-----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, Jgy5su+RyrT7+y3eqliWOmgLYddc/5yO+rCQ0kcUlu6XVo1bzeVElYw8eAXhfC8n ZVl0RlQezprew4u09vjppA== 0000950130-98-003207.txt : 19980622 0000950130-98-003207.hdr.sgml : 19980622 ACCESSION NUMBER: 0000950130-98-003207 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19980619 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: 98650629 BUSINESS ADDRESS: STREET 1: 1010 WISCONSIN AVE NW CITY: WASHINGTON STATE: DC ZIP: 20007 BUSINESS PHONE: 202965-445 S-1/A 1 FORM S-1 AMENDMENT NO. 3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1998 REGISTRATION NO. 333-49881 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- MERISTAR HOTELS & RESORTS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7011 51-0379982 (STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) MERISTAR HOTELS & RESORTS, INC. 1010 WISCONSIN AVENUE, N.W. WASHINGTON, D.C. 20007 (202) 965-4455 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- PAUL W. WHETSELL CHAIRMAN AND CHIEF EXECUTIVE OFFICER MERISTAR HOTELS & RESORTS, INC. 1010 WISCONSIN AVENUE, N.W. WASHINGTON, D.C. 20007 (202) 965-4455 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: RICHARD S. BORISOFF, ESQ. PAUL, WEISS, RIFKIND, WHARTON & GARRISON 1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019-6064 (212) 373-3000 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. --------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JUNE 19, 1998 PROSPECTUS MERISTAR HOTELS & RESORTS, INC. SHARES OF COMMON STOCK AND RIGHTS TO ACQUIRE UP TO OF SUCH SHARES ---------- MeriStar Hotels & Resorts, Inc. ("MeriStar Hotels" or the "Company") is distributing to holders of record of (a) the common stock, par value $0.01 per share (the "REIT Common Stock"), of MeriStar Hospitality Corporation, a Maryland corporation operating as a real estate investment trust (the "REIT"), and (b) the units of limited partnership (the "REIT OP Units") of MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership (the "REIT Operating Partnership"), other than REIT OP Units held by the REIT or any of its subsidiaries, as of the effective time of the Merger defined below (the "Record Date"), non-transferable rights (the "Rights") to subscribe for and purchase shares of the common stock, par value $0.01 per share (the "Common Stock"), of MeriStar Hotels, at a subscription price (the "Subscription Price") equal to 95% of the average of the daily high and low prices of the Common Stock on the New York Stock Exchange Inc. ("NYSE") for the period (the "Measurement Period") of five consecutive trading days (a "Trading Day") on the NYSE immediately following the third Trading Day after the date the Common Stock opens for trading on the NYSE. The Company will be spun off (the "Spin-Off") by CapStar Hotel Company, a Delaware corporation ("CapStar"), and certain of its affiliates, as further described below, to become the lessee, manager and operator of various hotel assets, including those currently (i) owned, leased and managed by CapStar and its affiliates. CapStar intends to transfer or cause to be transferred certain assets and liabilities constituting the hotel management and leasing business currently operated by CapStar and its subsidiaries to MeriStar Hotels, a wholly owned subsidiary of CapStar. CapStar then intends to distribute, on a share- for-share basis, to its stockholders of record as of the effective time of the Merger (the "Spin-Off Record Date") all of the outstanding capital stock of MeriStar Hotels in the Spin-Off. The Spin-Off will provide the stockholders of CapStar as of the Spin-Off Record Date with the opportunity to participate in the benefits of both the real estate operations of the REIT, and the leasing and management operations of MeriStar Hotels. Pursuant to an Agreement and Plan of Merger, dated as of March 15, 1998 (the "Merger Agreement"), among American General Hospitality Corporation, a Maryland corporation operating as a real estate investment trust ("AGH"), American General Hospitality Operating Partnership, L.P., a Delaware limited partnership ("AGH Operating Partnership"), CapStar, CapStar Management Company, L.P., a Delaware limited partnership, ("CapStar Management"), and CapStar Management Company II, L.P., a Delaware limited partnership ("CapStar Management II"), as amended, CapStar after spinning-off MeriStar Hotels will merge with and into AGH (the "Merger"), with the result that (a) AGH will be the surviving corporation operating under the name MeriStar Hospitality Corporation and (b) each outstanding share of common stock, par value $0.01 per share, of CapStar ("CapStar Common Stock") will be converted into 1.0 share of REIT Common Stock, and each outstanding share of common stock, par value $0.01 per share, of AGH ("AGH Common Stock") will be converted into 0.8475 shares of REIT Common Stock. Immediately following the Spin-Off and the effective date of the Merger, the Company will acquire 100% of the partnership interests in the third-party lessee of most of the hotels owned by AGH and substantially all of the assets and certain liabilities of the third-party manager of most of the hotels owned by AGH, pursuant to an Acquisition Agreement, dated as of March 15, 1998 (the "Lessee-Manager Acquisition Agreement"). See "The Merger and the Spin-Off--The Lessee-Manager Acquisition Agreement." (Continued on next page) PRIOR TO DECIDING TO EXERCISE THE RIGHTS, RIGHTHOLDERS SHOULD CAREFULLY CONSIDER THE MATERIAL RISKS SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 12 HEREOF. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
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 NYSE on the Expiration Date. Any such cash payment will be made to the applicable Rightholder at the same time that shares of Common Stock are issued in respect of whole rights exercised by Rightholders. Fractional Rights can only be exercised concurrently with the exercise of whole Rights. The Company intends to pay cash in lieu of all such fractional shares of Common Stock. An election to exercise Rights, once made, may not be revoked. The subscription agent (the "Subscription Agent") for the Rights Offering will be Continental Stock Transfer & Trust Company. All amounts received by the Subscription Agent pursuant to the exercise of Rights will be held in a non-interest-bearing escrow account until the completion of the Rights Offering. See "The Rights Offering--Subscription Privilege." The Rights will be evidenced by non- transferable subscription certificates. The issuance of shares of Common Stock pursuant to the Rights Offering is conditioned upon consummation of the Spin- Off, the Merger and transactions contemplated by the Lessee-Manager Acquisition Agreement. The Company also reserves the right, at its sole option, to cancel the Rights Offering if the Subscription Price is less than .. The Rights will be exercisable at any time following 5:00 p.m., New York City time, on the last day of the Measurement Period until 5:00 p.m., New York City time, on the sixteenth calendar day immediately following the last day of the Measurement Period, or such later date as the Company may determine (the "Expiration Date"), unless the Rights Offering is earlier cancelled. The Rights may not be exercised by any person, and neither this Prospectus nor any Subscription Certificate shall constitute an offer to sell or a solicitation of an offer to purchase any shares of Common Stock, in any jurisdiction in which such transactions would be unlawful. If the Rights Offering is not completed, the Subscription Agent will return the Subscription Price paid by investors as soon as practicable thereafter. See "The Rights Offering--Conditions to Sale of Shares" and "Risk Factors-- Risk of Termination of the Rights Offering Under Certain Circumstances." The maximum number of shares which may be issued in the Rights Offering is 8,400,000, representing approximately 14% of the shares of Common Stock that would be outstanding after the Rights Offering. The Common Stock has been approved for listing on the NYSE, under the symbol "MMH", subject to official notice of issuance. No listing has been applied for with respect to the Rights. Prior to the Spin-Off, there will be no established trading market for the Common Stock and there can be no assurance that after the Spin-Off any such trading market will develop. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF SO GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF ANY SECURITIES HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF MERISTAR HOTELS SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. 2 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"), as amended, CapStar after spinning-off MeriStar Hotels will merge with and into AGH (the "Merger"), with the result that (a) AGH will be the surviving corporation operating under the name MeriStar Hospitality Corporation (the "REIT") and (b) each outstanding share of common stock, par value $0.01 per share of CapStar ("CapStar Common Stock"), will be converted into 1.0 share of common stock of the REIT, par value $0.01 per share ("REIT Common Stock") and each outstanding share of common stock, par value $0.01 per share of AGH ("AGH Common Stock"), will be converted into 0.8475 shares of REIT Common Stock. See "The Merger and the Spin-Off." 5 Pursuant to the Intercompany Agreement (the THE INTERCOMPANY AGREEMENT.. "Intercompany Agreement") among MeriStar Hotels and its subsidiary operating partnership, MeriStar H & R Operating Company, L.P., a Delaware limited partnership that will be a manager and lessee of hotels and resorts ("Hotels OP" and, together with MeriStar Hotels, the "Hotel Parties"), on the one hand, and the REIT and its subsidiary operating partnership, MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership which will own hotels, resorts and other real property (the "REIT Operating Partnership" and, together with the REIT, the "REIT Parties"), on the other hand, the Hotel Parties and the REIT Parties will provide each other with, among other things, reciprocal rights to participate in certain transactions entered into by such parties. In particular, subject to certain exceptions, the Hotel Parties will have a right of first refusal to become the lessee of any real property acquired by the REIT Parties if the REIT Parties determine that, consistent with the REIT's status as a real estate investment trust, the REIT Parties are required to enter into such a lease arrangement; provided that the Hotel Parties or an entity that the Hotel Parties control is qualified to be the lessee. Further, pursuant to the Intercompany Agreement, MeriStar Hotels has agreed, subject to certain exceptions, not to acquire or make (i) investments in real estate (which, for purposes of the Intercompany Agreement, include the provision of services related to real estate and investment in hotel properties, real estate mortgages, real estate derivatives or entities that invest in real estate assets) or (ii) any other investments that may be structured in a manner that qualifies under the federal income tax requirements applicable to a real estate investment trust, unless in either case it has notified the REIT of the acquisition or investment opportunity, in accordance with the terms of the Intercompany Agreement, and the REIT has determined not to pursue such acquisition or investment. In addition, the Hotel Parties intend to pursue additional opportunities with other hotel owners in the future. See "The Company--The Intercompany Agreement." THE LESSEE-MANAGER ACQUISITION AGREEMENT...... Following the Spin-Off and the effective date of the Merger, the Company will acquire 100% of the partnership interests in AGH Leasing, the third- party lessee of most of the hotels owned by AGH, and substantially all of the assets and certain liabilities of AGHI, the third-party manager of most of the hotels owned by AGH, for $95 million pursuant to an Agreement, dated as of March 15, 1998 (the "Lessee-Manager Acquisition Agreement"), by and among Hotels OP, AGHI, AGHL GP, Inc., a Delaware corporation, the general partner of AGH Leasing, and the limited partners of AGH Leasing. Specifically, the Company will acquire (i) substantially all of the assets and certain liabilities of AGHI for a cash purchase price of $10 million; and (ii) 100% of the partnership interests in AGH Leasing for a purchase price of $85 million, consisting of approximately $73.8 million in cash and approximately $11.2 6 million in the form of partnership units of Hotels OP convertible into Common Stock ("Hotels OP Units"). Upon consummation of the transactions contemplated by the Lessee-Manager Acquisition Agreement, Hotels OP will become the lessee and manager of most of the AGH Owned Hotels that are currently leased and/or managed by AGH Leasing. The Lessee-Manager Acquisition Agreement further contemplates that the REIT and the Company will enter into new lease agreements with respect to all of the CapStar Owned Hotels and amend the lease agreements with respect to most of the AGH Owned Hotels. See "The Merger and the Spin-Off-- The Lessee-Manager Acquisition Agreement." THE RIGHTS OFFERING......... The distribution of the Rights by the Company and the sale of shares of Common Stock upon the exercise of the Rights are referred to herein as the "Rights Offering." RIGHTS...................... Non-transferable rights (the "Rights") to subscribe for and purchase shares at the Subscription Price. RECIPIENTS OF RIGHTS; RIGHTS RECEIVED............ MeriStar Hotels is distributing the Rights to holders of record of (a) the REIT Common Stock and/or (b) the units of limited partnership (the "REIT OP Units") of the REIT Operating Partnership (other than REIT OP Units held by the REIT or any of its subsidiaries) as of the Record Date defined below. Each holder of record of REIT Common Stock and/or REIT OP Units on the Record Date (a "Rightholder") will receive one-sixth of a Right for each share of REIT Common Stock and/or each REIT OP Unit so held. RECORD DATE................. The effective time of the Merger (the "Record Date"), which will be publicly announced by the Company. EXPIRATION DATE............. The Rights will be exercisable at any time following 5:00 p.m., New York City time, on the last day of the Measurement Period until 5:00 p.m., New York City time, on the sixteenth calendar day immediately following the last day of the Measurement Period, or such later date as the Company may determine (the "Expiration Date"), unless the Rights Offering is earlier cancelled. SUBSCRIPTION PRICE; MEASUREMENT PERIOD......... An amount in cash per share of Common Stock equal to 95% of the average of the daily high and low prices of the Common Stock on the New York Stock Exchange Inc. ("NYSE") for the period (the "Measurement Period") of five consecutive trading days (a "Trading Day") on the NYSE immediately following the third Trading Day after the date that the Common Stock opens for trading on the NYSE (the "Subscription Price"). The Company will publicly announce the Subscription Price promptly following determination thereof. SUBSCRIPTION PRIVILEGE...... Each whole Right will entitle the Rightholder (but not a subsequent transferee of the REIT Common Stock and/or REIT OP Units held 7 by such Rightholder on the Record Date) to purchase one share of Common Stock at the Subscription Price (the "Subscription Privilege"). See "The Rights Offering-- Subscription Privilege." COMMON STOCK OUTSTANDING AFTER RIGHTS OFFERING...... A maximum of 34,000,000 shares. See "The Spin-Off and the Merger," "Capitalization," "Management," and "Security Ownership of Certain Beneficial Owners and Management." TRANSFERABILITY OF RIGHTS... The Rights are non-transferable. In the event that Rightholders transfer the REIT Common Stock and/or REIT OP Units owned by them as of the Record Date, they will remain the owners of Rights issued in respect of such shares of REIT Common Stock or such REIT OP Units. PROCEDURE FOR EXERCISING The Subscription Privilege may be exercised by RIGHTS..................... properly completing the subscription certificate evidencing the Rights (a "Subscription Certificate") and forwarding such Subscription Certificate (or following the Guaranteed Delivery Procedures (as described in "The Rights Offering--Exercise of Rights")), with payment of the Subscription Price for each share subscribed for pursuant to the Subscription Privilege, to the Subscription Agent on or prior to the Expiration Date. If the mail is used to forward Subscription Certificates, it is recommended that insured registered mail be used. Once a Rightholder has exercised the Subscription Privilege, such exercise may not be revoked. See "The Rights Offering--Exercise of Rights." PROCEDURE FOR EXERCISING RIGHTS BY FOREIGN Subscription Certificates will not be mailed to STOCKHOLDERS............... Rightholders whose addresses are outside the United States or who have an APO or FPO address, but will be held by the Subscription Agent for their account. To exercise the Rights represented thereby, such Rightholders must notify the Subscription Agent by completing an International Holder Subscription Form, which will be delivered to such Rightholders in lieu of a Subscription Certificate, and sending it by mail or telecopy to the Subscription Agent. Rightholders located in the United Kingdom will not initially be provided with an International Holder Subscription Form and, if they are interested in participating in the Rights Offering, should contact European Agent/broker-dealer, facsimile number . , attention: . . International Holder Subscription Forms must be returned to the Subscription Agent on or prior to 11:00 a.m., New York City time, on the date that is four Trading Days prior to the Expiration Date. Certain restrictions applicable to the exercise and sale of Rights by persons located outside of the United States are set forth elsewhere in this Prospectus. See "The Rights Offering--Foreign and Certain Other Stockholders." PERSONS HOLDING SHARES OR WISHING TO EXERCISE RIGHTS Rightholders holding or receiving the Rights THROUGH OTHERS............. through a broker, dealer, commercial bank, trust company or other nominee, as well as Rightholders who would prefer to have such institutions effect 8 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 PAPER CLIP STRUCTURE RISKS Pursuant to the Intercompany Agreement, the Hotel Parties and the REIT Parties will provide each other with reciprocal rights to participate in certain transactions entered into by such parties. In particular, subject to certain exceptions, the Hotel Parties will have a right of first refusal to become the lessee of any real property acquired by the REIT Parties if the REIT Parties determine that, consistent with the REIT's status as a real estate investment trust, the REIT Parties are required to enter into such a lease arrangement; provided that the Hotel Parties or an entity that the Hotel Parties control is, as determined by the REIT in its sole discretion, qualified to be the lessee. This is known as the "paper-clip" REIT structure. However, because of the independent trading of the REIT and the Company, stockholders in each company may develop divergent interests which could lead to conflicts of interest. This divergence of interests could also reduce the anticipated benefits of the "paper-clip" REIT structure. ADVERSE EFFECTS RELATING TO THE LODGING INDUSTRY OPERATING RISKS Various factors could adversely affect the ability of MeriStar Hotels to generate revenues and make lease payments to the REIT. MeriStar Hotels' business will be subject to all of the operating risks inherent in the lodging industry. These risks include the following: (i) changes in general and local economic conditions; (ii) cyclical overbuilding in the lodging industry; (iii) varying levels of demand for rooms and related services; (iv) competition from other hotels, motels and recreational properties, some of which may have greater marketing and financial resources than the REIT or MeriStar Hotels; (v) dependence on business and commercial travelers and tourism, which business may fluctuate and be seasonal; (vi) the recurring need for renovations, refurbishment and improvements of hotel properties; (vii) changes in governmental regulations that influence or determine wages, prices and construction and maintenance costs; and (viii) changes in interest rates and the availability of credit. Demographic, geographic or other changes in one or more of MeriStar Hotels' markets could impact the convenience or desirability of the sites of certain hotels, which would in turn affect the operations of those hotels. In addition, due to the level of fixed costs required to operate full-service hotels, certain significant expenditures necessary for the operation of hotels generally cannot be reduced when circumstances cause a reduction in revenue. SEASONALITY The lodging industry is seasonal in nature. