been waived by the Purchaser; provided that in the case of a violation or breach which may be cured or remedied, the Purchaser shall have provided the Sellers written notice describing the same and such violation or breach shall not have been cured or remedied within 20 days of such notice or (ii) if the satisfaction of any condition to the obligations of the Purchaser hereunder becomes impossible or shall not occur on or prior to the Termination Date; or (d) by the Sellers (i) if there has been a material violation or breach by the Purchaser of any agreement, representation or warranty contained in this Agreement and such violation, breach or condition has not been waived by the Sellers; provided that in the case of a violation or breach which may be cured or remedied, the Sellers shall have provided the Purchaser written notice describing the same and such violation or breach shall not have been cured or remedied within 20 days of such notice or (ii) if the satisfaction of any condition to the obligations of the Sellers hereunder becomes impossible or shall not occur on or prior to the Termination Date. SECTION 11.02. NO WAIVER. No termination pursuant to Section 11.01 shall --------- be deemed to constitute a release or waiver by any party of any claim against another party hereto based on any breach by such party of its agreements, representations and warranties contained in this Agreement. ARTICLE XII INDEMNIFICATION SECTION 12.01. BY THE SELLERS. The Sellers, jointly and severally, agree -------------- to indemnify and hold harmless the Purchaser, Parent Corp. and, from and after the Closing, if any, Star Leasing and Star Sub L.P., and their respective Affiliates, and their respective shareholders, partners, directors, officers, employees, agents, successors and assigns (each an "indemnified person") from and against, and to reimburse any such indemnified person when incurred with respect to, any and all Losses incurred by such indemnified person by reason of or arising out of or in connection with (i) the breach of any representation or warranty made by or on behalf of any Seller contained in this Agreement or any other Seller Document or any exhibit hereto or thereto or in any Schedule or certificate furnished or to be furnished to the Purchaser pursuant to or in connection with this Agreement, a Seller Document or any of the transactions hereby contemplated; (ii) the failure of any Seller to perform any agreement required by this Agreement or any Seller Document to be performed by such Person; (iii) the allegation by any third party of the existence of any state of facts which if it existed would constitute a breach of any representation or warranty made by or on behalf of any Seller contained in this Agreement or any other Seller Document or any exhibit hereto or thereto or in any Schedule or certificate furnished or to be furnished to the Purchaser pursuant to or in connection with this Agreement, a Seller Document or any of the transactions hereby contemplated; and (iv) any Excluded Liability which such indemnified person may be liable to pay, perform or discharge. 31 Each indemnified person agrees to give prompt notice to the Sellers of any claim by any third party for which such indemnified party may request indemnification under this Section 12.01 (except any failure or delay to give such notice shall not relieve any Seller of its obligations hereunder unless and only to the extent, if at all, that any such Person has been irrevocably prejudiced directly by reason of such failure or delay). If (a) any such third party claim shall be a claim solely for monetary damages, (b) the entire amount of such claim shall not be subject to the limitations on indemnification set forth in Section 12.03 hereof, and (c) the Sellers shall agree in writing within ten business days after receipt of notice of such claim that they are required, pursuant to this Section 12.01, to indemnify for the full amount of such claim, then the Sellers shall be entitled to control the contest, defense, settlement or compromise of any such claim (including the engagement of counsel in connection therewith), at their own cost and expense, including the cost and expense of attorneys' fees in connection with such contest, defense, settlement or compromise and each indemnified person shall have the right to participate in the contest, defense, settlement or compromise of any such claim at its own cost and expense, including the cost and expense of attorneys' fees in connection with such participation; provided, however, that, the Sellers shall not settle or compromise any such claim without the prior written consent of the indemnified persons, unless the sole relief provided is monetary damages that are paid in full by the Sellers. If such claim shall not be solely a claim for monetary damages and/or such claim shall be subject, in whole or in part, to the limitations on indemnification set forth in Section 12.03, but the Sellers shall agree in writing within ten business days after receipt of notice of such claim that they are required, pursuant to this Section 12.01 (but subject to the limitations set forth in Section 12.03), to indemnify each indemnified person for the full amount of such claim, then the contest, defense, settlement and compromise of such claim shall be controlled jointly by the Sellers, on the one hand, and the indemnified persons, on the other hand (and any counsel engaged in connection therewith shall be acceptable to both such groups), at the cost and expense of the Sellers, including the cost and expense of attorneys' fees in connection with such contest, defense, settlement or compromise, and such claim shall not be settled or compromised unless the indemnified persons, on the one hand, and the Sellers, on the other hand, jointly approve such settlement or compromise. If such claim shall not be a claim for monetary damages or the Sellers do not agree in writing within ten business days after receipt of notice of such claim that the Sellers are required, pursuant to this Section 12.01, to indemnify the indemnified persons for the full amount of such claim, then the indemnified persons shall control the contest, defense, settlement or compromise of any such claim (including the engagement of counsel in connection therewith), at the Sellers' cost and expense, including the cost and expense of attorneys' fees in connection with such contest, defense, settlement or compromise, and the Sellers shall have the right to participate in the contest, defense, settlement or compromise of any such claim at their own cost and expense, including the cost and expense of attorneys' fees in connection with such participation; provided, however, that the indemnified persons shall diligently defend any such claim and shall not settle or compromise any such claim without the prior written consent of the Sellers, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, the right of the Sellers (i) to control any contest or defense or (ii) to require that the indemnified persons diligently defend any claim or obtain the consent of the Sellers to any settlement or compromise of any claim shall be conditioned upon the Sellers providing to such indemnified persons evidence satisfactory to such indemnified persons of the financial ability of the Sellers to satisfy such claim. 32 SECTION 12.02. BY THE PURCHASER. The Purchaser agrees to indemnify and ---------------- hold harmless the Sellers and their respective Affiliates, and their respective shareholders, partners, directors, officers, employees, agents, successors and assigns (each an "indemnified person") from and against, and to reimburse any such indemnified person when incurred with respect to, any and all Losses incurred by such indemnified person by reason of or arising out of or in connection with (i) the breach of any representation or warranty made by or on behalf of the Purchaser contained in this Agreement or any other Purchaser Document or any exhibit hereto or thereto or in any Schedule or certificate furnished or to be furnished to the Sellers pursuant to or in connection with this Agreement, a Purchaser Document or any of the transactions hereby contemplated, (ii) the failure of the Purchaser to perform any agreement required by this Agreement or any Purchaser Document to be performed by it, (iii) the allegation by any third party of the existence of any or state of facts which if it existed would constitute a breach of any representation or warranty made by or on behalf of the Purchaser contained in this Agreement or any other Purchaser Document or any exhibit hereto or thereto or in any Schedule or certificate furnished or to be furnished to the Sellers pursuant to or in connection with this Agreement, a Purchaser Document or any of the transactions hereby contemplated, and (iv) any Assumed Liability which such indemnified person is required to pay, perform or discharge. Each indemnified person agrees to give prompt notice to the Purchaser of any claim by any third party for which such indemnified party may request indemnification under this Section 12.02 (except any failure or delay to give such notice shall not relieve the Purchaser of its obligations hereunder unless and only to the extent, if at all, that the Purchaser has been irrevocably prejudiced directly by reason of such failure or delay). If (a) any such third party claim shall be a claim solely for monetary damages, (b) the entire amount of such claim shall not be subject to the limitations on indemnification set forth in Section 12.03 hereof, and (c) the Purchaser shall agree in writing within ten business days after receipt of notice of such claim that it is required, pursuant to this Section 12.02, to indemnify for the full amount of such claim, then the Purchaser shall be entitled to control the contest, defense, settlement or compromise of any such claim (including the engagement of counsel in connection therewith), at its own cost and expense, including the cost and expense of attorneys' fees in connection with such contest, defense, settlement or compromise and each indemnified person shall have the right to participate in the contest, defense, settlement or compromise of any such claim at its own cost and expense, including the cost and expense of attorneys' fees in connection with such participation; provided, however, that, the Purchaser shall not settle or compromise any such claim without the prior written consent of the indemnified persons, unless the sole relief provided is monetary damages that are paid in full by the Purchaser. If such claim shall not be solely a claim for monetary damages and/or such claim shall be subject, in whole or in part, to the limitations on indemnification set forth in Section 12.03, but the Purchaser shall agree in writing within ten business days after receipt of notice of such claim that it is required, pursuant to this Section 12.02 (but subject to the limitations set forth in Section 12.03), to indemnify each indemnified person for the full amount of such claim, then the contest, defense, settlement and compromise of such claim shall be controlled jointly by the Purchaser, on the one hand, and the indemnified persons, on the other hand (and any counsel engaged in connection therewith shall be acceptable to both such groups), at the cost and expense of the Purchaser, including the cost and expense of attorneys' fees in connection with such contest, defense, settlement or compromise, and such claim shall not be settled or compromised unless the indemnified persons, on the one hand, and the Purchaser, on the other hand, jointly approve such settlement or compromise. If such claim shall not be a claim for monetary damages or the Purchaser does not agree in writing within ten business days after receipt of notice of such claim that it is required, pursuant to this Section 12.02, 33 to indemnify the indemnified persons for the full amount of such claim, then the indemnified persons shall control the contest, defense, settlement or compromise of any such claim (including the engagement of counsel in connection therewith), at the Purchaser's cost and expense, including the cost and expense of attorneys' fees in connection with such contest, defense, settlement or compromise, and the Purchaser shall have the right to participate in the contest, defense, settlement or compromise of any such claim at their own cost and expense, including the cost and expense of attorneys' fees in connection with such participation; provided, however, that the indemnified persons shall diligently defend any such claim and shall not settle or compromise any such claim without the prior written consent of the Purchaser, which consent shall not be unreasonably withheld. SECTION 12.03. LIMITATIONS ON INDEMNIFICATION. Except as set forth ------------------------------ in the proviso to this Section, neither the Sellers, on the one hand, nor the Purchaser, on the other hand, shall be required to pay any amounts pursuant to clause (i) or (iii) of Section 12.01, or pursuant to clause (i) or (iii) of Section 12.02 hereof (as the case may be) unless and until the aggregate of all Losses (other than those hereinafter referred to in the proviso to this sentence) incurred by all persons indemnified by such indemnifying parties under such clauses exceeds $500,000, in which event such indemnifying parties shall be liable, dollar-for-dollar, for the full amount of such Losses in excess of $500,000; provided that, notwithstanding the foregoing, the Sellers shall in all -------- ---- events be obligated to indemnify on a dollar-for-dollar basis from and against all Losses arising out of or in connection with the breach or alleged breach of the representations and warranties made in Sections 3.01, 3.02(a), (b), (c)(i)(A) and (c)(i)(B), 3.04(a), 3.05, 3.20 and 3.21, and the first two sentences of Section 3.02(c) (or Section 3.22 as such Section relates to any of the foregoing Sections) and in any certificate delivered pursuant to Section 7.14, and the Purchaser shall be obligated to indemnify on a dollar-for-dollar basis from and against all Losses arising out of or in connection with the breach or alleged breach of the representations and warranties made in Sections 4.01, 4.02(a) and (b)(i), 4.04 and 4.05 and the first three sentences of Section 4.02(b); and provided, further, that with respect to any Losses for which a -------- ------- claim is made against the Sellers under Section 12.01(i) or (iii) (other than those arising out of or in connection with the breach or alleged breach of the representations and warranties made in Sections 3.01, 3.02(a), (b), (c)(i)(A), and (c)(i)(B), 3.04(a), 3.05, 3.20 and 3.21, and the first two sentences of Section 3.02(c) (or Section 3.22 as such Section relates to any of the foregoing Sections) and in any certificate delivered pursuant to Section 7.14) in no event shall the aggregate amount required to be paid by the Sellers exceed $3,000,000, for all such claims for indemnity brought prior to the Stipulated Date (the "Stipulated Date Payments"), and the lesser of (Y) $1,000,000 and (Z) $3,000,0000 minus the amount of the Stipulated Date Payments for all such claims for indemnification made after the Stipulation Date. SECTION 12.04. ESCROW. In any instance in which the Purchaser has a claim ------ for indemnity under this Article XII, the Purchaser agrees that it will make a demand and a reasonable effort under the circumstances (which shall not require the Purchaser to institute any suit or other action) to collect such claim as against the funds, if any, then held under the Escrow Agreement prior to making any claim as against any individual Shareholder with respect to such claim. ARTICLE XIII MISCELLANEOUS SECTION 13.01. SURVIVAL. All statements, certifications, indemnifications, -------- representations and warranties made hereby by the parties to this Agreement, and their respective covenants, agreements and obligations to be performed pursuant to the terms hereof, shall survive the Closing, notwithstanding any 34 examination by or on behalf of any party hereto, notwithstanding any notice of a breach or of a failure to perform not waived in writing and notwithstanding the consummation of the transactions hereby contemplated with knowledge of such breach or failure, and (except with respect to those made in Sections 3.01, 3.02(a), (b), (c)(i)(A) and (c)(i)(B), 3.04(a), 3.20 and 3.21, and the first two sentences of Section 3.02(c) (or Section 3.22 as such Section relates to any of the foregoing Sections), Sections 4.01, 4.02(a) and (b)(i), 4.04 and 4.05 and the first three sentences of Section 4.02(b)and in any certificate delivered pursuant to Section 7.14, which shall survive without limitation, and those contained in Section 3.05, which shall survive until the expiration of the statute of limitations on the tax matters discussed therein) the representations and warranties made hereby by the parties shall terminate on the first anniversary of the Closing Date, except to the extent a party gives written notice to the other parties of any breach thereof on or before such date, and then only with respect to the matters described in such notice; provided, however, that nothing herein contained shall modify or be construed to modify in any respect whatsoever any covenant, agreement or obligation to be performed by any party pursuant to the provisions of this Agreement. SECTION 13.02. NOTICES. Any notice, communication, request, reply or ------- advice (collectively, "Notice") provided for or permitted by this Agreement to be made or accepted by either party must be in writing. Notice shall be given or served by personal delivery, by delivery by nationally-recognized overnight courier, or by facsimile transmission, if applicable. Notice by personal delivery shall be effective on the business day delivered. Notice by overnight courier shall be effective one business day after deposit with the courier service. Notice given by facsimile transmission shall be effective on the business date delivered. For the purposes of Notice, the addresses of the parties shall be: Any Seller: As set forth on Schedule 13.02 with copy to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, N.Y. 10104 Fax No.: (212) 541-4630 Attn: Alan S. Pearce, Esq. Purchaser: 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 Fax No.: 202-965-4445 Attn: Mr. Paul W. Whetsell with copy to: DeCampo, Diamond & Ash 805 Third Avenue New York, New York 10022 Fax No.: 212-758-1728 Attn: William H. Diamond, Esq. The parties shall have the right from time to time to change their respective addresses for notice by at least five 35 days' written notice to the other party. SECTION 13.03. ENTIRE AGREEMENT; AMENDMENT. All prior or contemporaneous --------------------------- agreements, contracts, promises, representations and statements, if any, among the parties hereto, or their representatives, as to the subject matter hereof, are merged into this Agreement, the Purchaser Documents and the Seller Documents which shall constitute the entire agreement among such Persons with respect to the matters contained therein. No waiver or modification of the terms hereof shall be valid unless in writing signed by the party to be charged. SECTION 13.04. GOVERNING LAW. This Agreement shall be governed by, and ------------- construed in accordance with, the laws of the State of New York applicable to contracts made and wholly performed in such state by residents thereof without giving effect to the conflict of laws principles thereof. SECTION 13.05. ASSIGNMENT. This Agreement shall be binding upon and inure ---------- to the benefit of the parties hereto and their respective successors and assigns, provided that this Agreement may not be assigned to any third party except that this Agreement and the Purchaser's rights hereunder may be assigned, in whole or in part, by the Purchaser to one or more of its Affiliates, including, without limitation, the Management Sub. The Purchaser shall remain fully and primarily liable for the performance by any assignee of any obligation of the Purchaser hereunder. Any purported assignment in violation of this Section 13.05 shall be void. SECTION 13.06. PUBLICITY. The Purchaser and the Sellers shall consult --------- with one another before issuing any press release or public announcement or announcement to their respective employees generally about the transactions contemplated by this Agreement. Except as may be required by applicable law, no party shall issue any press release or other public announcement without the consent of the other parties, which consent shall not be unreasonably withheld or delayed. SECTION 13.07. TRANSFER TAXES. Any taxes in the nature of sales or -------------- transfer taxes, documentary stamps or similar taxes payable on the sale or transfer of all or any portion of the assets, properties or business being transferred under or pursuant to this Agreement shall be paid fifty (50%) per cent by the Shareholders and the Sellers and fifty (50%) per cent by the Purchaser. SECTION 13.08. LEGAL FEES. In the event of any litigation or arbitration ---------- concerning the interpretation, application or enforcement of this Agreement, the prevailing party shall be entitled to recover from the other party, in addition to all other remedies to which the prevailing party is entitled, all court costs and all fees and expenses of attorneys and expert witnesses incurred by the prevailing party. SECTION 13.09. COUNTERPARTS. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original and all of which taken together shall constitute a single agreement. SECTION 13.10. CAPTIONS AND SECTIONS. The captions appearing in this --------------------- Agreement are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope and intent of this Agreement or any of its provisions. All references to Sections, Articles, Exhibits and Schedules shall be deemed to refer to those of this Agreement unless otherwise specified. SECTION 13.11. THIRD PARTIES. Except as specifically set forth in this ------------- Agreement, other than the parties to this Agreement, no person shall have any rights under or to enforce any provisions of this Agreement. 36 SECTION 13.12. SPECIFIC PERFORMANCE. The parties acknowledge and agree -------------------- that the breach of certain provisions of this Agreement could not be adequately compensated with monetary damages, and the parties hereto agree, accordingly, that injunctive relief and specific performance shall be appropriate remedies to enforce such provisions and waive any claim or defense that there is an adequate remedy at law for breaches of such provisions. SECTION 13.13. BULK TRANSFERS. The parties acknowledge that the parties -------------- hereto will not comply with the bulk transfer laws of any jurisdiction, in connection with the transactions contemplated by this Agreement. 37 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement the day and year first above written. AGHL GP, INC. By:__________________________ Name: Title: _______________________________ CAROL CARRINGTON SHAW _______________________________ KENNETH E. BARR _______________________________ STEVEN D. JORNS _______________________________ KENNETH W. SHAW _______________________________ LEWIS W. SHAW, II _______________________________ JAMES E. SOWELL _______________________________ BRUCE G. WILES AMERICAN GENERAL HOSPITALITY, INC. By:__________________________ Name: Title: 38 CMC OPERATING PARTNERSHIP, L.P. By: CMC OPERATING COMPANY, general partner By:______________________________ Name: Title: 39 EX-5.1 3 OPINION AS TO VALIDITY OF COMMON STOCK & RIGHTS EXHIBIT 5.1 PAUL, WEISS, RIFKIND WHARTON & GARRISON 1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019-6064 June 5, 1998 MeriStar Hotels & Resorts, Inc. 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 MeriStar Hotels & Resorts, Inc. Registration Statement on Form S-1 Registration No. 333-49881 ------------------------------------ Ladies and Gentlemen: In connection with the above-captioned Registration Statement, dated April 10, 1998, as amended (the "Registration Statement"), filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), and the rules and regulations promulgated thereunder (the "Rules"), we have been requested by MeriStar Hotels & Resorts, Inc. (the "Company"), to furnish our opinion as to the legality of 8,400,000 shares (the "Shares") of common stock, par value $.01 per share ("Common Stock"), underlying rights to purchase Common Stock offered by the Company, registered for sale thereunder. In connection with the furnishing of this opinion, we have reviewed the Registration Statement (including all amendments thereto), the prospectus included as part of the Registration Statement, originals, or copies certified or MeriStar Hotels & Resorts, Inc. 2 otherwise identified to our satisfaction, of the Company's Certificate of Incorporation and By-laws, each as in effect on the date hereof, and records of certain of the Company's corporate proceedings. We have also examined and relied upon representations as to factual matters contained in certificates of officers of the Company, and have made such other investigations of fact and law and have examined and relied upon the originals, or copies certified or otherwise identified to our satisfaction, of such documents, records, certificates or other instruments, and upon such factual information otherwise supplied to us, as in our judgment are necessary or appropriate to render the opinion expressed below. In addition, we have assumed, without independent investigation, the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity of original documents to all documents submitted to us as certified, photostatic, reproduced or conformed copies, the authenticity of all such latter documents and the legal capacity of all individuals who have executed any of the documents. Based upon the foregoing, we are of the opinion that the Shares, when issued, delivered and paid for as contemplated in the Registration Statement, will be duly authorized, validly issued, fully paid and nonassessable. Our opinion expressed above is limited to the General Corporation Law of the State of Delaware. Please be advised that no member of this firm is admitted to practice in the State of Delaware. Our opinion is rendered only with respect to the laws, and the rules, regulations and orders thereunder, which are currently in effect. MeriStar Hotels & Resorts, Inc. 3 We hereby consent to the use of this opinion as an Exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" contained in the Prospectus included in the Registration Statement. In giving this consent, we do not thereby admit that we come within the category of persons whose consent is required by the Act or the Rules. Very truly yours, /s/ Paul, Weiss, Rifkind, Wharton & Garrison PAUL, WEISS, RIFKIND, WHARTON & GARRISON EX-8.1 4 OPINION AS TO CERTAIN TAX MATTERS EXHIBIT 8.1 PAUL, WEISS, RIFKIND, WHARTON & GARRISON 1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019-6064 May 22, 1998 MeriStar Hotels & Resorts, Inc. 