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters although this may not be true for hotels in major tourist destinations. Revenues for hotels in tourist areas generally are substantially greater during tourist season than other times of the year. Seasonal variations in revenue at the hotels MeriStar Hotels manages can be expected to cause quarterly fluctuations in the revenues of MeriStar Hotels. Quarterly earnings also may be adversely affected by events beyond MeriStar Hotels' control, such as extreme weather conditions, economic factors and other considerations affecting travel. FRANCHISE AGREEMENTS Upon completion of the Merger, 93 of the REIT Owned Hotels will be operated pursuant to existing franchise or license agreements with nationally recognized hotel companies (the "Franchise Agreements"). The Franchise Agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor system. Those limitations may conflict with the REIT's and MeriStar Hotels' philosophy of creating specific business plans tailored to each hotel and to each market. Such standards are often subject to change over time, in some cases at the discretion of the franchisor, and may restrict a franchisee's ability to make improvements or modifications to a hotel without the consent of the franchisor. In addition, compliance with such standards could require a franchisee to incur significant expenses or capital expenditures. Action or inaction on the part of any of the REIT, MeriStar 16 Hotels or third-party operators could result in a breach of such standards or other terms and conditions of the franchise agreements and could result in the loss or cancellation of a franchise license. In connection with terminating or changing the franchise affiliation of a REIT Owned Hotel or a subsequently acquired hotel, MeriStar Hotels or the REIT may be required to incur significant expenses or capital expenditures. Moreover, the loss of a franchise license could have a material adverse effect upon the operations or the underlying value of the hotel covered by the franchise because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. The Franchise Agreements covering the hotels expire or terminate, without specified renewal rights, at various times and have differing remaining terms. As a condition to renewal, the Franchise Agreements frequently contemplate a renewal application process, which may require substantial capital improvements to be made to a hotel. Under certain of their existing Franchise Agreements, AGH and CapStar may be required to obtain the consent of the franchisors under such agreements to consummate the Merger and related transactions. There can be no assurance that such consents will be obtained. COMPETITION IN THE LODGING INDUSTRY The lodging industry is highly competitive. There is no single competitor or small number of competitors of the REIT and MeriStar Hotels that will be dominant in the industry. MeriStar Hotels will operate in areas that contain numerous competitors, some of which may have substantially greater resources than MeriStar Hotels and the ability to accept more risk than MeriStar Hotels will be able to manage. Competition in the lodging industry is based generally on location, room rates and range and quality of services and guest amenities offered. New or existing competitors could significantly lower rates or offer greater conveniences, services or amenities or significantly expand, improve or introduce new facilities in markets in which MeriStar Hotels will compete, thereby adversely affecting MeriStar Hotels' operations and the number of suitable business opportunities. COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to properly remediate such contaminated property, may adversely affect the owner's ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. The operation and removal of certain underground storage tanks are also regulated by federal and state laws. In connection with the ownership and operation of the hotels, the REIT could be held liable for the costs of remedial action with respect to such regulated substances and storage tanks and claims related thereto. Activities have been undertaken to close or remove storage tanks located on the property of several of the REIT Owned Hotels. All of the REIT Owned Hotels have undergone Phase I environmental site assessments ("Phase Is"), which generally provide a nonintrusive physical inspection and database search, but not soil or groundwater analyses, by a qualified independent environmental engineer, within the last 18 months. The purpose of a Phase I is to identify potential sources of contamination for which the REIT Owned Hotels may be responsible and to assess the status of environmental regulatory compliance. The Phase Is have not revealed and the Company is not aware of any environmental liability or compliance concerns that MeriStar Hotels believes would have a material adverse effect on MeriStar Hotels' results of operation or financial condition. In addition, the REIT Owned Hotels have been inspected to determine the presence of asbestos. Federal, state and local environmental laws, ordinances and regulations also require abatement or removal of certain 17 asbestos-containing materials ("ACMs") and govern emissions of and exposure to asbestos fibers in the air. ACMs are present in various building materials such as sprayed-on ceiling treatments, roofing materials or floor tiles at some of the REIT Owned Hotels. Operations and maintenance programs for maintaining such ACMs have been or are in the process of being designed and implemented, or the ACMs have been scheduled to be or have been abated, at such hotels. However, there can be no assurance that this will be the case. Any liability resulting from non-compliance or other claims relating to environmental matters could have a material adverse effect on MeriStar Hotels' results of operations or financial condition. GOVERNMENTAL REGULATION A number of states regulate the licensing of hotels and restaurants, including liquor license grants, by requiring registration, disclosure statements and compliance with specific standards of conduct. MeriStar Hotels believes that it is substantially in compliance with these requirements or, in the case of liquor licenses, that it has or will promptly obtain the appropriate licenses. Managers of hotels are also subject to laws governing their relationship with hotel employees, including minimum wage requirements, overtime, working conditions and work permit requirements. Compliance with, or changes in, these laws could reduce the revenue and profitability of the REIT Owned Hotels and could otherwise adversely affect MeriStar Hotels' results of operations or financial condition. Under the Americans with Disabilities Act (the "ADA"), all public accommodations are required to meet certain requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts have been and continue to be invested in ADA required upgrades to the REIT Owned Hotels, a determination that the REIT is not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. The REIT is likely to incur additional costs of complying with the ADA. ADVERSE EFFECTS RELATING TO THE OPERATION OF REAL ESTATE Upon consummation of the Formation Transactions, MeriStar Hotels will continue the hotel management businesses as previously undertaken separately by AGHI, AGH Leasing and CapStar. MeriStar Hotels will lease the REIT Owned Hotels pursuant to the Participating Leases. The REIT will have the right to terminate a Participating Lease upon the sale of a hotel to a third party or if MeriStar Hotels fails to meet certain performance criteria. The underlying value of MeriStar Hotels' operations and income will be dependent upon the its ability to operate the hotels in a manner sufficient to maintain or increase revenues and to generate sufficient revenue in excess of operating expenses to make lease payments to the REIT. Many of these risks are beyond the control of MeriStar Hotels and the effects of these risks are likely to be more pronounced than if MeriStar Hotels had diversified operations. DEPENDENCE ON KEY PERSONNEL Upon consummation of the Merger, MeriStar Hotels will place substantial reliance on the lodging industry knowledge and experience and the continued services of both AGH and CapStar senior management, led by Messrs. Whetsell, Jorns and McCaslin. MeriStar Hotels' future success and its ability to manage future growth depend in large part upon the efforts of these persons and on MeriStar Hotel's ability to attract and retain other highly qualified personnel. Competition for such personnel is intense, and there can be no assurance that MeriStar Hotels will be successful in attracting and retaining such personnel. MeriStar Hotels' inability to attract and retain other highly qualified personnel may adversely affect its results of operations and financial condition. MeriStar Hotels will have employment agreements with Messrs. Whetsell and Jorns for terms of five years, and with Mr. McCaslin for a term of three years, in each case with automatic renewals on a year-to-year bases thereafter. See "Executive Officers-Employment Agreements." While certain of such contracts will contain non-compete clauses, such clauses may not be enforceable in certain jurisdictions. 18 ADVERSE EFFECTS ON MARKET PRICE OF COMMON STOCK ARISING FROM SHARES AVAILABLE FOR FUTURE SALE No prediction can be made as to the effect, if any, that any future sales of shares, or the availability of shares for future sale, will have on the market prices for Common Stock following the Spin-Off. Sales of substantial amounts of Common Stock (including Common Stock issued in connection with the Rights, outstanding stock options or the exchange or sale of units of limited partner interest in Hotels OP) or the perception that such sales could occur could adversely affect the then-prevailing market price for Common Stock. With the exception of the Common Stock issued to affiliates of MeriStar Hotels in connection with the Spin-Off and the Rights Offering, all of the Common Stock to be issued in connection with the Spin-Off and the Rights Offering will be freely transferable. ABSENCE OF A PUBLIC MARKET FOR COMMON STOCK There is currently no public market for the Common Stock. The Common Stock has been approved for listing on the NYSE, under the symbol "MMH", subject to official notice of issuance. There can be no assurance as to the prices at which trading in Common Stock will occur after the Spin-Off or that an active trading market in the Common Stock will develop or be sustained in the future. In the event no active trading market develops for the Common Stock, holders of shares of Common Stock may not be able to sell their shares promptly at a reasonable price. Accordingly, Rightholders and holders of Common Stock should consider the Common Stock a long-term investment. The prices at which the Common Stock trades will be determined by the marketplace and may be influenced by many factors, including, among others, MeriStar Hotels' and the REIT's performance and prospects, the depth and liquidity of the market for the Common Stock, investor perception of MeriStar Hotels and of the hotel industry in which MeriStar Hotels operate, economic conditions in general, MeriStar Hotels' dividend policy, and general financial and other market conditions. Such volatility and other factors may materially adversely affect the market price of the Common Stock. REDISTRIBUTION OF MERISTAR HOTELS COMMON STOCK Trading in shares of OpCo will likely be characterized by a period of redistribution among the MeriStar shareholders who receive such shares in the Spin-Off (especially in light of the taxable nature of the Spin-Off) which may temporarily depress the market price of such shares during such period. POTENTIAL ANTITAKEOVER EFFECT OF CERTAIN PROVISIONS OF DELAWARE LAW AND OF THE CHARTER AND BY-LAWS Certain provisions of Delaware law and of the Charter and By-Laws may have the effect of discouraging a third party from making an acquisition proposal for MeriStar Hotels and could delay, defer or prevent a transaction or a change in control of MeriStar Hotels under circumstances that could otherwise give the holders of Common Stock the opportunity to realize a premium over the then prevailing market prices of the Common Stock. Certain provisions of the Charter and By-laws, as each will be in effect as of the Rights Offering, and of the DGCL, have the effect of making more difficult an acquisition of control of the Company in a transaction not approved by the Board of Directors. These provisions include (i) a provision for a classified Board, with only approximately one-third of the Board to be elected in any year, to serve for three-year terms, (ii) a requirement that directors be removed only for cause upon the affirmative vote of holders of at least 66 2/3% of the total voting power, (iii) a requirement that actions of stockholders be taken at a meeting of stockholders, rather than by written consent, (iv) a prohibition on the stockholders' ability to call a special meeting, (v) an advance notice requirement for stockholders to make nominations of candidates for directors or to bring other business before an annual meeting of stockholders, (vi) a requirement that certain amendments to the Charter be approved by the affirmative vote of 66 2/3% of total voting power and (vii) a provision that the chair of any meeting of stockholders shall have the power to adjourn such meeting. See "Description of Capital Stock" and "Certain Antitakeover Provisions." 19 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................. 65,321 2,576 -- 253,906 1,871 -- -- -- -- Management services and other revenues.... 2,085 4,150 1,139 10,510 12,088 7,050 5,354 4,418 4,234 -------- ------- ------- -------- ------- ------- ------ ------ ------ Total revenues....... 243,880 30,130 1,139 938,613 23,839 7,050 5,354 4,418 4,234 -------- ------- ------- -------- ------- ------- ------ ------ ------ Operating expenses: Departmental expenses: Rooms.................. 41,232 5,124 -- 165,633 2,533 -- -- -- -- Food, beverage and other ................ 46,755 1,493 -- 185,021 1,170 -- -- -- -- Undistributed operating expenses: Administrative and general............... 43,794 6,963 2,202 159,909 10,473 6,140 4,745 4,508 4,065 Participating lease expense............... 85,592 10,655 -- 297,201 4,135 -- -- -- -- Property operating costs................. 29,962 4,142 -- 114,699 1,917 -- -- -- -- Depreciation and amortization.......... 1,224 421 96 4,690 636 349 84 23 14 -------- ------- ------- -------- ------- ------- ------ ------ ------ Total operating expenses.............. 248,559 28,798 2,298 927,153 20,864 6,489 4,829 4,531 4,079 -------- ------- ------- -------- ------- ------- ------ ------ ------ Net operating income (loss)................. (4,679) 1,332 (1,159) 11,460 2,975 561 525 (113) 155 Equity in earnings (loss) of affiliates... -- (521) -- 46 46 -- -- -- -- Interest expense, net... 2,006 18 14 5,297 56 123 44 -- -- Minority interest....... (1,074) 35 -- 1,047 103 -- -- -- -- Income tax provision (benefit).............. (2,244) -- -- 2,065 -- -- -- -- -- -------- ------- ------- -------- ------- ------- ------ ------ ------ Net income (loss).... $ (3,367) $ 758 $(1,173) $ 3,097 $ 2,862 $ 438 $ 481 $ (113) $ 155 ======== ======= ======= ======== ======= ======= ====== ====== ====== Basic and diluted net income (loss) per common share........... $ (0.14) $ -- $ -- $ 0.12 $ -- $ -- $ -- $ -- $ -- BALANCE SHEET DATA: Total assets ........... $198,879 $84,719 $25,415 $ -- $84,419 $24,366 $2,881 $1,232 $1,458 Debt.................... 65,776 776 800 -- 981 885 950 -- -- OTHER FINANCIAL DATA: EBITDA (A).............. (3,455) 1,753 (1,063) 16,150 3,611 910 609 (90) 169 Net cash provided by (used in) operating activities............. (1,583) 2,760 682 9,697 4,465 1,226 208 66 (101) Net cash used in investing activities... (84,125) (326) (902) (90,300) (6,501) (1,826) (61) (41) (24) Net cash provided by (used in) financing activities............. 64,795 (205) (85) 69,208 4,208 699 59 -- 244
- -------- (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 16,641 -- -- 51,630 Other hotel revenue.. 1,219 -- 7,024 8,243 5,448 -- -- 13,691 Hotel management, accounting and other................ 4,150 -- (3,121) 1,029 -- 2,815 (1,759) 2,085 ------- ----- ------- -------- ------- ------ ------- -------- Total revenue........ 30,130 -- 121,789 151,919 90,905 2,815 (1,759) 243,880 Hotel operating expense by department: Rooms................ 5,124 -- 21,130 26,254 14,978 -- -- 41,232 Food and beverage.... 995 -- 27,154 28,149 12,235 -- -- 40,384 Other operating departments......... 498 -- 3,819 4,317 2,054 -- -- 6,371 Undistributed operating expenses: Administrative and general............. 6,963 -- 20,775 27,738 14,203 2,430 (577) 43,794 Property operating costs............... 4,142 -- 15,778 19,920 12,112 -- (2,070) 29,962 Lease expense........ 10,655 -- 41,174 51,829 33,763 -- -- 85,592 Depreciation and amortization........ 421 -- -- 421 26 27 750 1,224 ------- ----- ------- -------- ------- ------ ------- -------- 28,798 -- 129,830 158,628 89,371 2,457 (1,897) 248,559 Interest expense and other, net........... 539 694 -- 1,233 6 (42) 809 2,006 ------- ----- ------- -------- ------- ------ ------- -------- Total expenses........ 29,337 694 129,830 159,861 89,377 2,415 (1,088) 250,565 ------- ----- ------- -------- ------- ------ ------- -------- Income (loss) before minority interest and income taxes......... 793 (694) (8,041) (7,942) 1,528 400 (671) (6,685) Minority interest..... 35 (20) (336) (321) -- -- (753) (1,074) ------- ----- ------- -------- ------- ------ ------- -------- Income (loss) before income taxes......... 758 (674) (7,705) (7,621) 1,528 400 82 (5,611) Income tax provision (benefit)............ -- 34 (3,082) (3,048) -- -- (804) (2,244) ------- ----- ------- -------- ------- ------ ------- -------- Net income (loss)..... $ 758 $(708) $(4,623) $ (4,573) $ 1,528 $ 400 $ (722) $ (3,367) ======= ===== ======= ======== ======= ====== ======= ======== Basic net income per common share......... -- $ (0.14)(F) ======= ======== Diluted net income per common share......... -- $ (0.14)(F) ======= ========