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 Re: Registration Statement on Form S-1 Dear Ladies and Gentlemen: In connection with the Registration Statement on Form S-1 (the "Registration Statement") filed by MeriStar Hotels and Resorts, Inc. (the "Company"), with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), and the rules and regulations thereunder (the "'Rules"), we have been requested to render our opinion as to the matters hereinafter set forth. Capitalized terms used and not otherwise defined herein shall have the meanings attributed thereto in the Registration Statement. In this regard, we have reviewed copies of the Registration Statement (including the exhibits and amendments thereto) with respect to the distribution of Rights to subscribe for and purchase shares of Common Stock of the Company. We have also made such other investigations of fact and law and have examined the originals, or copies authenticated to our satisfaction, of such other documents, record, certificates or other instruments as in our judgment are necessary or appropriate to render the opinion expressed below. The opinion set forth below is limited to the Internal Revenue Code of 1986, as amended (the "Code"), administrative rulings, judicial decisions, Treasury regulations and other applicable authorities, all as in effect on the date hereof. The statutory provisions, regulations, and interpretations upon which our opinion is based are subject to change, and such changes could apply retroactively. Any such change could affect the continuing validity of the opinion set forth below. We assume no responsibility to advise you of any subsequent changes in existing law or facts, nor do we assume any responsibility to update this opinion with respect to any matters expressly set forth herein, and no opinions are to be implied or may be inferred beyond the matters expressly so stated. Based upon and subject to the foregoing, we confirm that the opinion set forth in the Registration Statement under the heading "Federal Income Tax Consequences" constitutes our opinion with respect to such matters. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, or any amendment pursuant to Rule 462 under the Act, and to the reference to us under the heading "Legal Matters" in the Prospectus included in the Registration Statement, or any amendment pursuant to Rule 462 under the Act. In giving this consent, we do not hereby agree that we come within the category of persons whose consent is required by the Act or the Rules. Very truly yours, /s/ Paul, Weiss, Rifkind, Wharton & Garrison PAUL, WEISS, RIFKIND, WHARTON & GARRISON EX-23.1 5 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 ACCOUNTANTS' CONSENT The Board of Directors CapStar Hotel Company: We consent to the use of our report dated May 19, 1998 related to the balance sheet of MeriStar Hotels & Resorts, Inc. as of March 31, 1998 and the use of our report dated March 30, 1998 related to the combined balance sheets of the management and leasing business of CapStar Hotel Company and subsidiaries ("OpCo") as of December 31, 1997 and 1996 and the related combined statements of operations, owners' equity and cash flows for each of the years in the three-year period ended December 31, 1997, included in the registration statement on Form S-1 of MeriStar Hotels & Resorts, Inc. We also consent to the reference to our firm under the heading "Experts" in the registration statement. /s/ KPMG Peat Marwick LLP Washington, D.C. June 5, 1998 EX-23.2.1 6 CONSENT OF COOPERS & LYBRAND L.L.P. (DALLAS OFFICE) EXHIBIT 23.2.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Amendment No. 2 to Registration Statement of MeriStar Hotels & Resorts, Inc. on Form S-1 (File No. 333-49881) of our report dated January 30, 1998, except for Note 6, as to which the date is March 16, 1998, on our audits of the financial statements of AGH Leasing, L.P. and our report dated April 1, 1998, on our audits of the financial statements of American General Hospitality, Inc. We also consent to the references to our firm under the caption "Experts". /s/ COOPERS & LYBRAND L.L.P. Dallas, Texas June 5, 1998 EX-23.2.2 7 CONSENT OF COOPERS & LYBRAND L.L.P. (RALEIGH OFF.) EXHIBIT 23.2.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Amendment No. 2 to Registration Statement of MeriStar Hotels & Resorts, Inc. on Form S-1 (File No. 333-49881) of our report dated February 6, 1998 on our audits of the financial statements of Winston Hospitality, Inc. as of October 31, 1997 and December 31, 1996 and for the ten months ended October 31, 1997 and the years ended December 31, 1996 and 1995. We also consent to the references to our firm under the caption "Experts". /s/ COOPERS & LYBRAND L.L.P. Raleigh, North Carolina June 5, 1998 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 12-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 MAR-31-1998 DEC-31-1997 28,602 27,022 0 0 6,803 7,234 134 72 55 57 36,953 36,037 3,320 2,701 439 418 84,719 84,419 38,756 39,121 776 981 0 0 0 0 0 0 41,667 40,909 84,719 84,419 0 0 30,130 23,839 0 0 6,617 3,703 22,181 17,161 0 0 18 56 758 2,862 0 0 758 2,862 0 0 0 0 0 0 758 2,862 0 0 0 0
EX-99.1 9 FORM OF SUBSCRIPTION AGENCY AGREEMENT EXHIBIT 99.1 MERISTAR HOTELS & RESORTS, INC. and [----------------------------------------------------], as Subscription Agent This SUBSCRIPTION AGENCY AGREEMENT is dated as of [----------], 1998, by and between MeriStar Hotels & Resorts, Inc., a Delaware corporation (the "Company"), and [------------------------------------------], as Subscription Agent (the "Subscription Agent"). WHEREAS, the Company has caused a Registration Statement on Form S-1 (Registration No. 333-49881) under the Securities Act of 1933, as amended (the "Act"), to be filed with the Securities and Exchange Commission (the "Commission") relating to the distribution by the Company of non-transferable subscription rights (the "Rights") and the sale of newly issued shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), upon the exercise of such Rights (such Registration Statement, in the form in which it first becomes effective under the Act, and as it may thereafter be amended from time to time, is referred to herein as the "Registration Statement"; the prospectus contained in the Registration Statement, as it may be amended or supplemented from time to time, is referred to herein as the "Prospectus," and the distribution of the Rights and the sale of shares of Common Stock upon the exercise thereof as contemplated by the Registration Statement is referred to herein as the "Rights Offering"); WHEREAS, in the Rights Offering the Rights will be distributed to holders of record of (a) shares of the common stock, par value $0.01 per share (the "REIT Common Stock"), of MeriStar Hospitality Corporation, a Maryland corporation operating as a real estate investment trust (the "REIT"), and (b) the units of limited partnership (the "REIT OP Units") of MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership (the "REIT Operating Partnership"), other than REIT OP Units held by the REIT or any of its subsidiaries, as of the effective time of the Merger defined below (the "Record Date") at a rate of approximately one-sixth of a Right for each share of REIT Common Stock and/or REIT OP Unit held on the Record Date; WHEREAS, the Company will be spun off (the "Spin-Off") by CapStar Hotel Company, a Delaware corporation ("CapStar"), and certain of its affiliates, to become the lessee, manager and operator of various hotel assets, including those currently (i) owned, leased and managed by CapStar and its affiliates, and (ii) owned by American General Hospitality Corporation, a Maryland corporation operating as a real estate investment trust ("AGH"); 2 WHEREAS, pursuant to an Agreement and Plan of Merger, dated as of March 15, 1998, among AGH, American General Hospitality Operating Partnership, L.P., a Delaware limited partnership, CapStar, CapStar Management Company, L.P., a Delaware limited partnership, and CapStar Management Company II, L.P., a Delaware limited partnership, CapStar will merge with and into AGH (the "Merger"), with the result, among other things, that AGH will be the surviving corporation operating under the name MeriStar Hospitality Corporation; WHEREAS, immediately following the Spin-Off and the effective date of the Merger, the Company will acquire certain other interests and assets pursuant to an Acquisition Agreement, dated as of March 15, 1998 (the "Lessee-Manager Acquisition Agreement"); WHEREAS, the Company will reserve for issuance, and authorize the issuance of, an aggregate number of authorized and unissued shares of Common Stock (the "Underlying Shares") not less than the aggregate number of shares of Common Stock issuable pursuant to the Rights Offering; WHEREAS, each holder of record of REIT Common Stock and/or REIT OP Units on the Record Date (a "Rightholder") will be entitled pursuant to the Rights issued to such Rightholder to subscribe for and purchase shares of Common Stock at a subscription price (the "Subscription Price") equal to 95% of the average of the daily high and low prices of the Common Stock on the New York Stock Exchange ("NYSE") or any other principal trading market on which the Common Stock is then traded (the "Principal Market"), for the period (the "Measurement Period") of five consecutive trading days (a "Trading Day") on the Principal Market immediately following the third Trading Day after the date the Common Stock opens for trading on the Principal Market; WHEREAS, the issuance of shares of Common Stock in the Rights Offering is conditioned upon consummation of the Spin-Off, the Merger and the transactions contemplated by the Lessee-Manager Acquisition Agreement (collectively, the "Formation Transactions"); WHEREAS, the Company has expressly reserved the right, at its sole option, to cancel the Rights Offering if the Subscription Price is less than [----]; WHEREAS, the Rights will be exercisable at any time following 5:00 p.m., New York City time, on the last day of the Measurement Period until 5:00 p.m., New York City time, on the sixteenth calendar day immediately following the last day of the Measurement Period, or such later date as the Company may determine (the "Expiration Date"), unless the Rights Offering is earlier canceled; WHEREAS, the Rights will entitle the Rightholder (but not a subsequent transferee of the REIT Common Stock and/or REIT OP Units held by such Rightholder on the Record 3 Date) to purchase shares of Common Stock at the Subscription Price (the "Subscription Privilege"); and WHEREAS, the Company desires the Subscription Agent to act on its behalf in connection with the Rights Offering as set forth herein, and the Subscription Agent is willing so to act. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto hereby agree as follows: SECTION 1. Appointment of Subscription Agent. The Company hereby appoints the undersigned as the Subscription Agent to act as agent for the Company in accordance with the instructions set forth in this Agreement, and the Subscription Agent hereby accepts such appointment. The Company may from time to time appoint such co-subscription agents as it may deem necessary or desirable. SECTION 2. Distribution of Subscription Certificates and International Holder Subscription Forms; Issue of Securities. (a) The Company will promptly notify the Subscription Agent upon the effectiveness of the Registration Statement. [As transfer agent and registrar for the Common Stock], the Subscription Agent shall provide such assistance as the Company may require in order to effect the distribution of the Subscription Certificates (as defined in Section 3(b) hereof) or International Holder Subscription Forms (as defined in Section 3(c) hereof), as the case may be, to Rightholders. Such assistance shall include assistance in determining the identity of Rightholders on the Record Date, the name and address of each Rightholder, the number of Rights to which each Rightholder is entitled and distributing the Subscription Certificates and International Holder Subscription Forms to the applicable Rightholders. The Subscription Agent shall mail Subscription Certificates and International Holder Subscription Forms to Rightholders [(except those located in the United Kingdom)], together with a copy of the Prospectus, no later than two Trading Days following the Record Date. [Rightholders located in the United Kingdom must contact [--------------- - ----------] to obtain a copy of the International Holder Subscription Form and the Prospectus.] (b) The Company will authorize the issuance of, and will hold in reserve, the Underlying Shares, and upon the valid exercise of Rights, the Company will issue Underlying Shares to validly exercising Rightholders as set forth in the Prospectus and herein. SECTION 3. Subscription Privilege; Form of Subscription Certificates and International 4 Holder Subscription Forms. (a) Upon the valid exercise of Rights, Rightholders will be entitled to subscribe for and purchase Underlying Shares from the Company for the Subscription Price. (b) The Rights will be evidenced by Subscription Certificates (the "Subscription Certificates") dated as of the Record Date. The Subscription Certificates (and the form of election to exercise Rights to be printed on the reverse thereof) will be substantially in the form attached as Exhibit 4.2 to the Registration Statement. International Holder Subscription Forms (the "International Holder Subscription Forms") referred to herein will be substantially in the form attached as Exhibit 99.3 to the Registration Statement. (c) Subscription Certificates will not be provided to Rightholders whose addresses are outside the United States or who have an APO or FPO address, but will be held by the Subscription Agent for their account. Such Rightholders [(except those located in the United Kingdom )] will receive International Holder Subscription Forms in lieu of a Subscription Certificate from the Subscription Agent. To exercise Rights, such Rightholders must notify the Subscription Agent by duly completing an International Holder Subscription Form and timely sending it by mail or telecopy to the Subscription Agent. [Rightholders located in the United Kingdom will not initially be provided with International Holder Subscription Forms. Interested Rightholders in the United Kingdom will be directed to contact [--------------------------------].] SECTION 4. Signature and Registration. (a) The Subscription Certificates will be executed on behalf of the Company by two of its executive officers. Any Subscription Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Subscription Certificate, will be a proper officer of the Company to sign such Subscription Certificate, even if at the date of the execution of this Agreement or the date of the actual issuance of such certificate any such person is not such an officer. (b) The Subscription Agent will keep or cause to be kept, at its principal offices in [------------------------], books for the registration of ownership of the Rights issued hereunder. Such books will show the names and addresses of the respective Rightholders and the number of Rights held by each Rightholder. SECTION 5. Division, Combination and Exchange of Subscription Certificates; Mutilated, Destroyed, Lost or Stolen Subscription Certificates. (a) Subscription Certificates may be divided, combined or exchanged for any number of Subscription Certificates of different denominations; provided, however, that the aggregate number of Rights evidenced by the Subscription Certificate or 5 Subscription Certificates so issued shall not exceed the aggregate number of Rights evidenced by the Subscription Certificate or Subscription Certificates surrendered in exchange therefore. The foregoing notwithstanding, a bank, trust company, securities dealer or broker holding shares of Common Stock on the Record Date for more than one beneficial owner may, upon proper showing to the Subscription Agent, exchange its Subscription Certificate to obtain Subscription Certificates for the number of Rights (including fractions thereof) which each such beneficial owner would have been entitled to receive had each such beneficial owner been the Rightholder of record on the Record Date. Any Rightholder desiring to divide, combine or exchange Subscription Certificates shall make such requests in writing to the Subscription Agent, and shall surrender the Subscription Certificates to be divided, combined or exchanged to the Subscription Agent. Thereupon the Subscription Agent shall deliver to the person entitled thereto Subscription Certificates as so requested. In all cases of transfer by an attorney-in-fact, the original power of attorney, duly approved, or a copy thereof, duly certified, shall be deposited and remain with the Subscription Agent. In case of transfer by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority satisfactory to the Subscription Agent shall be produced and may be required to be deposited and to remain with the Subscription Agent in its discretion. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any division, combination or exchange of Subscription Certificates. (b) Upon receipt by the Company and the Subscription Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Subscription Certificate, and, in case of loss, theft or destruction, of indemnity and/or security satisfactory to them which may be in the form of an open penalty bond, and reimbursement to the Company and the Subscription Agent of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Subscription Certificate if mutilated, the Company will make and deliver a new Subscription Certificate of like tenor to the Subscription Agent for delivery to the registered owner in lieu of the Subscription Certificate so lost, stolen, destroyed or mutilated. If required by the Company or the Subscription Agent, an indemnity bond must be sufficient in the judgment of both to protect the Company, the Subscription Agent or any agent thereof from any loss which any of them may suffer if a Subscription Certificate is replaced. SECTION 6. Subsequent Issue of Subscription Certificates. Subsequent to their original issuance, no Subscription Certificates shall be issued except (a) Subscription Certificates issued upon any combination, division or exchange of Rights pursuant to Section 5(a) hereof, (b) Subscription Certificates issued in replacement of mutilated, destroyed, lost or stolen Subscription Certificates pursuant to Section 5(b) hereof and (c) Subscription Certificates issued pursuant to Section 7(h) hereof upon the partial exercise of any Subscription Certificate to evidence the unexercised portion of such Subscription Certificate. 6 SECTION 7. Exercise of Rights; Exercise Price; Expiration Date. (a) The Rights will be exercisable at any time following 5:00 p.m., New York City time, on the last day of the Measurement Period until 5:00 p.m., New York City time, on the Expiration Date, unless the Rights Offering is earlier canceled. (b) To exercise Rights directly, Rightholders receiving Subscription Certificates are required properly to complete and execute Form 1 of the Subscription Certificate or, for Rightholders outside the United States or with APO or FPO addresses, an International Holder Subscription Form, and timely to send such properly completed and executed Subscription Certificate or International Holder Subscription Form, together with payment in full of the Subscription Price for all shares subscribed for pursuant to the Subscription Privilege (including any fractions of shares), to the Subscription Agent. An International Holder Subscription Form, but not a Subscription Certificate, may --- be sent by telecopy to the Subscription Agent. Any wire transfer of funds shall clearly indicate the identity of the party paying the Subscription Price by the wire transfer. The Subscription Price will be deemed to have been received by the Subscription Agent only upon (i) the clearance of any uncertified check, (ii) the receipt by the Subscription Agent of any certified check or bank draft drawn upon a U.S. bank or any postal, telegraphic or express money order or (iii) the receipt of good funds in the Subscription Agent's account designated above. (c) Rightholders receiving Subscription Certificates (but not those receiving International Holder Subscription Forms) may cause a written guarantee (the "Notice of Guaranteed Delivery"), substantially in the form of EXHIBIT A to the Instructions as to Use of MeriStar Hotels & Resorts, Inc. Subscription Certificates and International Holder Subscription Forms (the "Instructions") distributed with the Subscription Certificates and International Holder Subscription Forms, from a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc., or from a commercial bank or trust company having an office or correspondent in the United States (each of the foregoing being an "Eligible Institution"), to be received by the Subscription Agent at or prior to the Expiration Date together with payment in full of the applicable Subscription Price. Such Notice of Guaranteed Delivery must state the Rightholder's name, the number of Rights represented by such Rightholder's Subscription Certificate and the number of Rights being exercised pursuant to the Subscription Privilege, and guarantee the delivery to the Subscription Agent of the Rightholder's properly completed and executed Subscription Certificate within three Trading Days following the date of the Notice of Guaranteed Delivery. To constitute a valid exercise of Rights, such Rightholder's Subscription Certificate must be received by the Subscription Agent within such three Trading Days following the date of the Notice of Guaranteed Delivery. (d) Rightholders shall be entitled to exercise the Rights evidenced by a 7 Subscription Certificate indirectly through their bank or broker, by so indicating on Form 2 in the Subscription Certificate and delivering such executed Subscription Certificate to their bank or broker for delivery to the Subscription Agent. If any such Form 2 is completed without designating a bank or broker, the Subscription Agent shall be entitled thereafter to treat the bearer of the Subscription Certificate as the absolute owner of all of the Rights evidenced by such Subscription Certificate for all purposes, and the Subscription Agent shall not be affected by any notice to the contrary. (e) Rights held of record through The Depository Trust Company ("DTC") shall be exercisable by instruction to DTC to transfer Rights (such Rights being "DTC Exercised Rights") from the DTC account of a beneficial holder of Rights to the DTC account of the Subscription Agent, together with payment of the Subscription Price for all shares subscribed for pursuant to the Subscription Privilege. (f) The Company will publicly announce the Subscription Price promptly following determination thereof and will simultaneously deliver a written copy of such announcement to the Subscription Agent. The Subscription Price shall be payable in United States dollars (i) by check or bank draft drawn upon a U.S. bank or postal, telegraphic or express money order payable to the Subscription Agent, or (ii) by wire transfer of same day funds to the account maintained by the Subscription Agent for such purpose at [------------------------------------ - -------------------], Account No. [----------]; ABA No.