- -------- (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 61,655 -- -- 203,726 Other................. 474 3,237 26,265 29,976 20,204 -- -- 50,180 Hotel management, accounting and other.. 12,088 -- (7,238) 4,850 -- 7,351 (1,691) 10,510 ------- ------- -------- -------- -------- ------ -------- -------- Total revenue......... 23,839 75,291 499,451 598,581 334,372 7,351 (1,691) 938,613 Hotel operating expense by department: Rooms................. 2,533 14,300 89,297 106,130 59,503 -- -- 165,633 Food and beverage..... 909 2,215 109,096 112,220 48,406 -- -- 160,626 Other operating departments.......... 261 1,648 14,227 16,136 8,259 -- -- 24,395 Undistributed operating expenses: Administrative and general.............. 10,473 11,169 77,254 98,896 54,873 7,242 (1,102) 159,909 Property operating costs................ 1,917 12,265 60,265 74,447 47,607 -- (7,355) 114,699 Participating lease expense.............. 4,135 32,002 140,936 177,073 120,128 -- -- 297,201 Depreciation and amortization......... 636 826 -- 1,462 104 124 3,000 4,690 ------- ------- -------- -------- -------- ------ -------- -------- 20,864 74,425 491,075 586,364 338,880 7,366 (5,457) 927,153 Interest expense and other, net............ 10 2,775 -- 2,785 (373) (135) 2,974 5,251 ------- ------- -------- -------- -------- ------ -------- -------- Total expenses......... 20,874 77,200 491,075 589,149 338,507 7,231 (2,483) 932,404 ------- ------- -------- -------- -------- ------ -------- -------- Income (loss) before minority interest and income taxes.......... 2,965 (1,909) 8,376 9,432 (4,135) 120 792 6,209 Minority interest...... 103 (14) 350 439 (1,663) -- 2,271 1,047 ------- ------- -------- -------- -------- ------ -------- -------- Income (loss) before income taxes.......... 2,862 (1,895) 8,026 8,993 (2,472) 120 (1,479) 5,162 Income tax provision (benefit)............. -- 387 3,210 3,597 -- -- (1,532) 2,065 ------- ------- -------- -------- -------- ------ -------- -------- Net income (loss)...... $ 2,862 $(2,282) $ 4,816 $ 5,396 $ (2,472) $ 120 $ 53 $ 3,097 ======= ======= ======== ======== ======== ====== ======== ======== Basic net income per common share.......... -- $ 0.12(F) ======= ======== Diluted net income per common share.......... -- $ 0.12(F) ======= ========
- -------- (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 $213.8 million to $243.9 million for the three- month period ended March 31, 1998 on a pro forma basis compared to $30.1 million for the three-month period ended March 31, 1998 on a historical basis. Operating expenses increased to $248.6 million for the three-month period ended March 31, 1998 on a pro forma basis from $28.8 million for the three- month period ended March 31, 1998 on a historical basis. These increases result primarily from the increase in total leased and managed hotels on a pro forma basis, as compared to a historical basis. Net operating income (loss) decreased to $(6.7) million for the three-month period ended March 31, 1998 on a pro forma basis from $0.8 million for the three-month period ended March 31, 1998 on a historical basis and EBITDA decreased to $(3.5) million for the three-month period ended March 31, 1998 on a pro forma basis from $1.8 million for the three-month period ended March 31, 1998 on a historical basis. These decreases relate primarily to the seasonal nature of operations of the leased hotels (whose operations are included in the Company's financial statements) on a pro forma basis. Net interest expense increased by $1.5 million to $2.0 million for the three-month period ended March 31, 1998 on a pro forma basis from $0.5 million for the three-month period ended March 31, 1998 on a historical basis. This increase results from the interest expense on the pro forma outstanding balance on the credit facility. Minority interest decreased by $1.1 million to $(1.0) million for the three- month period ended March 31, 1998 on a pro forma basis due to the allocation of a proportionate amount of loss to the minority interests. The pro forma statement of operations for 1998 reflects income tax expense at an effective rate of 40 percent, as a result of the change in tax status to a C-Corporation. HISTORICAL FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH HISTORICAL FOR THE THREE MONTHS ENDED MARCH 31, 1997 Total revenue increased by $29.0 million or 2,636% to $30.1 million in the three-month period ended March 31, 1998 compared to $1.1 million in the three- month period ended March 31, 1997. This increase results from revenue of $26.0 million from hotels leased subsequent to March 31, 1997 and an increase of $3.0 million in management fees and other revenue. The Company did not lease any hotels as of March 31, 1997. The increase in revenue from leased hotels is primarily due to the increase in the number of leased hotels in 1998. The increase in management fees and other revenue is primarily due to the increase in number of managed hotels in 1998. Hotel management and other revenue earned by the Company from hotels owned by CapStar were $3.1 million or 10% of total revenue in the three-month period ended March 31, 1998, and $0.3 million or 27% of total revenue in the three-month period ended March 31, 1997. Operating expenses increased to $28.8 million in the three-month period ended March 31, 1998 compared to $2.3 million in the three-month period ended March 31, 1997. The increase reflects the increase in the number of managed hotels and the hotel leases acquired subsequent to March 31, 1997, which resulted in and includes the costs of additional personnel and other administrative costs incurred in conjunction with the Company's growth. Net operating income increased by 215% to $1.3 million in the three-month period ended March 31, 1998 compared to a net operating loss of $1.2 million in the three-month period ended March 31, 1997 and earnings before interest EBITDA grew to $1.8 million in the three-month period ended March 31, 1998 from $(1.1) million in the three-month period ended March 31, 1997. These increases resulted primarily from the increase in the number of managed hotels and the hotel leases acquired subsequent to March 31, 1997, offset partially by the costs of additional personnel and other administrative costs incurred as described above. 28 Equity in loss of affiliates was $0.5 million in the three-month period ended March 31, 1998, due to the Company's share of net loss of affiliates accounted for using the equity method. The Company acquired all such investments in affiliates subsequent to March 31, 1997. PRO FORMA YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE HISTORICAL YEAR ENDED DECEMBER 31, 1997 Total revenue increased by $914.8 million to $938.6 million in 1997 on a pro forma basis compared to $23.8 million in 1997 on a historical basis. Operating expenses increased to $927.2 million in 1997 on a pro forma basis from $20.9 million in 1997 on a historical basis. Net operating income increased to $6.2 million in 1997 on a pro forma basis compared to $3.0 million in 1997 on a historical basis, and earnings before interest expense, income taxes, depreciation and amortization ("EBITDA") increased to $16.1 million in 1997 on a pro forma basis from $3.6 million in 1997 on a historical basis. These increases result primarily from the increase in total leased and managed hotels on a pro forma basis, as compared to a historical basis. Net interest expense increased by $5.2 million in 1997 on a pro forma basis from $0.01 million in 1997 on a historical basis. This increase results from the interest expense on the pro forma outstanding balance on the credit facilities. Minority interest increased by $0.9 million in 1997 on a pro forma basis from $0.1 million in 1997 on a historical basis as a result of the net effect of the changes described above and the issuance of the REIT OP Units in connection with the acquisition of AGH Leasing and AGHI. The pro forma statement of operations for 1997 reflects income tax expense at an effective rate of 40 percent, as a result of the change in tax status to a C-Corporation. HISTORICAL YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE HISTORICAL YEAR ENDED DECEMBER 31, 1996 Total revenue increased by $16.7 million or 235% to $23.8 million in 1997 compared to $7.1 million in 1996. The increase results from revenue of $11.8 million from hotel leases acquired in 1997 and an increase of $4.9 million in management fees and other revenue. The Company did not lease any hotels in 1996. The increase in management fees and other revenue is primarily due to the increase in the number of managed hotels in 1997 and additional fees resulting from improved operations of the managed hotels. Hotel management and other revenue earned by the Company from hotels owned by CapStar were $7.2 million or 30% of total revenue in 1997, and $2.6 million or 37% of total revenue in 1996. Operating expenses increased to $20.9 million in 1997 from $6.5 million in 1996. This increase reflects the increase in the number of managed hotels and the hotel leases acquired in 1997, which resulted in includes the costs of additional personnel and other administrative costs incurred in conjunction with the Company's growth. Net operating income increased by 430% to $3.0 million in 1997 compared to $0.6 million in 1996 and EBITDA grew to $3.7 million in 1997 from $0.9 million in 1996. These increases resulted primarily from the increase in the number of managed hotels and the hotel leases acquired in 1997, offset partially by the costs of additional personnel and other administrative costs incurred as described above. Minority interests of $0.1 million in 1997 are due to the Company's allocated portion of minority interests related to the REIT OP Units issued to third parties in 1997. 29 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 8,400,000; the Subscription Price will be equal to 95% of the average of the daily high and low prices of the Common Stock for the period of five consecutive trading days immediately following the third Trading Day after the date the Common Stock opens for trading. The Company also reserves the right, at its sole option, to cancel the Rights Offering if the Subscription Price is less than . . Based on an assumed Subscription Price of $2.85 per share, the net proceeds (net of transaction expenses of approximately $250,000) will range from a minimum of zero to a maximum of $23.7 million. The Company currently expects to use the net proceeds from the Rights Offering to repay existing indebtedness under the Company's two $50 million revolving credit facilities, which are expected to bear interest at a rate no greater than LIBOR plus 350 basis points, or for general corporate purposes. The pro forma balance outstanding on the credit facility prior to repayment of any amounts with the net proceeds of the Rights Offering is expected to be $65.0 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 35 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 "paper-clip" REIT structure. See "Risk Factors--Paper Clip Structure Risks." BACKGROUND OF AND REASONS FOR THE SPIN-OFF In order for the REIT to maintain its status as a REIT for federal income tax purposes, it may not operate hotels. The Company will be formed to own assets that the REIT could not itself own and to succeed to CapStar's hotel management and leasing business, by becoming the lessee, manager and operator of the various hotel assets, and to perform the services more fully described in the Intercompany Agreement. The Spin-Off, together with the Rights Offering, will provide the stockholders of CapStar as of the Spin-Off Record Date with the opportunity to participate in the benefits of both the ownership of real estate through the REIT, and the leasing and management operations of MeriStar Hotels. MeriStar Hotels will function principally as a hotel leasing, management and operating company, while the REIT will focus on investment in real estate assets. The Spin-Off is designed to provide CapStar's existing stockholders with the long-term benefits of ownership in an entity devoted to the conduct of operating business 37 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 and AGH Leasing will enter into amended and restated Participating Leases with the REIT for each of the AGH Owned Hotels that is currently leased by AGH Leasing, which will conform the Participating Leases for the applicable AGH Owned Hotels with the Participating Leases for the CapStar Owned Hotels, except that (a) the base rent and percentage rent for each Participating Lease of an applicable AGH Owned Hotel will not be modified (except as described below with respect to "discounted revenues") and (b) the initial term of each Participating Lease of an applicable AGH Owned Hotel will not be modified (though renewal options will be added). The obligations of Lessee under each Participating Lease will be guaranteed by MeriStar Hotels. TERM Each Participating Lease of an AGH Owned Hotel provides for an initial term of 12 years commencing on the date on which the hotel was acquired. Each Participating Lease of a CapStar Owned Hotel provides for an initial term of 12 years commencing on the effective date of the Merger. Each Participating Lease of an AGH Owned Hotel will be modified to provide, and each Participating Lease of a CapStar Owned Hotel will provide, Lessee with three renewal options of five years each (except in the case of Properties with ground leases having a remaining term of less than 40 years) provided that (a) Lessee will not have the right to a renewal if there shall have occurred a change in the tax law which would permit the REIT to operate the hotel directly; (b) if Lessee shall elect not to renew a Participating Lease for any REIT Owned Hotel, then the REIT shall have the right to reject the exercise of a renewal right on a Participating Lease of a comparable hotel; and (c) the rent for each renewal term shall be adjusted to reflect the then fair market rental value of the hotel. If the REIT and MeriStar Hotels are unable to agree upon the then fair market rental value of the hotel, the Participating Lease will terminate upon the expiration of the then current term and MeriStar Hotels shall thereupon have a right of first refusal to lease the hotel from the REIT on such terms as the REIT may have agreed upon with a third-party lessee. BASE RENT; PARTICIPATING RENT; ADDITIONAL CHARGES Each Participating Lease requires the lessee to pay (i) fixed monthly base rent, (ii) on a monthly basis, the excess of participating rent over base rent, with participating rent based on certain percentages of room revenue, food and beverage revenue and telephone and other revenue at each hotel, and (iii) certain other amounts, including interest accrued on any late payments or charges ("Additional Charges"). Base rent and participating rent departmental thresholds (departmental revenue on which the rent percentage is based) are increased annually by a percentage equal to the percentage increase in the consumer price index ("CPI") (CPI percentage increase plus 0.75% in the case of the participating rent departmental revenue threshold) compared to the price year. In addition, under certain circumstances a reduced percentage rate will apply to the revenues attributable to certain "discounted rates" that the Lessee may offer. Base rent is payable monthly in arrears. Participating rent is payable in arrears based on a monthly schedule adjusted to reflect the seasonal variations in the hotel's revenue. Participating rent payments during each calendar quarter will be adjusted at the end of each quarter to reflect actual results. Other than real estate and personal property taxes and assessments, rent payable under ground leases, casualty insurance, including loss of income insurance, capital impositions and capital replacements and refurbishments (determined in accordance with generally accepted accounting principles), which are obligations of the REIT, the Participating Leases require the Lessee to pay rent, liability insurance, all costs and expenses and all utility and other charges incurred in the operation of the hotels. The Participating Leases also provide for rent reductions and abatements in the event of damage or destruction or a partial taking of any hotel. The Participating Leases also provide for a rental adjustment under certain circumstances in the event of (a) a major renovation of the hotel, or (b) a change in the franchisor of the hotel. 48 LESSEE CAPITALIZATION The Participating Leases require Hotels OP (or MeriStar Hotels as guarantor of the Participating Leases) to maintain a book net worth of not less than $40,000,000 and MeriStar Hotel's consolidated debt cannot exceed an amount equal to 5.5 times MeriStar Hotel's trailing 12-month EBITDA. Further, commencing January 1, 1999, for so long as the tangible net worth of Hotels OP (or MeriStar Hotels as guarantor of the Participating Leases) is less than 17.5% of the aggregate rents payable under the Participating Leases for the prior calendar year, Hotels OP (or MeriStar Hotels as guarantor of the Participating Leases) is prohibited from paying dividends or making distributions other than dividends or distributions made for the purpose of permitting the partners of Hotels OP to pay taxes on the taxable income of Hotels OP attributable to its partners plus any required preferred distributions existing to partners. TERMINATION The REIT will have the right to terminate the applicable Participating Lease upon the sale of a hotel to a third-party or, upon the REIT's determination not to rebuild after a casualty, upon payment to Lessee of the fair market value of the leasehold estate (except for properties initially identified by the REIT and MeriStar Hotels as properties slated to be sold). The fair market value of the leasehold estate will be determined by discounting to present value at a discount rate of 10% per annum the cash flow for each remaining year of the then current lease term, which cash flow will be deemed to be the cash flow realized by Lessee under the applicable Participating Lease for the 12-month period preceding the termination date. The REIT will receive a credit against any such termination payments an amount equal to any outstanding "New Lease Credits" which shall mean the projected cash flow (determined on the same basis as the termination payment) of any new Participating Leases entered into between the REIT and Hotels OP or Lessee after the Effective Date for the initial term of such new Participating Lease amortized on a straight-line basis over the initial term of the new Participating Lease. PERFORMANCE STANDARDS The REIT will have the right to terminate the applicable Participating Lease if, in any calendar year, the gross revenues from a hotel are less than 95% of the projected gross revenues for such year as set forth in the applicable budget unless (a) Lessee can reasonably demonstrate that the gross revenue shortfall was caused by general market conditions beyond Lessee control or (b) Lessee "cures" the shortfall by paying to the REIT the difference between the rent that would have been paid to the REIT had the property achieved gross revenues of 95% of the budgeted amounts and the rent paid based on actual gross revenues. Lessee will not have such cure right for more than two consecutive years. The Participating Leases also require that Lessee spend in each calendar year at least 95% of the amounts budgeted for marketing expenses and for repair and maintenance expenses. ASSIGNMENT AND SUBLEASING Lessee will not have the right to assign a Participating Lease or sublet a hotel without the prior written consent of the REIT. For purposes of the Participating Lease, a change in control of MeriStar Hotels or Lessee will be deemed an assignment of the Participating Lease and will require the REIT's consent, which may be granted or withheld in its sole discretion. LEGAL PROCEEDINGS In the course of the Company's normal business activities, various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company. Based on currently available facts, management believes that the disposition of matters that are pending or asserted will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. 49 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 initial term of the first, second and third classes expires in 2001, 2002 and 2003, respectively. Directors of each class will be elected for three-year terms upon the expiration of the initial class terms, and, beginning in 2001 and each year thereafter, each class of directors will be elected by the stockholders. As of the Spin-off and the effective date of the Merger, the following individuals are expected to become directors of MeriStar Hotels:
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. S. KIRK KINSELL..................................... 1998 43 III S. Kirk Kinsell has been a Director and President and Chief Operating Officer of Apple South, Inc. since 1997. Prior to joining Apple South, Mr. Kinsell served as President of the Franchise Division of ITT Sheraton and its Four Point Hotels from 1995 to 1997. Immediately prior to ITT Sheraton, Mr. Kinsell was with Holiday Inn Worldwide from 1988 to 1995 and last served as the senior vice president in its franchise division.
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 Directors' Incentive Plan (the "MeriStar Hotels Directors' Plan"), each director, who is not an officer or employee of MeriStar or its subsidiaries (each an "Independent Director"), will be awarded an option to purchase 7,500 shares of Common Stock upon initial commencement of service after the Spin-Off, whether by appointment or election. Thereafter, each Independent Director will be granted an option to purchase 5,000 shares of Common Stock on the first business day following the Company's annual meeting of stockholders. The number of shares authorized for issuance under the MeriStar Hotels Directors' Plan is 125,000. The exercise price of option grants will be 100% of the fair market value of the Common Stock on the date of grant, and options will vest in three annual installments. The exercise price may be paid in cash, cash equivalents acceptable to the Compensation Committee, Common Stock or a combination thereof. Options granted under the MeriStar Hotels Directors' Plan, once vested, are exercisable for ten years from the date of grant. Upon termination of service as a director, options which have not vested are forfeited and vested options may be exercised until they expire. All options accelerate upon a change in control of MeriStar Hotels. CERTAIN FEDERAL INCOME TAX CONSEQUENCES RELATING TO OPTIONS Generally, an eligible director does not recognize any taxable income, and the Company is not entitled to a deduction upon the grant of an option. Upon the exercise of an option, the eligible director recognizes ordinary 60 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 S. Kirk Kinsell--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 product of (x) the sum of (A) his total then annual base salary and (B) the amount of his bonus for the preceding year, or if the term of the employment agreement is terminated in its initial year his target bonus for such year multiplied by (y) the greater of (A) two (2) and (B) a fraction, the numerator of which is the number of days remaining in the Term of the employment agreements, without further extension, and the denominator of which is 365. In addition, all of the executive's options and restricted stock will immediately vest and become exercisable for a period of one year thereafter and shares of restricted stock previously granted to the executive will become free from all contractual restrictions, effective as of the termination date. In addition, the Company will continue in effect certain benefits under the employment agreement, including, but not limited to, life and health insurance plans, or their equivalent for a period equal to the greater of two years or the remaining term of the employment agreement, without further extension. The other executives will receive (i) a lump sum payment equal to one times their then annual base salary, (ii) the amount of their bonus for the preceding year, and (iii) immediate vesting and exercisability of all unvested stock options and restricted stock awards and (iv) the continuance of certain benefits under their employment agreements, but only until the earlier of (x) one year from the end of the term of their respective employment agreements or (y) the date on which the executive obtains health insurance coverage from a subsequent employer. 63 Termination Due to Death or Disability. Upon termination due to death or disability, the executive or his estate will receive a lump sum payment equal to the executive's base salary, plus the pro rata portion of his bonus for the fiscal year in question, in addition to payment for one year of any other compensation due the executive pursuant to his employment contract. Any unvested portion of such executive's stock options and restricted stock will vest immediately and become exercisable for one year thereafter, and shares of restricted stock previously granted shall become free from all contractual restrictions. Voluntary Termination or Termination for Cause. Upon voluntary termination or termination for "cause" by the Company, the executive will receive any accrued and unpaid base salary through the termination date. Any unvested options will terminate immediately, and any vested options held by the executive will expire ninety (90) days after the termination date. Termination Following a Change in Control. If Mr. Whetsell or Mr. Jorns is terminated without cause or voluntarily terminates with "good reason" within 24 months following a "Change in Control," the executive will receive the following benefits: (i) a lump sum payment equal to the product of (x) the sum of (A) his then annual base salary and (B) the amount of his bonus for the preceding year or if the term of the employment agreement is terminated in its initial year his target bonus for such year multiplied by (y) the greater of (A) three (3) and (B) a fraction the numerator of which is the number of days remaining in the Term of the employment agreement, without further extension and the denominator of which is 365; (ii) all unvested stock options held by the executive will immediately vest and be exercisable for the period of one (1) year thereafter and shares of restricted stock previously granted to the executive will become free from all contractual restrictions; and (iii) the continuance of certain benefit under the employment agreement, including, but not limited to, life and health insurance plans, or their equivalent for a period equal to the greater of two years or the remaining term of the employment agreement, without further extension. In the case of the other executives, they would each be entitled to the same type of benefits provided the termination occurred within 18 months of the Change in Control, except their lump sum payment will only be two (2) times the sum of their then annual base salary plus bonus and the total payments would be limited to the amount which is deductible under Section 280G of the Code; but only if, by reason of such limitation, the net after tax benefit of executive shall exceed the net after tax benefit if such limitation were not made. Change in Control Payments. In the case of Messrs. Whetsell and Jorns, in the event that any accelerated vesting of the executive's rights with respect to stock options, restricted stock or any other payment, benefit or compensation results in the imposition of an excise tax payable by the executive under Section 4999 of the Code, or any successor or other provision with respect to "excess parachute payments" within the meaning of Section 280G(b) of the Internal Revenue Code, the Company will make a cash payment to the executive in the amount of such excise tax (the "Excise Tax Payment") and shall also make a cash payment to the executive in an amount equal to the total of federal, state and local income and excise taxes for which the executive may be liable on account of such Excise Tax Payment. TERMINATION WITHIN 24 MONTHS OF EFFECTIVE TIME Notwithstanding anything to the contrary, if the employment of Messrs. Whetsell or Jorns is terminated for any reason within 24 months after the consummation of the Formation Transactions, any pre-Formation Transaction stock options or other awards will immediately vest and remain exercisable in accordance with their respective terms (with a minimum of one year from the date of termination). If the employment of Messrs. Whetsell and Jorns is terminated other than for cause within 24 months after the consummation of the Formation Transactions, all post-Formation Transactions stock options or other awards made to Messrs. Whetsell and Jorns will continue to vest and remain exercisable following any such termination of employment as if such executive's employment had not terminated. THE MERISTAR HOTELS INCENTIVE PLAN The Board of Directors adopted the MeriStar Hotels & Resorts, Inc. Incentive Plan (the "MeriStar Hotels Incentive Plan") for the purposes of (i) attracting and retaining employees, directors and other service providers with ability and initiative, (ii) providing incentives to those deemed important to the success of the Company and related entities, and (iii) associating the interests of these individuals with the interests of the Company and its stockholders through opportunities for increased stock ownership. 64 ADMINISTRATION The MeriStar Hotels Incentive Plan is administered by the Compensation Committee. The Compensation Committee may delegate its authority to administer the MeriStar Hotels Incentive Plan. The Compensation Committee may not, however, delegate its authority with respect to grants and awards to individuals subject to Section 16 of the Exchange Act. As used in this summary, the term "Administrator" means the Compensation Committee or its delegate, as appropriate. ELIGIBILITY Each employee of the Company or of an affiliate of the Company or any other person whose efforts contribute to the Company's performance, excluding an employee who is a member of the Board of Directors, is eligible to participate in the MeriStar Hotels Incentive Plan ("Participants"). The Administrator may, from time to time, grant stock options, stock awards, incentive awards, or performance shares to Participants. OPTIONS Options granted under the MeriStar Hotels Incentive Plan may be incentive stock options ("ISOs") or nonqualified stock options. An option entitles a Participant to purchase shares of Common Stock from the Company at the option price. The option price may be paid in cash, with a cash equivalent, with shares of Common Stock, or with a combination of cash and Common Stock. The option price will be fixed by the Administrator at the time the option is granted, but the price cannot be less than 100% for existing employees (85% in connection with the hiring of new employees) of the shares' fair market value on the date of grant; provided, however, no more than 10% of the shares under the MeriStar Hotels Incentive Plan will be granted at less than 100% of fair market value. The exercise price of an ISO may not be less than 100% of the shares' fair market value on the date of grant (110% of the fair market value in the case of an ISO granted to a 10% stockholder of the Company). Options may be exercised at such times and subject to such conditions as may be prescribed by the Administrator but the maximum term of an option is ten years in the case of an ISO or five years in the case of an ISO granted to a 10% stockholder. ISOs may only be granted to employees; however, no employee may be granted ISOs (under the MeriStar Hotels Incentive Plan or any other plan of the Company) that are first exercisable in a calendar year for Common Stock having an aggregate fair market value (determined as of the date the option is granted) exceeding $100,000. In addition, no Participant may be granted options in any calendar year for more than 750,000 shares of Common Stock. STOCK AWARDS Participants also may be awarded shares of Common Stock pursuant to a stock award. A Participant's rights in a stock award will be nontransferable or forfeitable or both unless certain conditions prescribed by the Administrator are satisfied. These conditions may include, for example, a requirement that the Participant continue employment with the Company for a specified period or that the Company or the Participant achieve stated, performance-related objectives. The objectives may be stated with reference to the fair market value of the Common Stock or the Company's, a subsidiary's, or an operating unit's return on equity, earnings per share, total earnings, earnings growth, return on capital, funds from operations or return on assets or other acceptable performance criteria. A stock award, no portion of which is immediately vested and nonforfeitable, will be restricted, in whole or in part, for a period of at least three years; provided, however, that the period will be at least one year in the case of a stock award that is subject to objectives based on one or more of the foregoing performance criteria. The maximum number of stock awards that may be granted to an individual in any calendar year cannot exceed 50,000 shares of Common Stock and no more than 30% of the shares available under the plan may be issued in the form of Stock Awards. 65 INCENTIVE AWARDS Incentive awards also may be granted under the MeriStar Hotels Incentive Plan. An incentive award is an opportunity to earn a bonus, payable in cash, upon attainment of stated performance objectives. The objectives may be stated with reference to the fair market value of the Common Stock or on the Company's, a subsidiary's, or an operating unit's return on equity, earnings per share, total earnings, earnings growth, return on capital, funds from operations or return on assets or other acceptable performance criteria. The period in which performance will be measured will be at least one year. No Participant may receive an incentive award payment in any calendar year that exceeds the lesser of (i) 100% of the Participant's base salary (prior to any salary reduction or deferral election) as of the date of grant of the incentive award or (ii) $250,000. PERFORMANCE SHARE AWARDS The MeriStar Hotels Incentive Plan also provides for the award of performance shares. A performance share award entitles the Participant to receive a payment equal to the fair market value of a specified number of shares of Common Stock if certain standards are met. The Administrator will prescribe the requirements that must be satisfied before a performance share award is earned. These conditions may include, for example, a requirement that the Participant continue employment with the Company for a specified period or that the Company or the Participant achieve stated, performance-related objectives. The objectives may be stated with reference to the fair market value of the Common Stock or on the Company's, a subsidiary's, or an operating unit's return on equity, earnings per share, total earnings, earnings growth, return on capital, funds from operations or return on assets or other acceptable performance criteria. To the extent that performance shares are earned, the obligation may be settled in cash, in Common Stock, or by a combination of the two. No Participant may be granted performance shares for more than 12,500 shares of Common Stock in any calendar year. TRANSFERABILITY Awards granted under the MeriStar Hotels Incentive Plan are generally nontransferable. The Compensation Committee may, however, grant awards other than ISOs, which are transferable to Permitted Family Members. SHARE AUTHORIZATION At any given time, the maximum number of shares of Common Stock that may be issued pursuant to awards granted under the MeriStar Hotels Incentive Plan will be the total of (i) twelve (12%) percent of the number of shares of Common Stock that were outstanding as of the end of the immediately preceding calendar year (rounded downward if necessary to eliminate fractional shares), minus (ii) the number of shares subject to awards which were granted under the MeriStar Hotels Incentive Plan through the last day of the immediately preceding calendar year, plus (iii) as of the last day of the immediately preceding calendar year, the number of shares with respect to which previously granted awards have expired. For calendar year 1998, the maximum number of shares of Common Stock that may be issued pursuant to the plan will be twelve (12%) percent of the number of shares of Common Stock outstanding after the Spin-Off. In addition to the foregoing, in no event may the total number of shares of Common Stock covered by outstanding ISOs granted under the MeriStar Hotels Incentive Plan, plus the number of shares of Common Stock issued pursuant to the exercise of ISOs, whenever granted under the MeriStar Hotels Incentive Plan, exceed approximately 1.4 million shares. All awards made under the MeriStar Hotels Incentive Plan will be evidenced by written agreements between the Company and the Participant. The share limitation and the terms of outstanding awards will be adjusted, as the Compensation Committee deems appropriate, in the event of a stock dividend, stock split, combination, reclassification, recapitalization or other similar event. TERMINATION AND AMENDMENT No option or stock award may be granted and no performance shares may be awarded under the MeriStar Hotels Incentive Plan more than ten years after the earlier of the date that the MeriStar Hotels Incentive Plan is adopted by the Board of Directors or the date that it is approved by the Company's stockholders. The Board of 66 Directors may amend or terminate the MeriStar Hotels Incentive Plan at any time, but, except as set forth in the immediately preceding paragraph, an amendment will not become effective without stockholder approval if the amendment materially (i) increases the number of shares of Common Stock that may be issued under the MeriStar Hotels Incentive Plan (other than an adjustment as described above), (ii) changes the eligibility requirements, or (iii) increases the benefits that may be provided under the MeriStar Hotels Incentive Plan. CERTAIN FEDERAL INCOME TAX CONSEQUENCES In general, a Participant will not recognize taxable income upon the grant or exercise of an ISO. However, upon the exercise of an ISO, the excess of the fair market value of the shares received on the date of exercise over the exercise price of the shares will be treated as an adjustment to alternative minimum taxable income. When a Participant disposes of shares acquired by exercise of an ISO, the Participant's gain (the difference between the sale proceeds and the price paid by the Participant for the shares) upon the disposition will be taxed as capital gain provided the Participant does not dispose of the shares within two years after the date of grant nor within one year after the date of exercise, and exercises the option while an employee of the Company or of a subsidiary of the Company or within three months after termination of employment for reasons other than death or disability. If the first condition is not met, the Participant generally will realize ordinary income in the year of the disqualifying disposition. If the second condition is not met, the Participant generally will recognize ordinary income upon exercise of the ISO. In general, a Participant who receives a nonqualified stock option will recognize no income at the time of the grant of the option. Upon exercise of a nonqualified stock option, a Participant will recognize ordinary income in an amount equal to the excess of the fair market value of the shares on the date of exercise over the exercise price of the option. Special timing rules may apply to a Participant who is subject to Section 16(a) of the Exchange Act. A Participant will recognize income on account of the settlement of a performance share award or incentive award. A Participant will recognize income equal to any cash that is paid and with respect to performance share awards, which are settled in shares, will recognize the fair market value of Common Stock (on the date that the shares are first transferable or not subject to a substantial risk of forfeiture) that is received in settlement of the award. The employer (either the Company or its affiliate) will be entitled to claim a federal income tax deduction on account of the exercise of a nonqualified option, the vesting of a restricted share award, payment under an incentive award and the settlement of a performance share award. The amount of the deduction will be equal to the ordinary income recognized by the Participant. The employer will not be entitled to a federal income tax deduction on account of the grant or the exercise of an ISO. The employer may claim a federal income tax deduction on account of certain disqualifying dispositions of Common Stock acquired upon the exercise of an ISO. The transfer of a nonqualified stock option to a Permitted Family Member will have no immediate tax consequences to the Company, the Participant or the Permitted Family Member. Upon the subsequent exercise of the transferred option by the Permitted Family Member, the Participant will realize ordinary income in an amount measured by the difference between the option exercise price and the fair market value of the shares on the date of exercise, and the employer will be entitled to a deduction in the same amount. Any difference between such fair market value and the price at which the Permitted Family Member may subsequently sell such shares will be treated as capital gain or loss to the Permitted Family Member, long-term or short-term depending on the length of time the shares have been held by the Permitted Family Member. There has been no formal pronouncement on the tax consequences of the transfer of other awards. Accordingly, if such transfers are permitted, Participants will be directed to consult their own tax advisers. Section 162(m) of the Code places a limitation of $1,000,000 on the amount of compensation payable to each of the named executive officers that the Company may deduct for federal income tax purposes. The limit 67 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. 68 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. 69 DESCRIPTION OF CAPITAL STOCK The following summary information is qualified in its entirety by the provisions of the Charter and By-laws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. See "Available Information." The authorized capital stock of MeriStar Hotels consists of 100,000,000 shares of Common Stock, par value $0.01 per share, and 10,000,000 shares of preferred stock ("Preferred Stock"), of which 100 shares of Common Stock and no shares of Preferred Stock are outstanding. Upon completion of the Rights Offering, . shares of Common Stock and no shares of Preferred Stock will be outstanding. Prior to the Spin-Off, there has been no public market for the Common Stock and there can be no assurance that any such market will develop. See "Risk Factors--Absence of a Public Market for Common Stock." COMMON STOCK Voting Rights. Except as set forth below under "Certain Antitakeover Provisions," the Charter provides that holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders. Dividends. Each share of Common Stock is entitled to receive dividends if, as and when declared by the Board. Under Delaware law, a corporation may declare and pay dividends out of surplus, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding year. No dividends may be declared out of net profits, however, if the capital of the corporation has been diminished by depreciation in the value of its property, losses or otherwise to an amount less than the aggregate amount of capital represented by any issued and outstanding stock having a preference on the distribution of assets. See "Dividend Policy." Other Rights. Stockholders of MeriStar Hotels have no preemptive or other rights to subscribe for additional shares. Subject to any rights of the holders of any Preferred Stock, all holders of Common Stock are entitled to share equally on a share-for-share basis in any assets available for distribution to stockholders on liquidation, dissolution or winding up of MeriStar Hotels. No shares of Common Stock are subject to redemption or a sinking fund. All outstanding shares of Common Stock are, and the Common Stock to be outstanding upon completion of the Rights Offering will be, fully paid and nonassessable. PREFERRED STOCK The Board of Directors is authorized to issue, without further authorization from stockholders, up to 10,000,000 shares of Preferred Stock in one or more series and to determine, at the time of creating each series, the distinctive designation of, and the number of shares in, the series, its dividend rate, the number of votes, if any, for each share of such series, the price and terms on which such shares may be redeemed, the terms of any applicable sinking fund, the amount payable upon liquidation, dissolution or winding up, the conversion rights, if any, and such other rights, preferences and priorities of such series as the Board of Directors may be permitted to fix under the laws of the State of Delaware as in effect at the time such series is created. The issuance of Preferred Stock could adversely affect the voting power of the holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of MeriStar Hotels. 