[---------]. If the amount enclosed or transmitted is not sufficient to pay the Subscription Price for all shares that are stated to be subscribed for, or if the number of shares being subscribed for is not specified, the number of shares subscribed for will be assumed to be the maximum number that could be subscribed for upon payment of such amount. If the amount enclosed or transmitted exceeds the Subscription Price for all shares purchased pursuant to the Subscription Privilege (the "Subscription Excess"), the Subscription Excess will be returned without interest or deduction. (g) Funds received by the Subscription Agent in payment of the Subscription Price for Underlying Shares subscribed for pursuant to the Subscription Privilege shall be held in a segregated, interest-bearing account pending application pursuant to the terms hereof. The Company shall have sole discretion in determining how the funds in such account shall be invested, and all interest and gains earned on such funds shall be paid to the Company. (h) In case any Rightholder holding a Subscription Certificate shall exercise less than all the Rights evidenced thereby, a new Subscription Certificate evidencing the number of rights remaining unexercised shall be issued by the Subscription Agent to the Rightholder, to the extent the Subscription Agent is able to reissue a Subscription Certificate prior to the Expiration Date. International Rightholders who exercise less than all of their Rights by delivery of an International Holder Subscription Form will not receive a replacement Subscription Certificate or any other evidence of their remaining 8 Rights. (i) Except as provided to the contrary with respect to the procedures for guaranteed delivery set forth in Section 7(c), the Subscription Agent is authorized to accept only Subscription Certificates, International Holder Subscription Forms or transfers of Rights to its account at DTC received prior to 5:00 p.m., New York City time, on the Expiration Date. (j) Once a Rightholder has exercised a Right, such exercise may not be revoked. SECTION 8. Closing; Closing Conditions; Fractional Shares. (a) If the Closing Conditions defined in Section 8 (b) hereof are satisfied, the Company will so notify the Subscription Agent, and the closing of the sale of the Common Stock upon exercise of the Rights (the "Closing") will take place as soon as practicable after the fourth business day following the Expiration Date (the "Closing Date"). At the Closing, the Subscription Agent shall pay, by wire transfer, certified or bank check or other method acceptable to the Company, the amount of all funds received by the Subscription Agent in payment of the Subscription Price for Underlying Shares subscribed for pursuant to the Subscription Privilege. The Company shall deliver, or arrange to have delivered, at the Closing the number of shares of Common Stock as are properly subscribed for pursuant to the Rights Offering. As soon as practicable after the Closing, the Subscription Agent shall send to each exercising Rightholder, in the case of domestic Rightholders, at the address shown on the face of their respective Subscription Certificates or in accordance with instructions to the contrary on Form 3 of their respective Subscription Certificates and, in the case of international Rightholders or Rightholders with APO or FPO addresses, at the address shown on the records of the Company, (i) certificates representing shares of Common Stock purchased pursuant to the Subscription Privilege and (ii) excess funds, if any, received in payment of the Subscription Price and/or cash payable, if any, at the Company's option in lieu of fractional shares of Common Stock otherwise issuable in respect of fractional Rights exercised by Rightholders. (b) The issuance of shares of Common Stock purchased upon the exercise of Rights is conditioned upon consummation of (i) the Spin-Off, (ii) the Merger and (iii) the transactions contemplated by the Lessee-Manager Acquisition Agreement, in each case as described in more detail in the Prospectus (collectively, the "Transaction Conditions"), and the Company has expressly reserved the right, at its sole option, to cancel the Rights Offering if the Subscription Price is less than [------] (the "Pricing Condition," and, together with the Transaction Conditions, the "Closing Conditions"). If the Transaction Conditions are not satisfied, or if the Company, at its sole option, chooses to invoke the Pricing Condition and to cancel the Rights Offering, the Company will so notify the Subscription Agent, and the Subscription Agent will send to each of the 9 respective exercising Rightholders at the address referred to in Section 8 (a), the aggregate Subscription Price delivered by each of them for the exercise of Rights, without interest or deduction, as soon as practicable thereafter. [SECTION 9. Fractional Rights and Shares. (a) Fractional Rights will be issued to Rightholders in the Rights Offering. The Company reserves the right, in its sole discretion, to pay cash in lieu of fractional shares of Common Stock that would otherwise be issued or issuable in respect of fractional Rights exercised by Rightholders, based on a value per whole share of Common Stock equal to the closing price of the Common Stock on the Principal Market on the Expiration Date. Any such cash payment shall be made to the applicable Rightholder at the same time that shares of Common Stock are issued in respect of whole Rights exercised by Rightholders. Fractional Rights can only be exercised concurrently with the exercise of whole Rights. (b) Upon notice from the Company prior to the Closing that the Company will pay cash in lieu of fractional Underlying Shares, the Subscription Agent shall deliver to the Company as soon as practicable (but prior to the Closing) information with respect to all fractional Rights exercised by Rightholders, and the Company shall deliver, or arrange to have delivered, at the Closing cash payments in lieu of as many fractional Underlying Shares as are properly subscribed for pursuant to the Rights Offering, for delivery by the Subscription Agent to the applicable Rightholders as provided in Section 8(a) hereof. SECTION 10. Transfer of Rights. Except as specifically set forth in Section 7, the Rights shall be non- transferable. The Rights will entitle only a Rightholder (but not a subsequent transferee of the REIT Common Stock and/or REIT OP Units held by such Rightholder on the Record Date) to purchase one share of Common Stock per whole Right at the Subscription Price. In the event that Rightholders transfer the REIT Common Stock and/or REIT OP Units owned by them as of the Record Date, they will remain the owners of Rights issued in respect of such shares of REIT Common Stock and/or such REIT OP Units. None of the Company nor the Subscription Agent nor any of their affiliates will have any liability to a purported transferee or transferor of Rights in connection with any purported transfer. Except for the fees charged by the Subscription Agent (which will be paid by the Company), all commissions, fees and other expenses (including brokerage commissions and transfer taxes) incurred in connection with the exercise of Rights will be for the account of the Rightholder, and none of such commissions, fees or expenses will be paid by the Company or the Subscription Agent. SECTION 11. Foreign and Certain Other Stockholders. The Subscription Agent shall 10 not mail Subscription Certificates to Rightholders whose addresses are outside the U.S. or who have an APO or FPO address. The Subscription Agent shall hold such Subscription Certificates for the account of such Rightholders and upon notice from such Rightholders in the form of a duly completed and delivered International Holder Subscription Form shall exercise the Rights on their behalf. The distribution of the Prospectus and the offering of the Rights and the shares of Common Stock in the Rights Offering in certain jurisdictions may be restricted by law. No action has been taken by the Company that would permit an offering of the Rights or such shares or the circulation or distribution of the Prospectus or any offering material in relation to the Company, the Rights or such shares in any country outside the United States where action for that purpose is required. Persons into whose possession the Prospectus comes are required by the Company to inform themselves about and to observe any such restrictions. SECTION 12. Reports. The Subscription Agent shall notify both the Company and its designated representatives by telephone as requested during the period commencing with the mailing of Subscription Certificates and ending on the Expiration Date (and in the case of guaranteed deliveries pursuant to Section 7(c), the period ending three Trading Days after the Expiration Date), which notice shall thereafter be confirmed in writing, of (i) the number of Rights exercised on the day of such request, (ii) the number of Underlying Shares subscribed for pursuant to the Subscription Privilege and the number of such Rights for which payment has been received, (iii) the number of Rights subject to guaranteed delivery pursuant to Section 7(b) on such day, (iv) the number of Rights for which defective exercises have been received on such day and (v) cumulative totals derived from the information set forth in clauses (i) through (iv) above. At or before 5:00 p.m., New York City time, on the first Trading Day following the Expiration Date, the Subscription Agent shall certify in writing to the Company the cumulative totals through the Expiration Date derived from the information set forth in clauses (i) through (v) above. The Subscription Agent shall also maintain and update a listing of Rightholders who have fully or partially exercised their Rights, Rightholders who have exercised fractional Rights and Rightholders who have not exercised their Rights. The Subscription Agent shall provide the Company or its designated representatives with the information compiled pursuant to this Section 12 as any of them shall request. SECTION 13. Future Instructions and Interpretation. (a) All questions as to the timeliness, validity, form and eligibility of any exercise of Rights will be determined by the Company, whose determinations shall be final and binding. The Company in its sole discretion may waive any defect or irregularity, permit a defect or irregularity to be corrected within such time as it may determine or reject the purported exercise of any Right. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time 11 as the Company determines in its sole discretion. Neither the Company nor the Subscription Agent shall be under any duty to give notification of any defect or irregularity in connection with the submission of Subscription Certificates or incur any liability for failure to give such notification. (b) The Subscription Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from an authorized officer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer. SECTION 14. Payment of Taxes. The Company covenants and agrees that it will pay when due and payable all documentary, stamp and other taxes, if any, which may be payable in respect of the issuance or delivery of any Subscription Certificate or of the Underlying Shares; provided, however, that the Company shall not be liable for any tax liability arising out of any transaction which results in, or is deemed to be, an exchange of Rights or shares or a constructive dividend with respect to the Rights or shares, and provided further, that the Company shall not be required to pay any tax or other governmental charge which may be payable in respect of any transfer involved in the transfer or delivery of any Subscription Certificate or the issuance or delivery of certificates for shares of Common Stock in a name other than that of the Rightholder of Rights exercised or transferred, and the Subscription Agent shall not register any such transfer or issue any such certificate until such tax or governmental charge, if required, shall have been paid. SECTION 15. Cancellation and Destruction of Subscription Certificates. All Subscription Certificates surrendered for the purpose of exercise, exchange, substitution or transfer shall be canceled by the Subscription Agent, and no Subscription Certificates shall be issued in lieu thereof except as expressly permitted by provisions of this Agreement. The Company shall deliver to the Subscription Agent for cancellation and retirement, and the Subscription Agent shall so cancel and return, any other Subscription Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Subscription Agent shall deliver all canceled Subscription Certificates to the Company, or shall, at the written request of the Company, destroy such canceled Subscription Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. SECTION 16. Right of Action. All rights of action in respect of this Agreement are vested in the Company and the respective Rightholders; and any Rightholder, without the consent of the Subscription Agent or of any other Rightholder, may, on his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise Rights in the manner provided in this Agreement. 