70 CERTAIN ANTITAKEOVER PROVISIONS THE CHARTER AND BY-LAWS The Charter and By-laws and applicable sections of the DGCL contain several provisions that may make the acquisition of control of the Company more difficult without the prior approval of the Board of Directors. Certain provisions of the Charter and the By-laws, among other things: (i) classify the Board of Directors into three classes, each of which serves for staggered three-year terms; (ii) provide that a director of Company may be removed by the stockholders only for cause; (iii) provide that only the Chairman of the Board, Vice Chairman, President or the Board of Directors may call special meetings of the stockholders; (iv) provide that the stockholders may take action only at a meeting of Company stockholders, not by written consent; (v) provide that stockholders must comply with certain advance notice procedures in order to nominate candidates for election to the Board of Directors or to place stockholders' proposals on the agenda for consideration at meetings of the stockholders; (vi) provide that the stockholders may amend or repeal any of the foregoing provisions of the Charter only by a vote of 66 2/3% of the stock entitled to vote generally in the election of directors and (vii) provide that the chair of any meeting of stockholders shall have the power to adjourn such meeting. In general, Section 203 of the DGCL prohibits publicly held Delaware corporations from engaging in a "business combination" with an "interested stockholder" for a period of three years following the time of the transaction in which the person or entity became an interested stockholder, unless (i) prior to such time, either the business combination or the transaction which resulted in the stockholder's becoming an interested stockholder is approved by the Board of Directors, (ii) upon consummation of the transaction which resulted in the stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the outstanding voting stock of the corporation (excluding for this purpose certain shares owned by persons who are directors and also officers of the corporation and by certain employee benefit plans) or (iii) on or after such date the business combination is approved by the Board of Directors and by the affirmative vote (and not by written consent) of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. For the purposes of Section 203, a "business combination" is broadly defined to include mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or, in certain cases, within the immediately preceding three years did own) 15% or more of the corporation's voting stock. The Charter authorizes the Board of Directors to issue up to 10 million shares of Preferred Stock in series, and to establish the rights and preferences (including the convertibility of such shares of Preferred Stock into shares of Common Stock) of any series of Preferred Stock so issued. The issuance of Preferred Stock could have the effect of delaying or preventing a change in control of Company, even if such a change in control were in the best interests of some, or a majority, of Company's stockholders. See "Description of Capital Stock". RESTRICTIONS ON OWNERSHIP The Charter also provides, with certain exceptions, that no person may own, either directly or under the attribution rules set forth in Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code, more than 9.9% of the shares of any class of the Company's stock (the "Ownership Limit"). The Charter provides that a transfer of Common Stock that would otherwise result in ownership of Common Stock in excess of the Ownership Limit will be void ab initio as to the Common Stock that would otherwise be owned in violation of the Ownership Limit and the intended transferee will acquire no rights or economic interest in such Common Stock. In addition, the Charter provides that Common Stock that would otherwise be owned, whether as a result of a transfer or otherwise, in violation of the Ownership Limit will automatically be designated as Excess Shares until the intended transferee does not own Common Stock in excess of the Ownership Limit. Such Excess Shares shall be transferred, by operation of law, to a special trust for the benefit of a charitable organization designated by the Board of Directors of the Company. The trustee of the special trust shall have the authority to exercise any voting rights associated with Excess Shares during the period that they are held as Excess Shares. Except as described below, any distributions on 71 Excess Shares shall be paid to the trustee of the special trust for the benefit of the charitable organization designated by the Board of Directors of the Company. Excess Shares may be transferred only to a person designated by the Board of Directors whose ownership of the Excess Shares will not result in a violation of the Ownership Limit, in which case such Excess Shares cease to be held as Excess Shares. In the event of a transfer of Excess Shares, the holder of the shares of Common Stock that were automatically exchanged for Excess Shares shall be entitled to receive, from the proceeds of the transfer of the Excess Shares, an amount equal to the lesser of (a) the proceeds from the transfer of the Excess Shares and (b) the amount paid by such holder if the automatic designation as Excess Shares resulted from a transfer for value or, if the automatic designation did not result from a transfer for value, the fair market value of the shares of Common Stock on the date of their designation as Excess Shares. In the event of a liquidation, dissolution or winding up of the Company while shares are held as Excess Shares, the holder of the shares of Common Stock that were automatically designated as Excess Shares will be entitled to receive, from the proceeds of such liquidation, dissolution or winding-up, an amount equal to the lesser of (a) the proceeds from the liquidation, dissolution or winding-up which would have been applicable to such shares if they had remained shares of Common Stock and (b) the amount paid by such holder if the automatic designation as Excess Shares resulted from a transfer for value or, if the automatic designation did not result from a transfer for value, the fair market value of the shares of Common Stock on the date of their designation as Excess Shares. Any excess proceeds from a transfer of the Excess Shares or on liquidation, dissolution or winding-up shall be paid to the trustee of the special trust for the benefit of the designated charitable organization. The Company shall also have the right to purchase any Excess Shares at a price equal to the lesser of (a) the fair market value of such shares on the date that the Company or its designee exercises such right to purchase and (b) the price per share in the transaction that resulted in designation of such Excess Shares or, if the Excess Share designation resulted from an event other than a transfer for value, the fair market value of the Common Stock designated as Excess Shares at the time of such designation. EXPERTS The balance sheet of MeriStar Hotels & Resorts, Inc. as of March 31, 1998 and the combined financial statements of the management and leasing business of CapStar Hotel Company and subsidiaries ("OpCo") as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997, included in this Prospectus, have been included herein in reliance on the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements of AGH Leasing, L.P. as of December 31, 1997 and 1996 and for the year ended December 31, 1997 and for the period from July 31, 1996 through December 31, 1996, the financial statements of American General Hospitality, Inc. as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and the balance sheets of Winston Hospitality, Inc. as of October 31, 1997 and December 31, 1996 and the statements of income, shareholders' equity, and cash flows for the ten months ended October 31, 1997 and each of the two years in the period ended December 31, 1996, included in this registration statement have been audited by Coopers & Lybrand L.L.P., independent accounts, as set forth in their reports thereon. Each of the above referenced financial statements have been included by reference herein in reliance upon the authority of said firm as expert in accounting and auditing. LEGAL MATTERS Paul, Weiss, Rifkind, Wharton & Garrison will pass on the validity of the Rights and the Common Stock to be issued in connection with the Rights Offering and certain federal income tax consequences of the Rights Offering. 72 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..................... 28,626,625 6,659,959 14,147,363 4,173,607 Other revenue............ 10,121,833 2,205,822 4,415,258 1,612,944 Minority interest income. 1,802,558 -- -- -- ------------ ----------- ----------- ----------- Total revenue.......... 164,516,665 35,590,981 76,786,777 25,252,519 ------------ ----------- ----------- ----------- Expenses Property operating costs and expenses............ 33,894,184 7,235,297 13,956,762 5,340,286 Food and beverage costs and expenses............ 22,768,224 5,061,921 9,983,727 3,522,766 General and administra- tive.................... 15,871,676 3,270,481 6,315,376 2,475,288 Advertising and promo- tion.................... 12,792,700 2,305,776 5,316,895 1,820,589 Repairs and maintenance.. 6,712,883 1,450,987 2,906,546 1,032,093 Utilities................ 7,258,674 1,628,490 2,872,937 1,147,891 Management fees.......... 1,691,639 947,632 1,759,353 82,854 Franchise costs.......... 4,754,285 950,307 2,300,237 676,148 Depreciation............. 63,000 26,250 15,750 15,750 Amortization............. 40,997 6,753 10,348 10,052 Interest expense......... 26,808 13,314 5,858 7,192 Other expense............ 158,113 27,093 91,628 20,746 Participating Lease ex- penses.................. 59,934,337 13,387,719 28,165,224 9,508,365 ------------ ----------- ----------- ----------- Total expenses......... 165,967,520 36,312,020 73,700,641 25,660,020 ------------ ----------- ----------- ----------- Net income (loss)...... $ (1,450,855) $ (721,039) $ 3,086,136 $ (407,501) ============ =========== =========== ===========
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. Reclassifications--Certain prior period amounts have been reclassified to conform with the current period presentation. Interim Financial Information--The unaudited interim financial statements as of March 31, 1998 and for the three months ended March 31, 1998 and 1997 have been prepared pursuant to the rules and regulations of the SEC. The accompanying interim financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. F-38 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..................... 36,301,599 35,545,269 Other revenue................................. 12,378,349 12,126,659 Minority interest income...................... 2,874,156 1,284,177 ------------ ------------ Total revenue............................... 203,326,094 185,767,947 ------------ ------------ Hotel operating expenses...................... 128,752,753 120,473,305 Depreciation and amortization................. 103,997 69,753 Interest expense.............................. 264,064 31,689 Other expenses................................ 331,229 359,009 Participating Lease expense................... 74,192,463 65,776,641 ------------ ------------ Net loss...................................... $ (318,412) $ (942,450) ============ ============
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).......... 28,626,625 7,674,974 25,145,757 207,374 -- 61,654,730 Other revenue (D)..... 10,121,833 2,256,516 8,380,871 82,507 -- 20,841,727 Minority interest 1,802,558 (139,150) -- -- -- 1,663,408 income (E)........... ------------ ----------- ------------ ---------- ----------- ------------ Total revenue....... $164,516,665 $37,598,681 $132,888,523 $1,669,437 -- $336,673,306 ------------ ----------- ------------ ---------- ----------- ------------ Expenses Property operating costs and expenses (F).................. 33,894,184 6,754,081 26,658,014 456,500 -- 67,762,779 Food and beverage costs and expenses (F).................. 22,768,224 5,297,676 20,218,787 121,170 -- 48,405,857 General and administrative (F)... 15,871,676 2,978,176 11,792,008 241,768 -- 30,883,628 Advertising and promotion (F)........ 12,792,700 2,489,673 8,638,295 68,533 -- 23,989,201 Repairs and maintenance (F)...... 6,712,883 1,756,796 6,399,372 95,048 -- 14,964,099 Utilities (F)......... 7,258,674 1,532,149 6,198,780 95,716 -- 15,085,319 Management fees (G)... 1,691,639 1,158,265 2,694,902 42,106 1,767,977 7,354,889 Franchise costs (H)... 4,754,285 1,041,672 3,945,161 50,095 -- 9,791,213 Depreciation.......... 63,000 -- -- -- -- 63,000 Amortization (I)...... 40,997 -- -- -- -- 40,997 Interest expense...... 26,808 237,256 -- -- -- 264,064 Other expense......... 158,113 173,116 79,997 -- -- 411,226 Participating Lease 59,934,337 14,258,118 45,298,537 637,336 -- 120,128,328 expenses (J)......... ------------ ----------- ------------ ---------- ----------- ------------ Total expenses...... 165,967,520 37,676,978 131,923,853 1,808,272 1,767,977 339,144,600 ------------ ----------- ------------ ---------- ----------- ------------ Net income (loss)... $ (1,450,855) $ (78,297) $ 964,670 $ (138,835) $(1,767,977) $ (2,471,294) ============ =========== ============ ========== =========== ============
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)............. 14,147,363 2,493,306 -- 16,640,669 Other revenue (D)..... 4,415,258 1,028,980 3,373 5,447,611 ----------- ----------- --------- ----------- Total revenue..... 76,786,777 14,114,039 3,373 90,904,189 ----------- ----------- --------- ----------- Expenses Property operating cost and expenses (E).................. 13,956,762 3,068,333 7,492 17,032,587 Food and beverage costs and expenses (E).................. 9,983,727 2,251,201 (411) 12,234,517 General and adminis- trative (E).......... 6,315,376 1,486,918 46,447 7,848,741 Advertising and promo- tion (E)............. 5,316,895 1,030,001 7,289 6,354,185 Repairs and mainte- nance (E)............ 2,906,546 735,838 1,135 3,643,519 Utilities (E)......... 2,872,937 694,370 9,151 3,576,458 Management fees (F)... 1,759,353 311,020 -- 2,070,373 Franchise costs (G)... 2,300,237 409,716 -- 2,709,953 Depreciation.......... 15,750 -- -- 15,750 Amortization (H)...... 10,348 -- -- 10,348 Interest expense...... 5,858 -- -- 5,858 Other expense......... 91,628 19,500 -- 111,128 Participating Lease expense (I).......... 28,165,224 5,358,517 238,997 33,762,738 ----------- ----------- --------- ----------- Total expenses.... 73,700,641 15,365,414 310,100 89,376,155 ----------- ----------- --------- ----------- Net income (loss). $ 3,086,136 $(1,251,375) $(306,727) $ 1,528,034 =========== =========== ========= ===========
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) 2.4 -- Amendment No. 1 to the Agreement and Plan of Merger, dated as of June 5, 1998, by and among American General Hospitality Corporation, American General Hospitality Operating Partnership, L.P., CapStar Hotel Company, CapStar Management Company, L.P. and CapStar Management Company II, L.P. (Incorporated by reference to Exhibit 2.2 to American General Hospitality Corporation's Amendment No. 2 to Form S-4 dated June 8, 1998) 2.5** -- Form of Dealer-Manager Agreement Amended and Restated Certificate of Incorporation of the 3.1* -- Company 3.2* -- By-laws of the Company 4.1** -- Specimen Common Stock certificate 4.2* -- Specimen Subscription Certificate 5.1*** -- Opinion as to Validity of Common Stock and Rights 8.1*** -- Opinion as to Certain Tax Matters Form of Employment Agreement between the Company and Paul W. 10.1*+ -- Whetsell Form of Employment Agreement between the Company and Steven D. 10.2*+ -- Jorns Form of Employment Agreement between the Company and David E. 10.3**+ -- McCaslin Form of Employment Agreement between the Company and James A. 10.4**+ -- Calder Form of Employment Agreement between the Company and John E. 10.5**+ -- Plunket 10.6*+ -- Form of Equity Incentive Plan of the Company 10.7*+ -- Form of Non-Employee Directors' Incentive Plan of the Company 10.8 -- Form of Intercompany Agreement among MeriStar Hotels & Resorts, Inc., MeriStar H&R Operating Company, L.P., MeriStar Hospitality Corporation and MeriStar Hospitality Operating Partnership, L.P. (Incorporated by reference to Exhibit 99.4 to CapStar Hotel Company's Report on Form 8-K dated March 17, 1998, No. 1-11903) 23.1* -- Consent of KPMG Peat Marwick LLP 23.2.1* -- Consent of Coopers & Lybrand L.L.P. (Dallas Office) 23.2.2* -- Consent of Coopers & Lybrand L.L.P. (Raleigh Office) 23.3*** -- Consent of Daniel L. Doctoroff 23.4*** -- Consent of Kent Hance 23.5*** -- Consent of Steven D. Jorns 23.6*** -- Consent of Joseph McCarthy 23.7*** -- Consent of James McCurry 23.8*** -- Consent of James Worms Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included 23.11*** -- in Exhibit 5) 27*** -- Financial Data Schedule 99.1*** -- Form of Subscription Agency Agreement Instructions as to use of Subscription Certificates and 99.2*** -- International Holder Subscription Form 99.3*** -- International Holder Subscription Form
- -------- * 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. 3 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF WASHINGTON, DISTRICT OF COLUMBIA, ON THE 19TH DAY OF JUNE, 1998. MeriStar Hotels & Resorts, Inc. /s/ Paul W. Whetsell By:__________________________________ NAME: PAUL W. WHETSELL TITLE: CHAIRMAN AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE /s/ Paul W. Whetsell Chief Executive Officer and Chairman - ------------------------------------- of the Board (Principal Executive PAUL W. WHETSELL Officer) /s/ James A. Calder Chief Financial Officer (Principal - ------------------------------------- Financial and Accounting Officer) JAMES A. CALDER President and Director /s/ David E. McCaslin - ------------------------------------- DAVID E. MCCASLIN DATED: JUNE 19, 1998 II-4 EX-3.1 2 AMENDED AND RESTATED CERTIFICATE OF INCORP. Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION of MERISTAR HOTELS & RESORTS, INC. (Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware) The undersigned Chief Executive Officer of MeriStar Hotels & Resorts, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: FIRST. The Corporation's present name is MeriStar Hotels & Resorts, Inc.; SECOND. The Corporation was originally incorporated under the name CMC Operating Company, and its original Certificate of Incorporation was duly filed with the Secretary of State of the State of Delaware on March 13, 1998. The Certificate of Amendment to change the name of the Corporation to MeriStar Hotels & Resorts, Inc. was duly filed with the Secretary of State of the State of Delaware on April 9, 1998; THIRD. This Restated Certificate of Incorporation restates, integrates and further amends the Certificate of Incorporation, as heretofore amended and now in effect; FOURTH. This Restated Certificate of Incorporation of the Corporation has been duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware; and 2 FIFTH. The text of the Corporation's Certificate of Incorporation is hereby amended and restated to read in full as follows: ARTICLE I NAME The name of the corporation is MeriStar Hotels & Resorts, Inc. (the "Corporation"). ARTICLE II ADDRESS; REGISTERED AGENT AND ADDRESS The address of the Corporation's registered office is 1209 Orange Street, City of Wilmington, County of New Castle, State of Delaware; and its registered agent at such address is Corporation Trust Corporation. ARTICLE III PURPOSE The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. ARTICLE IV CAPITALIZATION A. Number of Shares. The total number of shares of stock that the ---------------- Corporation shall have authority to issue is: one hundred ten million (110,000,000), which shall be one hundred million (100,000,000) shares of common stock, par value of one cent ($0.01) per share (the "Common Stock"), and ten million (10,000,000) shares of preferred stock, par value of one cent ($0.01) per share (the "Preferred Stock"). B. Designation of Classes; Relative Rights, Etc. The designation, --------------------------------------------- relative rights, preferences and limitations of the shares of each class are as follows: 1. Preferred Stock. The Board of Directors (the "Board") is --------------- authorized, subject to any limitations prescribed by law, to provide for the issuance of shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable 3 law of the State of Delaware (such certificate being hereinafter referred to as a "Preferred Stock Designation"), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of any Preferred Stock Designation. 2. Common Stock. Subject to the provisions of any applicable ------------ law or of the by-laws of the Corporation (the "By-laws"), as from time to time amended, with respect to the closing of the transfer books or the fixing of a record date for the determination of stockholders entitled to vote and except as otherwise provided by law or by the resolution or resolutions providing for the issue of any series of shares of Preferred Stock, the holders of outstanding shares of Common Stock shall exclusively possess voting power for the election of directors and for all other purposes, each holder of record of shares of Common Stock being entitled to one vote for each share of Common Stock standing in his or her name on the books of the Corporation. 3. Consideration. Subject to the provisions of this ------------- Certificate of Incorporation and except as otherwise provided by law, the stock of the Corporation, regardless of class, may be issued for such consideration and for such corporate purposes as the Board may from time to time determine. ARTICLE V BOARD OF DIRECTORS A. General Powers. This Article is inserted for the management of -------------- the business and for the conduct of the affairs of the Corporation, and it is expressly provided that it is intended to be in furtherance and not in limitation or exclusion of the powers conferred by the statutes of the State of Delaware. The business and affairs of the Corporation shall be managed by the board of directors of the Corporation (the "Board"). B. Number. The Board shall consist of not less than three (3) and ------ not more than fifteen (15) members. The exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by resolution adopted by a majority of the entire Board that would be in office, if no vacancy existed, whether or not present at a meeting. 4 C. Election. Members of the Board need not be elected by written -------- ballot. The directors shall be elected at the annual meeting of stockholders by such stockholders as have the right to vote on such election. D. Classes. The Board shall be divided into three Classes, ------- designated "Class I," "Class II" and "Class III," respectively. E. Term. The initial term of office of Class I shall expire at the ---- first annual meeting of stockholders of the Corporation following the end of the Corporation's fiscal year ending December 31, 1998. The initial term of office of Class II shall expire at the first annual meeting of stockholders of the Corporation following the end of the Corporation's fiscal year ending December 31, 1999, and the initial term of office of Class III shall expire at the first annual meeting of stockholders of the Corporation following the end of the Corporation's fiscal year ending December 31, 2000. Commencing with the annual meeting of stockholders of the Corporation at which the initial term of office of the Class I directors expires, each director elected to succeed those directors whose terms have thereupon expired shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which such director was elected. F. Vacancies. In the event of any increase or decrease in the --------- authorized number of directors, (a) each director then serving as such shall nonetheless continue as a director of the class of which he is a member until the expiration of his current term, or his earlier death, retirement, resignation, or removal, and (b) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board among the three classes of directors so as to maintain such classes as nearly equal in number as reasonably possible. If such equality is not possible, the increase or decrease shall be apportioned among the classes in such a way that the difference in the number of directors in any two classes shall not exceed one. G. Filling Vacancies and Newly-Created Directors. Subject to the --------------------------------------------- rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board resulting from death, resignation, retirement, disqualification, removal from office or other cause shall, unless otherwise provided by law or by resolution of the Board, be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been chosen expires. No decrease in the authorized number of directors shall shorten the term of any incumbent director. H. Removal. A director may be removed, with cause, by the ------- affirmative vote of not less than two-thirds of the votes entitled to be cast by all of the then outstanding shares of capital stock of the Corporation in an election of directors at 5 an annual meeting or at a special meeting of the stockholders called for the purpose of removing such director. ARTICLE VI DIRECTOR LIABILITY A. Limitation. No director of the Corporation shall be personally ---------- liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not eliminate or limit the liability of a director (a) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under section 174 of the Delaware General Corporation Law or (d) for any transaction from which the director derived any improper personal benefits. Any repeal or modification of the foregoing provision shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. B. Indemnification and Advance of Expenses. To the extent not --------------------------------------- prohibited by law, the Corporation shall indemnify any person who is or was made, or threatened to be made, a party to any threatened, pending or completed action, suit or proceeding (a "Proceeding"), whether civil, criminal, administrative or investigative, including, without limitation, an action by or in the right of the Corporation to procure a judgment in its favor, by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a director or officer of the Corporation, or, at the request of the Corporation, is or was serving as a director or officer of any other corporation or in a capacity with comparable authority or responsibilities for any partnership, joint venture, trust, employee benefit plan or other enterprise (an "Other Entity"), against judgments, fines, penalties, excise taxes, amounts paid in settlement and costs, charges and expenses (including attorneys' fees, disbursements and other charges). Persons who are not directors or officers of the Corporation (or otherwise entitled to indemnification pursuant to the preceding sentence) may be similarly indemnified in respect of service to the Corporation or to an Other Entity at the request of the Corporation to the extent the Corporation determines to provide such indemnification. The Corporation shall reimburse or advance to any director or officer or other person entitled to indemnification hereunder the funds necessary for payment of expenses, including attorneys' fees and disbursements, incurred in connection with any Proceeding, in advance of the final disposition of such Proceeding; provided, however, that, if required by the Delawares General -------- ------- Corporation Law, such expenses incurred by or on behalf of any director or officer or other person may be paid in advance of the final disposition of a Proceeding only upon receipt by the Corporation of an under- 6 taking, by or on behalf of such director or officer (or other person indemnified hereunder), to repay any such amount so advanced if it shall ultimately be determined by final judicial decision from which there is no further right of appeal that such director, officer or other person is not entitled to be indemnified for such expenses. C. Rights Not Exclusive. The rights to indemnification and reim -------------------- bursement or advancement of expenses provided by, or granted pursuant to, this Section C shall not be deemed exclusive of any other rights to which a person seeking indemnification or reimbursement or advancement of expenses may have or hereafter be entitled under any statute, this Certificate of Incorporation, the By-laws, any agreement, any vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Section C shall continue as to a person who has ceased to be a director or officer (or other person indemnified hereunder) and shall inure to the benefit of the executors, administrators, legatees and distributees of such person. D. Insurance. The Corporation shall have power to purchase and --------- maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of an Other Entity, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article, the By-laws or under Section 145 of the Delaware General Corporation Law or any other provision of law. E. Binding Effect. The rights to indemnification and to the -------------- advancement of expenses conferred in this Article shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. No repeal or modification of this Article shall affect any rights or obligations with respect to any state of facts then or theretofore existing or thereafter arising or any proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. F. Procedural Rights. The rights to indemnification and reim ----------------- bursement or advancement of expenses provided by, or granted pursuant to, this Article shall be enforceable by any person entitled to such indemnification or reimbursement or advancement of expenses in any court of competent jurisdiction. The burden of proving that such indemnification or reimbursement or advancement of expenses is not appropriate shall be on the Corporation. Neither the failure of the Corporation 7 (including its directors, its independent legal counsel and its stockholders) to have made a determination prior to the commencement of such action that such indemnification or reimbursement or advancement of expenses is proper in the circumstances nor an actual determination by the Corporation (including its directors, its independent legal counsel and its stockholders) that such person is not entitled to such indemnification or reimbursement or advancement of expenses shall constitute a defense to the action or create a presumption that such person is not so entitled. Such a person shall also be indemnified for any expenses incurred in connection with successfully establishing his or her right to such indemnification or reimbursement or advancement of expenses, in whole or in part, in any such proceeding. G. Service Deemed at Corporation's Request. Any director or officer --------------------------------------- of the Corporation serving in any capacity of (a) another corporation of which a majority of the shares entitled to vote in the election of its directors is held, directly or indirectly, by the Corporation or (b) any employee benefit plan of the Corporation or any corporation referred to in clause (a) shall be deemed to be doing so at the request of the Corporation. ARTICLE VII STOCKHOLDER MEETINGS A. Notice and Place of Meeting. Meetings of stockholders of the --------------------------- Corporation may be held at such place, either within or outside the State of Delaware as may be designated by or in the manner provided in the By-laws. B. Stockholder Action. Any action required or permitted to be taken ------------------ by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. C. Special Meetings. Special meetings of stockholders of the ---------------- Corporation may be called at any time only by the Chairman of the Board, the Vice Chairman of the Board, the Secretary of the Board, by the President or by a majority of the directors, and any power of stockholders to call a special meeting is specifically denied. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. ARTICLE VIII STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS ETC. Advance notice of stockholder nominations for election of directors and other business to be brought by stockholders before a meeting of stockholders, shall be given in the manner provided in the By-laws. 8 ARTICLE IX AMENDMENTS A. Certificate of Incorporation. Notwithstanding any other ---------------------------- provisions of law, this Certificate of Incorporation or the By-laws, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of not less than two-thirds of all votes entitled to be cast by all of the then outstanding shares of capital stock of the Corporation in an election of directors shall be required to amend, repeal, or adopt any amendment to Sections D, E, F, G, and H of Article V, this Article IX and Article X of the Certificate of Incorporation. B. By-Laws. The By-laws may be altered or repealed and new By-laws ------- may be adopted (i) at any annual or special meeting of stockholders, by the affirmative vote of not less than a majority of all votes entitled to be cast by all of the then outstanding shares of capital stock of the Corporation in the election of directors, provided, however, that any proposed alteration or repeal of, or the adoption of any by-law inconsistent with, Sections 2.3, 2.13 and 2.14 of Article 2 of the By-laws, 3.1, 3.2, 3.3, 3.4 and 3.5 of Article 3 of the By- laws, by stockholders shall require the affirmative vote of not less than two- thirds of all votes entitled to be cast by all of the then outstanding shares of capital stock of the Corporation in an election of directors, or (ii) by the affirmative vote of a majority of the Board. ARTICLE X OWNERSHIP AND TRANSFER RESTRICTIONS A. Definitions. For the purposes of this Article the following ----------- terms shall have the following meanings: "Beneficial Ownership" shall mean ownership of Shares by a Person ---------------------- either directly or under the constructive ownership rules of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The terms "Beneficial Owner," "Beneficially Owns," "Beneficially Own" and "Beneficially Owned" shall have the correlative meanings. "Charitable Beneficiary" shall mean an organization or ------------------------ organizations described in Sections 170(b)(1)(A) and 170(c) of the Code and identified by the Board as the beneficiary or beneficiaries of the Excess Share Trust. "Code" shall mean the Internal Revenue Code of 1986, as ---- amended from time to time. "Excess Shares" shall mean Shares resulting from an event described in Section C of this Article. "Excess Share Trust" shall mean the trust created pursuant to ------------------ 9 Section C and Section K of this Article. "Excess Share Trustee" shall mean a person, who shall be ---------------------- unaffiliated with the Corporation, any Purported Beneficial Transferee and any Purported Record Transferee, identified by the Board as the trustee of the Excess Share Trust. "Exchange" shall mean the New York Stock Exchange. -------- "Fair Market Value" shall mean the last reported sales price on ------------------- the Exchange for Shares of the relevant class or series on the trading day immediately preceding the relevant date, or if not then traded on the Exchange, the last reported sales price for such Shares on the trading day immediately preceding the relevant date as reported on any exchange or quotation system over or through which such Shares may be traded, or if not then traded over or through any exchange or quotation system, then the market price of such Shares on the relevant date as determined in good faith by the Board. "Ownership Limit" shall initially mean 9.9%, in number of Shares ----------------- or value, of the outstanding Shares of any class or series of the Corporation. The number and value of the outstanding Shares of any class or series of the Corporation shall be determined by the Board in good faith, which determination shall be conclusive for all purposes hereof. "Person" shall mean an individual, corporation, partnership, -------- estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, joint stock company or other entity and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. "Purported Beneficial Transferee" shall mean, with respect to ------------------------------- any Excess Shares, the Person who would have been the beneficial holder of the Shares, if the Shares had not been transferred to the Trust. "Purported Record Transferee" shall mean, with respect to any --------------------------- purported Transfer which results in Excess Shares, the Person who would have been the record holder of the Shares, if the Shares had not been transferred by the Trust. "REIT" shall mean a real estate investment trust under Section ---- 856 of the Code. "REIT Provisions of the Code" shall mean Sections 856 through 860 of --------------------------- the Code and any successor or other provisions of the Code relating to real 10 estate investment trusts (including provisions as to the attribution of ownership of beneficial interests therein) and the regulations promulgated thereunder. "Restriction Termination Date" shall mean such date as may be ---------------------------- determined by the Board as the date on which the ownership and transfer restrictions set forth in this Article should cease to apply; provided that such -------- date may not be prior to the date on which MeriStar Hospitality Corporation makes a public announcement that neither MeriStar Hospitality Corporation nor any affiliate of MeriStar Hospitality Corporation that, directly or indirectly, leases property to the Corporation, intends to qualify as a REIT. "Shares" shall mean the shares of the Corporation as may be ------ authorized and issued from time to time pursuant to Article IV. "Transfer" shall mean any sale, transfer, gift, assignment, -------- devise or other disposition of Shares (including (a) the granting of any option or entering into any agreement for the sale, transfer or other disposition of Shares, (b) the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Shares and (c) any transfer or other disposition of any interest in Shares as a result of a change in the marital status of the holder thereof), whether voluntary or involuntary, whether of record, constructively or beneficially and whether by operation of law or otherwise. The terms "Transfers" and "Transferred" shall have the correlative meanings. B. Ownership Limitation. -------------------- 1. Subject to Clause 3 of this Section B, until the Restriction Termination Date, no Person, or Persons acting as a group, shall Beneficially Own Shares of any class or series in excess of the Ownership Limit; 2. Subject to Clause 3 of this Section B, until the Restriction Termination Date, any Transfer that, if effective, would result in any Person Beneficially Owning Shares of any class in excess of the Ownership Limit shall be void ab initio as to the Transfer of such Shares which would be otherwise Beneficially Owned by such Person in excess of the Ownership Limit; and the intended transferee shall acquire no rights in such Shares; and 3. Nothing contained in this Article shall preclude the settlement of any transaction entered into through the facilities of the Exchange. The fact that the settlement of any transaction is permitted shall not negate the effect of any other provision of this Article and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Article. C. Excess Shares. ------------- 11 1. If, notwithstanding the other provisions contained in this Article, at any time prior to the Restriction Termination Date, there is a purported Transfer such that any Person would Beneficially Own Shares of any class in excess of the applicable Ownership Limit, then Shares beneficially owned by such Person in excess of the Ownership Limit shall be automatically designated as Excess Shares (without reclassification) until such Person does not own Shares in excess of the applicable Ownership Limit. The designation of such Shares as Excess Shares shall be effective as of the close of business on the business day prior to the date of the purported Transfer. If, after designation of such Shares owned directly by a Person as Excess Shares, such Person still owns Shares in excess of the applicable Ownership Limit, Shares Beneficially Owned by such Person constructively in excess of the Ownership Limit shall be designated as Excess Shares until such Person does not own Shares in excess of the applicable Ownership Limit. Where such Person owns Shares constructively through one or more Persons and the Shares held by such other Persons must be designated as Excess Shares, the designation of Shares held by such other Persons as Excess Shares shall be pro rata. 2. If, at any time prior to the Restriction Termination Date, an event other than a purported Transfer (an "Event") occurs which would cause any Person to Beneficially Own Shares of any class in excess of the Ownership Limit, then, Shares Beneficially Owned by such Person in excess of the Ownership Limit shall be automatically designated as Excess Shares to the extent necessary to eliminate such excess ownership. The designation of Shares as Excess Shares shall be effective as of the close of business on the business day prior to the date of the Event. In determining which Shares are designated as Excess Shares, Shares beneficially Owned by any Person who caused the Event to occur shall be designated as Excess Shares before any Shares not so held are designated. Where several similarly situated Persons exist, the designation of Shares as Excess Shares shall be pro rata. If Shares held by any Person are required to be designated as Excess Shares pursuant to this Clause 2 of this Section C of this Article, Shares beneficially held by such Person shall first be designated before Shares Beneficially Owned constructively and designated. Where such Person owns Shares constructively through one or more Persons and the Shares held by such other Persons must be designated as Excess Shares, the designation of Shares held by such other Persons as Excess Shares shall be pro rata. D. Prevention of Transfer. If the Board or its designee shall at ---------------------- any time determine in good faith that a Transfer has taken place in violation of Section B of this Article or that a Person intends to acquire or has attempted to acquire Beneficial Ownership (determined without reference to any rules of attribution) of any Shares in violation of Section B of this Article, the Board or its designee shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer, including, but not limited to, refusing to give effect to such Transfer on the books of the Corporation or instituting proceedings to enjoin such Transfer; provided, however, that any Transfers or -------- ------- attempted Transfers in violation of Section B of this Article shall 12 automatically result in the designation and treatment described in Section C of this Article, irrespective of any action (or non-action) by the Board. E. Notice to Corporation. Any Person who acquires or attempts to --------------------- acquire Shares in violation of Section B of this Article, or any Person who is a transferee such that Excess Shares result under Section C of this Article, shall immediately give written notice or, in the event of a proposed or attempted Transfer, give at least 15 days prior written notice to the Corporation of such event. Such person shall also provide to the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such Transfer or attempted Transfer on the status of MeriStar Hospitality Corporation or any affiliate of MeriStar Hospitality Corporation as a REIT and shall execute and deliver such instruments and provide such further cooperation and assistance as the Board deems advisable to preserve