12 SECTION 17. Concerning the Subscription Agent. (a) The Company agrees to pay to the Subscription Agent compensation in the amount of $[-----] for all services rendered by it hereunder and, from time to time, on demand of the Subscription Agent, its reasonable out-of-pocket expenses and disbursements for mailing, postage and delivery. The Company also agrees to indemnify the Subscription Agent for, and to hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on the part of the Subscription Agent for anything done or omitted by the Subscription Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises, provided that the Subscription Agent shall have provided the Company with notice of any such claim promptly after such claim became known to the Subscription Agent, and provided further that the Company shall have the right to assume the defense of any such claim upon receipt of written notice thereof from the Subscription Agent. If the Company assumes the defense of any such claim, the Subscription Agent shall be entitled to participate in (but not control) the defense of any such claim at its own expense. The Company shall not be required to indemnify the Subscription Agent with respect to any claim or action settled without its consent, which consent shall not be unreasonably withheld. (b) The Subscription Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any Subscription Certificate, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or other paper or document reasonably believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged by the proper person or persons. SECTION 18. Merger or Consolidation of Subscription Agent. Any corporation into which the Subscription Agent or any successor Subscription Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Subscription Agent or any successor Subscription Agent shall be a party, or any corporation succeeding to the corporate trust business of the Subscription Agent or any successor Subscription Agent, shall be the successor to the Subscription Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto. SECTION 19. Duties of Subscription Agent. The Subscription Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the Rightholders shall be bound: (a) The Subscription Agent may consult with legal counsel (who may be, but is not required to be, legal counsel for the Company), and the opinion of such counsel 13 shall be full and complete authorization and protection to the Subscription Agent as to any actions taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Subscription Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, the President or any Vice President (including any Senior or Executive Vice President) and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary of the Company and delivered to the Subscription Agent; and such certificate shall be full authorization to the Subscription Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Subscription Agent shall be liable hereunder only for its own negligence or willful misconduct. (d) The Subscription Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Subscription Certificates or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Subscription Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Subscription Agent) or in respect of the validity or execution of any Subscription Certificate; nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Subscription Certificate; nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Subscription Certificate or as to whether any shares of Common Stock will, when issued, be validly authorized and issued, fully paid and non-assessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Subscription Agent for the carrying out or performing by the Subscription Agent of the provisions of this Agreement. (g) Nothing herein shall preclude the Subscription Agent from acting in any other capacity for the Company 14 SECTION 20. Notices to the Company, Rightholders and Subscription Agent. All notices and other communications provided for or permitted hereunder shall be made by hand delivery, prepaid first-class mail, or telecopier: (a) if to the Company, to: MeriStar Hotels & Resorts, Inc. 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 Attn: [NAME] Telephone: (202) 965-4455 Telecopier: (202) 295-2230 (b) if to the Subscription Agent, to: Attn: [NAME] Telephone: Telecopier: Attn: (c) if to a Rightholder, at the address of such Rightholder as shown on the registry books or other records of the Company. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; two business days after being deposited in the mail, postage prepaid, if mailed as aforesaid; when answered back if telexed; and when receipt is acknowledged, if telecopied. SECTION 21. Supplements and Amendments. The Company and the Subscription Agent may from time to time supplement or amend this Agreement without the approval of any Rightholders in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Subscription Agent may deem necessary or desirable and which shall not materially adversely affect the interests of the Rightholders. SECTION 22. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Subscription Agent shall bind and inure to the 15 benefit of their respective successors and assigns hereunder. SECTION 23. Termination. This Agreement shall terminate at 5:00 p.m.,New York City time, on the thirtieth day following the Expiration Date. Upon termination of this Agreement, and provided that all shares of Common Stock for Rights accepted for exercise on prior to such termination are issued and delivered by the Company, the Company shall be discharged from all obligations under this Agreement except for its obligations to the Subscription Agent under Sections 14 and 17 hereof and except with respect to the obligation of the Company to provide instruction and direction to the Subscription Agent as may be provided in this Agreement SECTION 24. Governing Law. This Agreement and each Subscription Certificate shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the internal laws of said State. SECTION 25. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Subscription Agent and the Rightholders any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Subscription Agent and the Rightholders. SECTION 26. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. SECTION 27. Descriptive Headings. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF each of the undersigned have caused this Subscription Agency Agreement to be executed by their duly authorized representative as of the date first above written. 16 The Company: ------------ MERISTAR HOTELS & RESORTS, INC. By:_________________________ Name: Title: The Subscription Agent: ----------------------- [----------------------------------------------------------] By:_________________________ Name: Title: EX-99.2 10 INSTRUCTIONS AS TO USE OF SUBSCRIPTION CERT. EXHIBIT 99.2 MERISTAR HOTELS & RESORTS, INC. INSTRUCTIONS AS TO USE OF SUBSCRIPTION CERTIFICATE AND INTERNATIONAL HOLDER SUBSCRIPTION FORM ---------------- CONSULT THE SUBSCRIPTION AGENT OR YOUR BANK OR BROKER AS TO ANY QUESTIONS The following instructions relate to the rights offering (the "Rights Offering") by MeriStar Hotels & Resorts, Inc., a Delaware corporation (the "Company"), with respect to subscription rights (the "Rights") to subscribe for and purchase shares of the Company's common stock, par value $0.01 per share (the "Common Stock") described in the Company's Prospectus dated [------------- ], 1998 (the "Prospectus"). Capitalized terms used herein but not defined herein shall have the meanings ascribed to them in the Prospectus. The Company is distributing to holders of record of (a) the common stock, par value $0.01 per share (the "REIT Common Stock"), of MeriStar Hospitality Corporation, a Maryland corporation operating as a real estate investment trust (the "REIT"), and (b) the units of limited partnership (the "REIT OP Units") of MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership (the "REIT Operating Partnership"), other than REIT OP Units held by the REIT or any of its subsidiaries, as of the effective time of the Merger (the "Record Date"), non- transferable Rights to subscribe for and purchase shares of Common Stock at a subscription price (the "Subscription Price") equal to 95% of the average of the daily high and low prices of the Common Stock on the New York Stock Exchange ("NYSE") or any other principal trading market on which the Common Stock is then traded (the "Principal Market"), for the period (the "Measurement Period") of five consecutive trading days (a "Trading Day") on the Principal Market immediately following the third Trading Day after the date the Common Stock opens for trading on the Principal Market. See "The Rights Offering" in the Prospectus. The Rights will be exercisable at any time following 5:00 p.m., New York City time, on the last day of the Measurement Period until 5:00 p.m., New York City time, on the sixteenth calendar day immediately following the last day of the Measurement Period, or such later date as the Company may determine (the "Expiration Date"), unless the Rights Offering is earlier canceled. Each holder of record of REIT Common Stock and/or REIT OP Units on the Record Date (a "Rightholder") will receive one-sixth of a Right for each share of REIT Common Stock and/or each REIT OP Unit so held. Each whole Right will entitle the Rightholder (but not a subsequent transferee of the REIT Common Stock and/or REIT 2 OP Units held by such Rightholder on the Record Date) to purchase one share of Common Stock at the Subscription Price (the "Subscription Privilege"). The Company will publicly announce the Subscription Price promptly following determination thereof. Although fractional Rights will be issued to Rightholders, the Company reserves the right, in its sole discretion, to pay cash in lieu of fractional shares of Common Stock that would otherwise be issued or issuable in respect of fractional Rights exercised by Rightholders, based on a value per whole share of Common Stock equal to the closing price of the Common Stock on the Principal Market on the Expiration Date. Any such cash payment will be made to the applicable Rightholder at the same time that shares of Common Stock are issued in respect of whole Rights exercised by Rightholders. Fractional Rights can only be exercised concurrently with the exercise of whole Rights. An election to exercise Rights, once made, may not be revoked. All amounts received by the Subscription Agent pursuant to the exercise of Rights will be held in a non-interest-bearing escrow account until the completion of the Rights Offering. The Rights will, with certain exceptions referred to below, be evidenced by non-transferable subscription certificates. See "The Rights Offering--Subscription Privilege" in the Prospectus. If your address is located within the United States and you do not have an APO or FPO address, you will be provided with a Subscription Certificate dated as of the Record Date, with the number of rights to which you are entitled printed on the face thereof. You should indicate your wishes with regard to the exercise of your Rights by completing the appropriate form or forms on the back of your Subscription Certificate and returning it to the Subscription Agent in the envelope provided. If your address is located outside of the United States or you have an APO or FPO address, you will not be provided with a Subscription Certificate, but will receive an International Holder Subscription Form (unless you are located in the United Kingdom). You should indicate your wishes with regard to the exercise of your Rights by completing the International Holder Subscription Form and returning it to the Subscription Agent by mail or by telecopy at the address or telecopier number provided below. Rightholders located in the United Kingdom who are interested in participating in the Rights Offering should contact [----- - -------------------------------------]. YOUR SUBSCRIPTION CERTIFICATE OR INTERNATIONAL HOLDER SUBSCRIPTION FORM MUST BE RECEIVED BY THE SUBSCRIPTION AGENT, OR GUARANTEED DELIVERY REQUIREMENTS WITH RESPECT TO YOUR SUBSCRIPTION CERTIFICATE MUST BE COMPLIED WITH AND PAYMENT OF THE SUBSCRIPTION PRICE, INCLUDING FINAL CLEARANCE OF ANY CHECKS, MUST BE RECEIVED BY THE SUBSCRIPTION AGENT, ON OR BEFORE 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. YOU MAY NOT REVOKE ANY EXERCISE OF A RIGHT. 3 THE ISSUANCE OF SHARES UPON THE EXERCISE OF RIGHTS IS CONDITIONED UPON THE CONSUMMATION OF THE SPIN-OFF, THE MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE LESSEE-MANAGER ACQUISITION AGREEMENT. THE COMPANY ALSO RESERVES THE RIGHT, AT ITS SOLE OPTION, TO CANCEL THE RIGHTS OFFERING IF THE SUBSCRIPTION PRICE IS LESS THAN [-----]. IF THE RIGHTS OFFERING IS CANCELED, THE SUBSCRIPTION PRICE WILL BE RETURNED TO YOU WITHOUT INTEREST OR DEDUCTION. 