the status of the MeriStar Hospitality Corporation or any affiliate of MeriStar Hospitality Corporation as a REIT. F. Information for Corporation. Until the Restriction Termination --------------------------- Date, each Person who is a Beneficial Owner of Shares and each Person (including the stockholder of record) who is holding Shares for a Beneficial Owner shall provide to the Corporation in writing such information with respect to direct, indirect and constructive ownership of Shares as the Board deems reasonably necessary to comply with the provisions of the Code applicable to the status of MeriStar Hospitality Corporation or any of its affiliates as a REIT, to determine the status of MeriStar Hospitality Corporation or any of its affiliates as a REIT, to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance. G. Other Action by Board. Subject to Section B of this Article, --------------------- nothing contained in this Article shall limit the authority of the Board to take such other action as it deems necessary or advisable to protect the status of MeriStar Hospitality Corporation or any affiliate of MeriStar Hospitality Corporation as a REIT. H. Ambiguities. In the case of an ambiguity in the application of ----------- any of the provisions of this Article, including any definition contained in Section A, the Board shall have the power to determine the application of the provisions of this Article with respect to any situation based on the facts known to it. In the event this Article requires or permits an action by the Board and the Certificate of Incorporation fails to provide specific guidance with respect to such action, the Board shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of this Article. I. Legend. Each certificate for Shares shall bear substantially the ------ following legend: 13 The securities represented by this certificate are subject to restrictions on ownership and transfer. This description is summary only, and is qualified in its entirety by reference to the full transfer restrictions in the Certificate of Incorporation of the Corporation, a copy of which will be supplied free of charge at any stockholder request. Except as otherwise provided pursuant to the Certificate of Incorporation of the Corporation, no Person may Beneficially Own Shares in excess of 9.9% of the number or value of the outstanding Shares of any class or series of the Common Stock or Preferred Stock of the Corporation. Any Person who attempts or proposes to Beneficially Own Shares in excess of the above limitations must notify the Corporation in writing at least 15 days prior to such proposed or attempted Transfer. All capitalized terms in this legend have the meanings defined in the Certificate of Incorporation of the Corporation, a copy of which, including the restrictions on transfer, will be furnished to each stockholder on request and without charge. If the restrictions on transfer are violated, the securities represented hereby which are in excess of the above limitations will be designated and treated as Excess Shares which will be held in trust by the Excess Share Trustee for the benefit of the Charitable Beneficiary. Instead of the foregoing legend, the certificate may state that the Corporation will furnish a full statement about certain restrictions on transferability to a stockholder on request and without charge. J. Severability. If any provision of this Article or any ------------ application of any such provision is determined to be void, invalid or unenforceable by any court having jurisdiction over the issue, the validity and enforceability of the remaining provisions shall be affected only to the extent necessary to comply with the determination of such court. K. Transfer of Excess Shares. Upon any purported Transfer that ------------------------- results in Excess Shares pursuant to Section C of this Article, such Excess Shares shall be automatically transferred to the Excess Share Trustee, as trustee of a special trust for the exclusive benefit of the Charitable Beneficiary. The Corporation shall name a Charitable Beneficiary, if one does not already exist, within five days of the discovery of any designation of any Excess Shares; however, the failure to so name a Charitable Beneficiary shall not affect the designation of Shares as Excess Shares or the transfer thereof to the Excess Share Trustee. Excess Shares so held in trust shall be issued and outstanding Shares of the Corporation. The Purported Record Transferee or Purported Record Holder shall have no rights in such Excess Shares except as expressly provided in this Article. L. Distributions on Excess Shares. Any dividends (whether taxable ------------------------------ as a dividend, return of capital or otherwise) on Excess Shares shall be paid to the Excess Share Trust for the benefit of the Charitable Beneficiary. Upon liquidation, 14 dissolution or winding up, the Purported Record Transferee shall receive, for each Excess Share, the lesser of (1) the amount per share of any distribution made upon liquidation, dissolution or winding up or (2) the price paid by the Purported Record Transferee for the Excess Shares, or if the Purported Record Transferee did not give value for the Excess Shares, the Fair Market Value of the Excess Shares on the day of the event causing the Excess Shares to be held in trust. Any such dividend or distribution paid to the Purported Record Transferee in excess of the amount provided in the preceding sentence prior to the discovery by the Corporation that the Shares with respect to which the dividend or distribution was made had been designated as Excess Shares shall be repaid, upon demand, to the Excess Share Trust for the benefit of the Charitable Beneficiary. M. Voting of Excess Shares. The Excess Share Trustee shall be ----------------------- entitled to vote the Excess Shares on behalf of the Charitable Beneficiary on any matter. Subject to Delaware law, any vote cast by a Purported Record Transferee with respect to the Excess Shares prior to the discovery by the Corporation that the Excess Shares were held in trust will be rescinded ab initio; provided, however, that if the Corporation has already taken -------- ------- irreversible action with respect to a merger, reorganization, sale of all or substantially all the assets, dissolution of the Corporation or other action by the Corporation, then the vote cast by the Purported Record Transferee shall not be rescinded. The owner of the Excess Shares will be deemed to have given an irrevocable proxy to the Excess Share Trustee to vote the Excess Shares for the benefit of the Charitable Beneficiary. Notwithstanding the provisions of this Article, until the Corporation has received notification that Excess Shares have been transferred into an Excess Share Trust, the Corporation shall be entitled to rely on its share transfer and other stockholder records for purposes of preparing lists of stockholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes of stockholders. N. Non-Transferability of Excess Shares. Excess Shares shall be ------------------------------------ transferable only as provided in this Section N. At the direction of the Board of the Directors, the Excess Share Trustee shall transfer the Shares held in the Excess Share Trust to a Person or Persons whose ownership of such Shares will not violate the Ownership Limit. If such a transfer is made to such a Person or Persons, the interest of the Charitable Beneficiary shall terminate the designation of such Shares as Excess Shares shall thereupon cease. The Purported Record Transferee shall receive the lesser of (1) the price paid by the Purported Record Transferee for the Excess Shares or, if the Purported Record Transferee did not give value for the Excess Shares, the Fair Market Value of the Excess Shares on the day of the event causing the Excess Shares to be held in trust, or (2) the price received by the Excess Share Trust from the sale or other disposition of the Excess Shares. Any proceeds in excess of the amount payable to the Purported Record Transferee will be paid to the Charitable Beneficiary. The Excess Share Trustee shall be under no obligation to obtain the highest possible price 15 for the Excess Shares. Prior to any transfer of any Excess Shares by the Excess Share Trustee, the Corporation must have waived in writing its purchase rights under Section N. It is expressly understood that the Purported Record Transferee may enforce the provisions of this Section against the Charitable Beneficiary. If any of the foregoing restrictions on transfer of Excess Shares is determined to be void, invalid or unenforceable by any court of competent jurisdiction, then the Purported Record Transferee may be deemed, at the option of the Corporation, to have acted as an agent of the Corporation in acquiring such Excess Shares in trust and to hold such Excess Shares on behalf of the Corporation. O. Call by Corporation on Excess Shares. Excess Shares shall be ------------------------------------ deemed to have been offered for sale to the Corporation, or its designee, at a price equal to the lesser of (a) the price paid by the Purported Record Transferee for the Excess Shares or, if the Purported Record Transferee did not give value for the Excess Shares, the Fair Market Value of the Excess Shares on the day of the event causing the Excess Shares to be held in trust and (b) the Fair Market Value of the Excess Shares on the date the Corporation, or its designee, accepts such offer (the "Redemption Price"). The Corporation shall have the right to accept such offer for a period of ninety days after the later of (x) the date of the Purported Transfer which resulted in such Excess Shares or (y) the date the Board determines in good faith that a Purported Transfer resulting in Excess Shares has occurred, if the Corporation does not receive a notice of such Purported Transfer pursuant to Section E of this Article but in no event later than a permitted Transfer pursuant to and in compliance with the terms of Section N of this Article. Unless the Board determines that it is in the interests of the Corporation to make earlier payments of all of the amount determined as the Redemption Price in accordance with the preceding sentence, the Redemption Price may be payable at the option of the Board at any time up to but not later than the five years after the date the Corporation accepts the offer to purchase the Excess Shares. The Corporation shall pay interest at the applicable federal rate under Section 1274(d) of the Code, or any successor provision, to the Purported Record Transferee. P. Underwritten Offerings. The Ownership Limit shall not apply to ---------------------- the acquisition of Shares or rights, options or warrants for, or securities convertible into, Shares by an underwriter in a public offering, provided that (i) the underwriter makes a timely distribution of such Shares or rights, options or warrants for, or securities convertible into, Shares and (ii) the underwriter Beneficially Owns (x) less than 10% of the value of the outstanding shares of MeriStar Hospitality Corporation and (y) less than 10% of the value of the outstanding shares of any affiliate of MeriStar Hospitality Corporation that is a REIT. Q. Enforcement. The Corporation is authorized specifically to seek ----------- equitable relief, including injunctive relief, to enforce the provisions of this Article. 16 R. Non-Waiver. No delay or failure on the part of the Corporation ---------- or the Board in exercising any right hereunder shall operate as a waiver of any right of the Corporation or the Board, as the case may be, except to the extent specifically waived in writing. IN WITNESS WHEREOF, MeriStar Hotels & Resorts, Inc. has caused this certificate to be signed on this __ day of June, 1998. ____________________________________ Name: Title: EX-3.2 3 BY-LAWS OF THE COMPANY Exhibit 3.2 BY-LAWS of MERISTAR HOTELS & RESORTS, INC. (A Delaware Corporation) ________________________ ARTICLE 1 DEFINITIONS ----------- As used in these By-laws, unless the context otherwise requires, the term: 1.1 "Assistant Secretary" means an Assistant Secretary of the Corporation. 1.2 "Assistant Treasurer" means an Assistant Treasurer of the Corporation. 1.3 "Board" means the Board of Directors of the Corporation. 1.4 "By-laws" means the initial by-laws of the Corporation, as amended from time to time. 1.5 "Certificate of Incorporation" means the initial certificate of incorporation of the Corporation, as amended, supplemented or restated from time to time. 1.6 "Chairman" means the Chairman of the Board of Directors of the Corporation. 1.7 "Corporation" means MeriStar Hotels & Resorts, Inc. 1.8 "Directors" means directors of the Corporation. 1.9 "Entire Board" means all directors of the Corporation in office, whether or not present at a meeting of the Board, but disregarding vacancies. 1.10 "General Corporation Law" means the General Corporation Law of the State of Delaware, as amended from time to time. 2 1.11 "Office of the Corporation" means the executive office of the Corporation, anything in Section 131 of the General Corporation Law to the contrary notwithstanding. 1.12 "President" means the President of the Corporation. 1.13 "Secretary" means the Secretary of the Corporation. 1.14 "stockholders" means stockholders of the Corporation. 1.15 "Treasurer" means the Treasurer of the Corporation. 1.16 "Vice President" means a Vice President of the Corporation. ARTICLE 2 STOCKHOLDERS ------------ 2.1 Place of Meetings. Every meeting of stockholders shall be held ----------------- at the office of the Corporation or at such other place within or without the State of Delaware as shall be specified or fixed in the notice of such meeting or in the waiver of notice thereof. 2.2 Annual Meeting. A meeting of stockholders shall be held annually -------------- for the election of Directors and the transaction of other business at such hour and on such business day or as may be determined by the Board and designated in the notice of meeting. 2.3 Other Special Meetings. A special meeting of stockholders (other ---------------------- than a special meeting for the election of Directors), unless otherwise prescribed by statute, may be called at any time only by the Chairman of the Board, the Vice Chairman of the Board, the Secretary of the Board, by the President or by a majority of the Directors. At any special meeting of stockholders only such business may be transacted as is related to the purpose or purposes of such meeting set forth in the notice thereof given pursuant to Section 2.5 hereof or in any waiver of notice thereof given pursuant to Section 2.6 hereof. Any power of stockholders to call a special meeting is specifically denied. 2.4 Fixing Record Date. For the purpose of (a) determining the ------------------ stockholders entitled (i) to notice of or to vote at any meeting of stockholders or any adjournment thereof, (ii) to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock; or (b) any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date was adopted by the Board and which record date shall not be 3 (x) in the case of clause (a)(i) above, more than sixty nor less than ten days before the date of such meeting or (y) in the case of clause (a)(iii) or (b) above, more than sixty days prior to such action. If no such record date is fixed: 2.4.1 The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; 2.4.2 The record date for determining stockholders for any purpose other than that specified in Sections 2.4.1 shall be at the close of business on the day on which the Board adopts the resolution relating thereto. When a determination of stockholders entitled to notice of or to vote at any meeting of stockholders has been made as provided in this Section 2.4, such determination shall apply to any adjournment thereof unless the Board fixes a new record date for the adjourned meeting. 2.5 Notice of Meetings of Stockholders. Except as otherwise provided ---------------------------------- in Sections 2.4 and 2.6 hereof, whenever under the provisions of any statute, the Certificate of Incorporation or these By-laws, stockholders are required or permitted to take any action at a meeting, written notice shall be given stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by any statute, the Certificate of Incorporation or these by-laws, a copy of the notice of any meeting shall be given, personally or by mail, not less than ten nor more than sixty days before the date of the meeting, to each stockholder entitled to notice of or to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, with postage prepaid, directed to the stockholder at his or her address as it appears on the records of the Corporation. An affidavit of the Secretary or an Assistant Secretary that the notice required by this Section 2.5 has been given shall be prima facie evidence of the facts stated therein. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meet ing if the time and place thereof are announced at the meeting at which the adjournment is taken, and at the adjourned meeting any business may be transacted that might have been transacted at the meeting as originally called. If, however, the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.6 Waiver of Notice. Whenever the giving of any notice is required ---------------- by statute, the Certificate of Incorporation or these By-laws, a waiver thereof, in writing, signed by the stockholder or stockholders entitled to said notice, whether before or after the event as to which such notice is required, shall be deemed equivalent 4 to notice. Attendance by a stockholder at a meeting shall constitute a waiver of notice of such meeting except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting has not been lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by statute, the Certificate of Incorporation or these By-laws. 2.7 List of Stockholders. The Secretary shall prepare and make, or -------------------- cause to be prepared and made, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, the stockholder's agent, or attorney, at the stockholder's expense, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The Corporation shall maintain the stockholder list in written form or in another form capable of conversion into written form within a reasonable time. Upon the willful neglect or refusal of the Directors to produce such a list at any meeting for the election of Directors, they shall be ineligible for election to any office at such meeting. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of stockholders or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. 2.8 Quorum of Stockholders; Adjournment. Except as otherwise ----------------------------------- provided by any statute, the Certificate of Incorporation or these By-laws, the holders of one-third of all outstanding shares of stock entitled to vote at any meeting of stockholders, present in person or represented by proxy, shall constitute a quorum for the transaction of any business at such meeting. When a quorum is once present to organize a meeting of stockholders, it is not broken by the subsequent withdrawal of any stockholders. The chair of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The chair shall have the power to adjourn the meeting to another place, date and time. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that -------- ------- the foregoing shall not limit the 5 right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. 2.9 Voting; Proxies. Unless otherwise provided in the Certificate --------------- of Incorporation, every stockholder of record shall be entitled at every meeting of stockholders to one vote for each share of capital stock standing in his or her name on the record of stockholders determined in accordance with Section 2.4 hereof. If the Certificate of Incorporation provides for more or less than one vote for any share on any matter, each reference in the By-laws or the General Corporation Law to a majority or other proportion of stock shall refer to such majority or other proportion of the votes of such stock. The provisions of Sections 212 and 217 of the General Corporation Law shall apply in determining whether any shares of capital stock may be voted and the persons, if any, entitled to vote such shares; but the Corporation shall be protected in assuming that the persons in whose names shares of capital stock stand on the stock ledger of the Corporation are entitled to vote such shares. Holders of redeemable shares of stock are not entitled to vote after the notice of redemption is mailed to such holders and a sum sufficient to redeem the stocks has been deposited with a bank, trust company, or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares of stock. At any meeting of stockholders (at which a quorum was present to organize the meeting), all matters, except as otherwise provided by statute or by the Certificate of Incorporation or by these By-laws, shall be decided by a majority of the votes cast affirmatively or negatively on any such matter at such meeting by the holders of shares present in person or represented by proxy and entitled to vote thereon, whether or not a quorum is present when the vote is taken. All elections of Directors shall be by written ballot unless otherwise provided in the Certificate of Incorporation. In voting on any other question on which a vote by ballot is required by law or is demanded by any stockholder entitled to vote, the voting shall be by ballot. Each ballot shall be signed by the stockholder voting or the stockholder's proxy and shall state the number of shares voted. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy. The validity and enforceability of any proxy shall be determined in accordance with Section 212 of the General Corporation Law. A stockholder may revoke any proxy that is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by delivering a proxy in accordance with applicable law bearing a later date to the Secretary. 2.10 Voting Procedures and Inspectors of Election at Meetings of ----------------------------------------------------------- Stockholders. The Board, in advance of any meeting of stockholders, may appoint - ------------ one or more inspectors to act at the meeting and make a written report thereof. The Board may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed or is able to act at a meeting, the person presiding at the meeting may appoint, and on the request of any stockholder entitled to vote thereat shall appoint, one or more inspectors to act at the 6 meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall (a) ascertain the number of shares outstanding and the voting power of each, (b) determine the shares represented at the meeting and the validity of proxies and ballots, (c) count all votes and ballots, (d) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (e) certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of their duties. Unless otherwise provided by the Board, the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be determined by the person presiding at the meeting and shall be announced at the meeting. No ballot, proxies or votes, or any revocation thereof or change thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery of the State of Delaware upon application by a stockholder shall determine otherwise. 