1. CLOSING; CONDITIONS; DELIVERIES; ETC. (a) If the Closing Conditions referred to in paragraph 1(b) are satisfied, the Company will so notify the Subscription Agent, and the closing of the sale of the Common Stock upon exercise of the Rights (the "Closing") will take place as soon as practicable after the fourth business day following the Expiration Date (the "Closing Date"). At the Closing, the Subscription Agent shall pay, by wire transfer, certified or bank check or other method acceptable to the Company, the amount of all funds received by the Subscription Agent in payment of the Subscription Price for Underlying Shares subscribed for pursuant to the Subscription Privilege. The Company shall deliver, or arrange to have delivered, at the Closing the number of shares of Common Stock as are properly subscribed for pursuant to the Rights Offering. As soon as practicable after the Closing, the Subscription Agent shall send to each exercising Rightholder, in the case of domestic Rightholders, at the address shown on the face of their respective Subscription Certificates or in accordance with instructions to the contrary on Form 3 of their respective Subscription Certificates and, in the case of international Rightholders or Rightholders with APO or FPO addresses, at the address shown on the records of the Company, (i) certificates representing shares of Common Stock purchased pursuant to the Subscription Privilege and (ii) excess funds, if any, received in payment of the Subscription Price and cash payable, if any, at the Company's option in lieu of fractional shares of Common Stock otherwise issuable in respect of fractional Rights exercised by Rightholders. (b) The issuance of shares of Common Stock purchased upon the exercise of Rights is conditioned upon consummation of (i) the Spin-Off, (ii) the Merger and (iii) the transactions contemplated by the Lessee-Manager Acquisition Agreement, in each case as described in more detail in the Prospectus (collectively, the "Transaction Conditions"), and the Company has expressly reserved the right, at its sole option, to cancel the Rights Offering if the Subscription Price is less than [------] (the "Pricing Condition," and, together with the Transaction Conditions, the "Closing Conditions"). If the Transaction Conditions are not satisfied, or if the Company, at its sole option, chooses to invoke the Pricing Condition and to cancel the Rights Offering, the Company will so notify the Subscription Agent, and the Subscription Agent will send to you at the address referred to in paragraph 1(a), the aggregate Subscription Price delivered by 4 you for the exercise of Rights, without interest or deduction, as soon as practicable thereafter. 2. DIRECT EXERCISE OF SUBSCRIPTION PRIVILEGE To exercise Rights directly, complete Form 1 of the Subscription Certificate and send your properly completed and executed Subscription Certificate or, for Rightholders outside the United States or with APO or FPO addresses, complete an International Holder Subscription Form and send it, together with payment in full of the Subscription Price for all shares subscribed for pursuant to the Subscription Privilege (including any fractions of shares), to the Subscription Agent. An International Holder Subscription Form, but not a Subscription Certificate, may be sent by telecopy to the --- Subscription Agent at the number provided below. Payment of the Subscription Price must be made in U.S. dollars for all shares being subscribed for (a) by check or bank draft drawn upon a U.S. bank or postal, telegraphic or express money order payable to [--------------------------], as Subscription Agent, or (b) by wire transfer of same day funds to the account maintained by the Subscription Agent for such purpose at [----------------------------]. Any wire transfer of funds should clearly indicate the identity of the Rightholder on whose behalf the Subscription Price is being paid. The Subscription Price will be deemed to have been received by the Subscription Agent only upon (i) the clearance of any uncertified check, (ii) the receipt by the Subscription Agent of any certified check or bank draft drawn upon a U.S. bank or any postal, telegraphic or express money order or (iii) the receipt of good funds in the Subscription Agent's account designated above. If paying by uncertified personal check, please note that the funds paid thereby may take up to five business days to clear. Accordingly, Rightholders who wish to pay the Subscription Price by means of uncertified personal check are urged to make payment sufficiently in advance of the Expiration Date to ensure that such payment is received and clears by such date and are urged to consider payment by means of certified or cashier's check, money order or wire transfer of funds. You may also transfer your Subscription Certificate to your bank or broker in accordance with the procedures specified in paragraph 3, by making arrangements with such bank or broker for the delivery of funds on your behalf and requesting such bank or broker to exercise the Subscription Certificate on your behalf. Alternatively, you may cause a written guarantee substantially in the form of EXHIBIT A to these instructions (the "Notice of Guaranteed Delivery") from a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc., or from a commercial bank or trust company having an office or correspondent in the United States (each of the foregoing being an "Eligible Institution"), to be received by the Subscription Agent at or prior to the Expiration Date together with payment in full of the applicable Subscription Price. Such Notice of Guaranteed Delivery must state your name, the number of Rights represented by your Subscription Certificate and the number of Rights being exercised pursuant to the Subscription Privilege, and will guarantee the delivery to the Subscription Agent of your properly completed and 5 executed Subscription Certificate within three Trading Days following the date of the Notice of Guaranteed Delivery. If this procedure is followed, your Subscription Certificate must be received by the Subscription Agent within three Trading Days following the date of the Notice of Guaranteed Delivery. Additional copies of the Notice of Guaranteed Delivery may be obtained upon request from the Subscription Agent at the address, or by calling the telephone number, indicated below. The address, telephone and telecopier numbers of the Subscription Agent are as follows: If By Mail: If By Hand: If By Overnight Courier or Telecopier: Telephone and Telecopier Numbers: Telephone: Telecopier: If you exercise less than all of the Rights evidenced by your Subscription Certificate by so indicating in Form 1 of your Subscription Certificate, the Subscription Agent will issue you a new Subscription Certificate evidencing the unexercised Rights. However, if you choose to have a new Subscription Certificate sent to you, you may not receive such new Subscription Certificate in sufficient time to permit you to exercise the Rights evidenced thereby. International Rightholders or Rightholders with APO or FPO addresses who exercise less than all of their Rights will not receive a Subscription Certificate evidencing their remaining Rights. If the amount enclosed or transmitted is not sufficient to pay the Subscription Price for all shares that are stated to be subscribed for, or if the number of shares being subscribed for is not specified, the number of shares subscribed for will be assumed to be the maximum number that could be subscribed for upon payment of such amount. If the amount enclosed or transmitted exceeds the Subscription Price for all shares purchased pursuant to the Subscription Privilege (the "Subscription Excess"), the Subscription Excess will be returned without interest or deduction. 3. EXERCISE OF RIGHTS THROUGH BANK OR BROKER To exercise the Rights evidenced by a Subscription Certificate through your bank or broker, so indicate on Form 2 and deliver your properly completed and executed Subscription Certificate to your bank or broker. Your Subscription Certificate should be 6 delivered to your bank or broker in ample time for it to be exercised. If Form 2 is completed without designating a bank or broker, the Subscription Agent shall be entitled thereafter to treat the bearer of the Subscription Certificate as the absolute owner of all of the Rights evidenced by such Subscription Certificate for all purposes, and the Subscription Agent shall not be affected by any notice to the contrary. Because your bank or broker cannot issue Subscription Certificates, if you wish to exercise less than all of the Rights evidenced by the Subscription Certificate, either you or your bank or broker must instruct the Subscription Agent as to the action to be taken with respect to the Rights not exercised, or you or your bank or broker must first have your Subscription Certificate divided into Subscription Certificates of appropriate denominations by following the instructions in paragraph 5 of these instructions. The Subscription Certificates evidencing the number of Rights you intend to exercise can then be exercised by your bank or broker in accordance with the instructions in this paragraph 3. 4. DELIVERY THROUGH THE DEPOSITORY TRUST COMPANY In the case of Rights that are held of record through The Depository Trust Company ("DTC"), exercises of the Subscription Privilege may be effected by instructing DTC to transfer Rights (such Rights being "DTC Exercised Rights") from the DTC account of such Rightholder to the DTC account of the Subscription Agent, together with payment of the Subscription Price for all shares subscribed for pursuant to the Subscription Privilege. 5. SUBDIVIDING A SUBSCRIPTION CERTIFICATE Send your Subscription Certificate, together with complete separate instructions (including specification of the denominations into which you wish your Rights to be divided) signed by you, to the Subscription Agent, allowing a sufficient time for new Subscription Certificates to be issued and returned so that they can be used prior to the Expiration Date. Alternatively, you may ask a bank or broker to effect such actions on your behalf. Your signature must be guaranteed by an Eligible Institution if any of the new Subscription Certificates are to be issued in a name other than that in which the old Subscription Certificate was issued. Subscription Certificates may not be divided into fractional Rights, and any instruction to do so will be rejected. As a result of delays in the mail, the time of the transmittal, the necessary processing time and other factors, you may not receive such new Subscription Certificates in time to enable the Rightholder to complete an exercise by the Expiration Date. Neither the Company nor the Subscription Agent will be liable for any such delays. 6. EXECUTION (a) Execution by Registered Rightholder 7 The signature on the Subscription Certificate or the International Holder Subscription Form must correspond with the name of the registered Rightholder exactly as it appears on the face of the Subscription Certificate or, in the case of international Rightholders or Rightholders with APO or FPO addresses, the name of the registered Rightholder as shown on the records of the Company, without any alteration or change whatsoever. Persons who sign the Subscription Certificate or the International Holder Subscription Form in a representative or other fiduciary capacity must indicate their capacity when signing and, unless waived by the Subscription Agent in its sole and absolute discretion, must present to the Subscription Agent satisfactory evidence of their authority so to act. (b) Execution by Person Other than Registered Rightholder If the Subscription Certificate or the International Holder Subscription Form is executed by a person other than the Rightholder named on the face of the Subscription Certificate or shown on the records of the Company, as the case may be, proper evidence of authority of the person executing the Subscription Certificate or the International Holder Subscription Form must accompany the same unless the Subscription Agent dispenses with proof of authority. (c) Signature Guarantees Your signature must be guaranteed by an Eligible Institution if you specify special payment or delivery instructions pursuant to Form 3. 7. METHOD OF DELIVERY The method of delivery of subscription certificates or International Holder Subscription Forms and payment of the Subscription Price to the Subscription Agent will be at the election and risk of the Rightholder, but, if sent by mail, it is recommended that they be sent by registered mail, properly insured, with return receipt requested, and that a sufficient number of days be allowed to ensure delivery to the Subscription Agent and the clearance of any checks sent in payment of the Subscription Price prior to 5:00 p.m., New York City time, on the Expiration Date. 8. FORM W-9 Each Rightholder who elects to exercise Rights should provide the Subscription Agent with a correct Taxpayer Identification Number ("TIN") on Form W-9, a copy of which is included as EXHIBIT B hereto. Additional copies of Form W-9 may be obtained upon request from the Subscription Agent at the address or by calling the telephone number indicated above. Failure to provide the information on the form may subject such Rightholder to federal income tax withholding with respect to dividends that 8 may be paid by the Company on shares of Common Stock purchased upon the exercise of Rights (for those Rightholders exercising Rights), or funds to be remitted in respect of fractional Rights for which the Company elects to pay cash in lieu of issuing fractional shares of Common Stock. EXHIBIT A TO INSTRUCTIONS NOTICE OF GUARANTEED DELIVERY FOR SUBSCRIPTION CERTIFICATES ISSUED BY MERISTAR HOTELS & RESORTS, INC. This form, or one substantially equivalent hereto, must be used to exercise Rights in connection with the Rights Offering described in the Prospectus dated [----------], 1998 (the "Prospectus") of MeriStar Hotels & Resorts, Inc., a Delaware corporation (the "Company"), if a Rightholder cannot deliver the Subscription Certificate(s) evidencing the Rights (the "Subscription Certificate(s)"), to the Subscription Agent listed below (the "Subscription Agent") at or prior to 5:00 p.m., New York City time, on the Expiration Date referred to in the Prospectus. Such form must be delivered by hand or sent by facsimile transmission or mailed to the Subscription Agent, and must be received by the Subscription Agent on or prior to the Expiration Date. See "The Rights Offering" in the Prospectus. Payment of the Subscription Price for all shares of Common Stock subscribed for upon exercise of such Rights must be received by the Subscription Agent in the manner specified in the Prospectus at or prior to 5:00 p.m., New York City time, on the Expiration Date even if the Subscription Certificate evidencing such Rights is being delivered pursuant to the procedure for guaranteed delivery thereof. The Subscription Agent is: General Information: By Mail: Facsimile Transmission: By Hand: DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. 2 GUARANTEE OF DELIVERY (NOT TO BE USED FOR SUBSCRIPTION CERTIFICATE SIGNATURE GUARANTEE) The undersigned, a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States, guarantees that the undersigned will deliver to the Subscription Agent the certificate representing the Rights being exercised hereby, with any required signature guarantee and any other required documents, all within three Trading Days after the date hereof. Dated: ________________, 1998 ________________________ (Name of Firm) ________________________ ________________________ ________________________ ________________________ ________________________ (Address) ________________________ (Authorized Signature) ________________________ (Telephone Number) The institution which completes this form must communicate the guarantee to the Subscription Agent and must deliver the Subscription Certificate(s) to the Subscription Agent within the time period shown herein. Failure to do so could result in a financial loss to such institution. Ladies and Gentlemen: The undersigned hereby represents that he or she is the Rightholder of Subscription Certificate(s) representing ________ Rights and that such Subscription Certificate(s) cannot be delivered to the Subscription Agent at or before 5:00 p.m., New York City time, on the Expiration Date. Upon the terms and subject to the conditions set forth in the Prospectus, receipt of which is hereby acknowledged, the undersigned hereby 3 elects to exercise the Subscription Privilege to subscribe for shares of Common Stock with respect to the Rights and/or fractions thereof represented by such Subscription Certificate. The undersigned understands that payment of the Subscription Price for all shares of Common Stock subscribed for pursuant to the Subscription Privilege must be received by the Subscription Agent at or before 5:00 p.m., New York City time, on the Expiration Date and represents that such payment, in the aggregate amount of $_______, either (check appropriate box): [ ] is being delivered to the Subscription Agent herewith; or [ ] has been delivered separately to the Subscription Agent; and is or was delivered in the manner set forth below (check appropriate box and complete information relating thereto): [ ] wire transfer of funds Name of transferor institution:_____________________________ Date of transfer:_________________________________________ Confirmation number (if available):_________________________ [ ] uncertified check (Payment by uncertified check will not be deemed to have been received by the Subscription Agent until such check has cleared. Rightholders paying by such means are urged to make payment sufficiently in advance of the Expiration Date to ensure that such payment clears by such date.) [ ] certified check [ ] bank draft (cashier's check) [ ] money order Name of maker:_________________________ Date of check, draft or money order:_______________________ Check, draft or money order number:______________________ Bank on which check is drawn or issuer of money order:_______________________ Signature(s): _________________________________ Name: _________________________________ Name: 4 _________________________________ Name: _________________________________ Name: Address: _________________________________ _________________________________ _________________________________ _________________________________ _________________________________ _________________________________ Telephone: (___)_______________ Subscription Certificate Numbers:____________________________ ____________________________ ____________________________ ____________________________ EXHIBIT B TO INSTRUCTIONS IMPORTANT TAX INFORMATION Under the federal income tax law, (i) dividend payments that may be made by the Company on shares of Common Stock issued upon the exercise of Rights, and (ii) payments to be remitted in respect of fractional Rights for which the Company elects to pay cash in lieu of issuing fractional shares of Common Stock, may be subject to backup withholding, and each Rightholder who exercises Rights should provide the Subscription Agent (as the Company's agent, in respect of exercised Rights) with such Rightholder's correct taxpayer identification number on Form W-9 below. If such Rightholder is an individual, the taxpayer identification number is his social security number. If the Subscription Agent, [which is also the transfer agent for the Company], is not provided with the correct taxpayer identification number in connection with such payments, the Rightholder may be subject to a penalty imposed by the Internal Revenue Service. Certain Rightholders (including, among others, all corporations and certain foreign individuals) are exempt from these backup withholding and reporting requirements. In general, in order for a foreign individual to qualify as an exempt recipient, that Rightholder must submit a statement, signed under the penalties of perjury, attesting to that individual's exempt status. Such statements can be obtained from the Subscription Agent. See the Specific Instructions on Form W-9 for additional instructions and information. If backup withholding applies, the Company or the Subscription Agent, as the case may be, will be required to withhold [31 percent] of any such payments made to the Rightholder. Backup withholding is not an additional tax. Rather, the amount of backup withholding is treated, like other withheld amounts, as an advance payment of the person's tax liability. If withholding results in an overpayment of taxes, a refund may be obtained. PURPOSE OF FORM To prevent backup withholding, the Rightholder is required to notify the Subscription Agent of his correct taxpayer identification number by completing the form below certifying that the taxpayer identification number provided on Form W-9 is correct or that such Rightholder is awaiting a taxpayer identification number. WHAT NUMBER TO GIVE THE SUBSCRIPTION AGENT The Rightholder is required to give the Subscription Agent the social security number or employer identification number of the record owner of the Rights. If the 2 Rights are in more than one name or are not in the name of the actual owner, consult the Specific Instructions on Form W-9 for additional guidance on which number to report. EX-99.3 11 INTERNATIONAL HOLDER SUBSCRIPTION FORM EXHIBIT 99.3 MERISTAR HOTELS & RESORTS, INC. International Holder Subscription Form IMPORTANT: THE NUMBER OF RIGHTS THAT MAY BE EXERCISED PURSUANT TO THE SUBSCRIPTION PRIVILEGE BY THE PERSON WHOSE NAME APPEARS ON THE LABEL AFFIXED TO THIS FORM IS THE NUMBER INDICATED IN THE TOP RIGHT-HAND CORNER OF THE LABEL. RIGHTHOLDERS MAY USE THIS FORM TO EXERCISE RIGHTS (THE "RIGHTS") TO PURCHASE SHARES OF COMMON STOCK, $0.01 PAR VALUE, OF MERISTAR HOTELS & RESORTS, INC. ("COMMON STOCK"). THE RIGHTS ARE VOID IF NOT EXERCISED BEFORE THE EXPIRATION DATE. THE RIGHTS ARE NON-TRANSFERABLE AND ENTITLE ONLY A RIGHTHOLDER (BUT NOT A SUBSEQUENT TRANSFEREE OF THE REIT COMMON STOCK OR REIT OP UNITS HELD BY SUCH RIGHTHOLDER ON THE RECORD DATE) TO PURCHASE SHARES OF COMMON STOCK AT THE SUBSCRIPTION PRICE. THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING, THE RIGHTS AND THIS INTERNATIONAL HOLDER SUBSCRIPTION FORM ARE SET FORTH IN THE COMPANY'S PROSPECTUS DATED [-------------] (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN BY REFERENCE. CAPITALIZED TERMS USED HEREIN BUT NOT DEFINED HEREIN SHALL HAVE THE MEANINGS ASCRIBED TO THEM IN THE PROSPECTUS. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM THE SUBSCRIPTION AGENT, AT [----------------]. EXERCISE AND SUBSCRIPTION: The undersigned hereby irrevocably exercises Rights to subscribe for shares of MeriStar Hotels & Resorts, Inc. Common Stock as indicated below, on the terms and subject to the conditions specified in the Prospectus, receipt of which is hereby acknowledged. (a) Number of Rights exercised/shares of Common Stock subscribed for pursuant to the Subscription Privilege (including fractions):_______________________ (b) Total Subscription Price (number of Rights exercised/shares of Common Stock subscribed for pursuant to the Subscription Privilege multiplied by the ------------- Subscription Price):_____________________(1) METHOD OF PAYMENT (CHECK ONE) [ ] CHECK OR BANK DRAFT DRAWN ON A U.S. BANK OR MONEY ORDER PAYABLE TO [-------------], AS SUBSCRIPTION AGENT. [ ] WIRE TRANSFER DIRECTED TO THE ACCOUNT MAINTAINED BY THE SUBSCRIPTION AGENT AT ______________________________________. (1) If the amount enclosed or transmitted is not sufficient to pay the Subscription Price for all shares that are stated to be subscribed for, or if the number of shares being subscribed for is not specified, the number of shares subscribed for will be assumed to be the maximum number that could be subscribed for upon payment of such amount. If the amount enclosed or transmitted exceeds the Subscription Price for all shares purchased pursuant to the Subscription Privilege (the "Subscription Excess"), the Subscription Excess will be returned without interest or deduction. ANY PERSON LOCATED IN THE UNITED KINGDOM WHO IS NOT A PERSON WHOSE ORDINARY BUSINESS IS TO BUY OR SELL SHARES OR DEBENTURES, WHETHER AS PRINCIPAL OR AGENT REPRESENTS, BY SIGNING BELOW, THAT ANY SHARES OF MERISTAR HOTELS & RESORTS, INC. COMMON STOCK PURCHASED UPON THE EXERCISE OF RIGHTS ARE BEING PURCHASED WITH A VIEW TO HOLDING SUCH SHARES AS AN INVESTMENT AND WITHOUT ANY INTENTION TO RESELL SUCH SHARES. ALL RIGHTHOLDERS MUST SIGN BELOW AND ENCLOSE A DULY COMPLETED FORM W-9. Signature of Rightholder:_______________________________ Name: Dated:_____________________ Telephone Number: ( )__________________ Tax Identification or Social Security No.:_______________ A duly completed Form W-9 must be signed by the registered holder(s) exactly as name(s) appear(s) on this International Holder Subscription Form. If signature is by trustee(s), executor(s), administrator(s), guardian(s), attorney(s)-in- fact, agent(s), officer(s) of a corporation or another acting in a fiduciary capacity, please provide the following information. See Instructions. Name(s): __________________________ Capacity: __________________________ Dated: __________________________ Address: __________________________ __________________________ __________________________ __________________________ (Including Zip Code) -----END PRIVACY-ENHANCED MESSAGE-----