2.11 Organization. At each meeting of stockholders, the President, ------------ or in the absence of the President, the Chairman, or if there is no Chairman or if there be one and the Chairman is absent, a Vice President, and in case more than one Vice President shall be present, that Vice President designated by the Board (or in the absence of any such designation, the most senior Vice President, based on age, present), shall act as chairman of the meeting. The Secretary, or in his or her absence, one of the Assistant Secretaries, shall act as secretary of the meeting. In case none of the officers above designated to act as chairman or secretary of the meeting, respectively, shall be present, a chairman or a secretary of the meeting, as the case may be, shall be chosen by a majority of the votes cast at such meeting by the holders of shares of capital stock present in person or represented by proxy and entitled to vote at the meeting. 2.12 Order of Business. The order of business at all meetings of ----------------- stockholders shall be as determined by the chairman of the meeting. 2.13 Written Consent of Stockholders Not Permitted. Any action --------------------------------------------- required or permitted to be taken by the stockholders of the Corporation must be taken at a duly called annual or special meting of such holders and may not be taken by any consent in writing by such stockholders. 2.14 Advance Notice of Stockholder Proposals. At any annual or --------------------------------------- special meeting of stockholders, proposals by stockholders and persons nominated for election as Directors by stockholders shall be considered only if advance notice thereof has been timely given as provided herein and such proposals or nominations are otherwise proper for consideration under applicable law and the Certificate of Incorporation and these By-laws. Notice of any proposal to be presented by any 7 stockholder or of the name of any person to be nominated by any stockholder for election as a director of the Corporation at any meeting of stockholders shall be delivered to the Secretary of the Corporation at its principal executive office not less than 60 nor more than 90 days prior to the date of the meeting; provided, however, that if the date of the meeting is first publicly announced - -------- ------- or disclosed (in a public filing or otherwise) less than 70 days prior to the date of the meeting, such advance notice shall be given not more than ten days after such date is first so announced or disclosed. Public notice shall be deemed to have been given more than 70 days in advance of the annual meeting if the Corporation shall have previously disclosed, in these By-laws or otherwise, that the annual meeting in each year is to be held on a determinable date, unless and until the Board determines to hold the meeting on a different date. Any stockholder who gives notice of any such proposal shall deliver therewith the text of the proposal to be presented and a brief written statement of the reasons why such stockholder favors the proposal and setting forth such stockholder's name and address, the number and class of all shares of each class of stock of the Corporation beneficially owned by such stockholder and any material interest of such stockholder in the proposal (other than as a stockholder). Any stockholder desiring to nominate any person for election as a director of the Corporation shall deliver with such notice a statement in writing setting forth the name of the person to be nominated, the number and class of all shares of each class of stock of the Corporation beneficially owned by such person, the information regarding such person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and Exchange Commission (or the corresponding provisions of any regulation subsequently adopted by the Securities and Exchange Commission applicable to the Corporation), such person's signed consent to serve as a director of the Corporation if elected, such stockholder's name and address and the number and class of all shares of each class of stock of the Corporation beneficially owned by such stockholder. As used herein, shares "beneficially owned" shall mean all shares as to which such person, together with such person's affiliates and associates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934), may be deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as well as all shares as to which such person, together with such person's affiliates and associates, has the right to become the beneficially owner pursuant to any agreement or understanding, or upon the exercise of warrants, options or rights to convert or exchange (whether such rights are exercisable immediately or only after the passage of time or the occurrence of conditions). The person presiding at the meeting, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall determine whether such notice has been duly given and shall direct that proposals and nominees not be considered if such notice has not been given. 8 ARTICLE 3 Directors --------- 3.1 General Powers. Except as otherwise provided in the Certificate -------------- of Incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board. The Board may adopt such rules and regulations, not inconsistent with the Certificate of Incorporation or these By- laws or applicable laws, as it may deem proper for the conduct of its meetings and the management of the Corporation. In addition to the powers expressly conferred by these By-laws, the Board may exercise all powers and perform all acts that are not required, by these By-laws or the Certificate of Incorporation or by statute, to be exercised and performed by the stockholders. 3.2 Number; Qualification. The Board shall consist of not less than --------------------- three (3) and not more than fifteen (15) members. The exact number of Directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by resolution adopted by a majority of the Entire Board that would be in office, if no vacancy existed, whether or not present at a meeting. Directors need not be stockholders. 3.3 Classes; Term; Vacancies. The directors of the Corporation ------------------------- shall be divided into three Classes, designated "Class I", "Class II" and "Class III" respectively. The initial term of office of Class I shall expire at the first annual meeting of stockholders of the Corporation following the end of the Corporation's fiscal year ending December 31, 1998. The initial term of office of Class II shall expire at the first annual meeting of stockholders of the Corporation following the end of the Corporation's fiscal year ending December 31, 1999, and the initial term of office of Class III shall expire at the first annual meeting of stockholders of the Corporation following the end of the Corporation's fiscal year ending December 31, 2000. Commencing with the annual meeting of stockholders of the Corporation at which the initial term of office of the Class I directors expires, each director elected to succeed those directors whose terms have thereupon expired shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which such director was elected. In the event of any increase or decrease in the authorized number of directors, (a) each director then serving as such shall nonetheless continue as a director of the class of which he is a member until the expiration of his current term, or his earlier death, retirement, resignation, or removal, and (b) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board among the three classes of directors so as to maintain such classes as nearly equal in number as reasonably possible. If such equality is not possible, the increase or decrease shall be apportioned among the classes in such a way that the difference in the number of directors in any two classes shall not exceed one. 9 3.4 Election. Directors shall, except as otherwise required by -------- statute or by the Certificate of Incorporation, be elected by a plurality of the votes cast at a meeting of stockholders by the holders of shares entitled to vote in the election. 3.5 Resignation. Any Director may resign at any time by written ----------- notice to the Corporation. Such resignation shall take effect at the time therein specified, and, unless otherwise specified in such resignation, the acceptance of such resignation shall not be necessary to make it effective. 3.6 Compensation. Each Director, in consideration of his or her ------------ service as such, shall be entitled to receive from the Corporation such amount per annum or such fees for attendance at Directors' meetings, or both, as the Board may from time to time determine, together with reimbursement for the reasonable out-of-pocket expenses, if any, incurred by such Director in connection with the performance of his or her duties. Each Director who shall serve as a member of any committee of Directors in consideration of serving as such shall be entitled to such additional amount per annum or such fees for attendance at committee meetings, or both, as the Board may from time to time determine, together with reimbursement for the reasonable out-of-pocket expenses, if any, incurred by such Director in the performance of his or her duties. Nothing contained in this Section 3.6 shall preclude any Director from serving the Corporation or its subsidiaries in any other capacity and receiving proper compensation therefor. 3.7 Times and Places of Meetings. The Board may hold meetings, both ---------------------------- regular and special, either within or without the State of Delaware. The times and places for holding meetings of the Board may be fixed from time to time by resolution of the Board or (unless contrary to a resolution of the Board) in the notice of the meeting. 3.8 Annual Meetings. On the day when and at the place where the --------------- annual meeting of stockholders for the election of Directors is held, and as soon as practicable thereafter, the Board may hold its annual meeting, without notice of such meeting, for the purposes of organization, the election of officers and the transaction of other business. The annual meeting of the Board may be held at any other time and place specified in a notice given as provided in Section 3.11 hereof for special meetings of the Board or in a waiver of notice thereof. 3.9 Regular Meetings. Regular meetings of the Board may be held ---------------- without notice at such times and at such places as shall from time to time be determined by the Board. 3.10 Special Meetings. Special meetings of the Board may be called by ---------------- the Chairman, the President or the Secretary or majority of the Entire Board then serving on at least one day's notice to each Director given by one of the means 10 specified in Section 3.13 hereof other than by mail, or on at least three days' notice if given by mail. Special meetings shall be called by the Chairman, President or Secretary in like manner and on like notice on the written request of any two or more of the Directors then serving. 3.11 Telephone Meetings. Directors or members of any committee ------------------ designated by the Board may participate in a meeting of the Board or of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 3.11 shall constitute presence in person at such meeting. 3.12 Adjourned Meetings. A majority of the Directors present at any ------------------ meeting of the Board, including an adjourned meeting, whether or not a quorum is present, may adjourn such meeting to another time and place. At least one day's notice of any adjourned meeting of the Board shall be given to each Director whether or not present at the time of the adjournment, if such notice shall be given by one of the means specified in Section 3.14 hereof other than by mail, or at least three days' notice if by mail. Any business may be transacted at an adjourned meeting that might have been transacted at the meeting as originally called. 3.13 Notice Procedure. Subject to Sections 3.10 and 3.16 hereof, ---------------- whenever, under the provisions of any statute, the Certificate of Incorporation or these By-laws, notice is required to be given to any Director, such notice shall be deemed given effectively if given in person or by telephone, by mail addressed to such Director at such Director's address as it appears on the records of the Corporation, with postage thereon prepaid, or by telegram, telex, telecopy or similar means addressed as aforesaid. 3.14 Waiver of Notice. Whenever the giving of any notice is required ---------------- by statute, the Certificate of Incorporation or these By-laws, a waiver thereof, in writing, signed by the person or persons entitled to said notice, whether before or after the event as to which such notice is required, shall be deemed equivalent to notice. Attendance by a person at a meeting shall constitute a waiver of notice of such meeting except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting has not been lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Directors or a committee of Directors need be specified in any written waiver of notice unless so required by statute, the Certificate of Incorporation or these By-laws. 3.15 Organization. At each meeting of the Board, the Chairman, or in ------------ the absence of the Chairman, the President, or in the absence of the President, a chairman chosen by a majority of the Directors present, shall preside. The Secretary 11 shall act as secretary at each meeting of the Board. In case the Secretary shall be absent from any meeting of the Board, an Assistant Secretary shall perform the duties of secretary at such meeting; and in the absence from any such meeting of the Secretary and all Assistant Secretaries, the person presiding at the meeting may appoint any person to act as secretary of the meeting. 3.16 Quorum of Directors. Except as otherwise expressly provided by ------------------- statute or the Certificate of Incorporation, the presence in person of a majority of the entire Board shall be necessary and sufficient to constitute a quorum for the transaction of business at any meeting of the Board, but a majority of a smaller number may adjourn any such meeting to a later date. 3.17 Action by Majority Vote. Except as otherwise expressly required ----------------------- by statute, the Certificate of Incorporation or these By-laws, the act of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board. 3.18 Action Without Meeting. Unless otherwise restricted by the ---------------------- Certificate of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if all Directors or members of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. ARTICLE 4 COMMITTEES OF THE BOARD ----------------------- The Board may designate one or more committees, each committee to consist of one or more of the Directors. The Board may designate 1 or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, or in the By-laws, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matter: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the General Corporation Law to be submitted to stockholders for approval or (ii) adopting, amending or repealing any by-law of the Corporation. 12 ARTICLE 5 OFFICERS -------- 5.1 Positions. The officers of the Corporation shall be a President, --------- a Secretary, a Treasurer and such other officers as the Board may appoint, including a Chairman, one or more Vice Presidents and one or more Assistant Secretaries and Assistant Treasurers, who shall exercise such powers and perform such duties as shall be determined from time to time by the Board. The Board may designate one or more Vice Presidents as Executive Vice Presidents and may use descriptive words or phrases to designate the standing, seniority or areas of special competence of the Vice Presidents elected or appointed by it. Any number of offices may be held by the same person unless the Certificate of Incorporation or these By-laws otherwise provide. 5.2 Appointment. The officers of the Corporation shall be chosen by ----------- the Board at its annual meeting or at such other time or times as the Board shall determine. 5.3 Compensation. The compensation of all officers of the ------------ Corporation shall be fixed by, or in the manner prescribed by, the Board. No officer shall be prevented from receiving a salary or other compensation by reason of the fact that the officer is also a Director. 5.4 Term of Office. Each officer of the Corporation shall hold -------------- office for the term for which he or she is elected and until such officer's successor is chosen and qualifies or until such officer's earlier death, resignation or removal. Any officer may resign at any time upon written notice to the Corporation. Such resignation shall take effect at the date of receipt of such notice or at such later time as is therein specified, and, unless otherwise specified, the acceptance of such resignation shall not be necessary to make it effective. The resignation of an officer shall be without prejudice to the contract rights of the Corporation, if any. Any officer elected or appointed by the Board may be removed at any time, with or without cause, by vote of a majority of the Entire Board. Any vacancy occurring in any office of the Corporation shall be filled by the Board. The removal of an officer without cause shall be without prejudice to the officer's contract rights, if any. The election or appointment of an officer shall not of itself create contract rights. 5.5 Fidelity Bonds. The Corporation may secure the fidelity of any -------------- or all of its officers or agents by bond or otherwise. 5.6 Chairman. The Chairman, if one shall have been appointed, shall -------- preside at all meetings of the Board and shall exercise such powers and perform such other duties as shall be determined from time to time by the Board. 13 5.7 Chief Executive Officer The Chief Executive Officer shall have ----------------------- responsibility for the management and direction of the business and affairs of the Corporation and shall exercise such duties as customarily pertain to the office of the Chief Executive Officer and such other duties as may be prescribed from time to time by the Board. 5.8 President. The President shall be the Chief Executive Officer of --------- the Corporation and shall have general supervision over the business of the Corporation, subject, however, to the control of the Board and of any duly authorized committee of Directors. The President shall preside at all meetings of the stockholders and at all meetings of the Board at which the Chairman (if there be one) is not present. The President may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts and other instruments except in cases in which the signing and execution thereof shall be expressly delegated by the Board or by these By-laws to some other officer or agent of the Corporation or shall be required by statute otherwise to be signed or executed and, in general, the President shall perform all duties incident to the office of President of a corporation and such other duties as may from time to time be assigned to the President by the Board. 5.9 Vice Presidents. At the request of the President, or, in the --------------- President's absence, at the request of the Board, the Vice Presidents shall (in such order as may be designated by the Board, or, in the absence of any such designation, in order of seniority based on age) perform all of the duties of the President and, in so performing, shall have all the powers of, and be subject to all restrictions upon, the President. Any Vice President may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts or other instruments, except in cases in which the signing and execution thereof shall be expressly delegated by the Board or by these By-laws to some other officer or agent of the Corporation, or shall be required by statute otherwise to be signed or executed, and each Vice President shall perform such other duties as from time to time may be assigned to such Vice President by the Board or by the President. 5.10 Secretary. The Secretary shall attend all meetings of the Board --------- and of the stockholders and shall record all the proceedings of the meetings of the Board and of the stockholders in a book to be kept for that purpose, and shall perform like duties for committees of the Board, when required. The Secretary shall give, or cause to be given, notice of all special meetings of the Board and of the stockholders and shall perform such other duties as may be prescribed by the Board or by the President, under whose supervision the Secretary shall be. The Secretary shall have custody of the corporate seal of the Corporation, and the Secretary, or an Assistant Secretary, shall have authority to impress the same on any instrument requiring it, and when so impressed the seal may be attested by the signature of the Secretary or by the signature of such Assistant Secretary. The Board may give general authority to any other officer to impress the seal of the Corporation and to attest the same by such 14 officer's signature. The Secretary or an Assistant Secretary may also attest all instruments signed by the President or any Vice President. The Secretary shall have charge of all the books, records and papers of the Corporation relating to its organization and management, shall see that the reports, statements and other documents required by statute are properly kept and filed and, in general, shall perform all duties incident to the office of Secretary of a corporation and such other duties as may from time to time be assigned to the Secretary by the Board or by the President. 5.11 Treasurer. The Treasurer shall have charge and custody of, and --------- be responsible for, all funds, securities and notes of the Corporation; receive and give receipts for moneys due and payable to the Corporation from any sources whatsoever; deposit all such moneys and valuable effects in the name and to the credit of the Corporation in such depositaries as may be designated by the Board; against proper vouchers, cause such funds to be disbursed by checks or drafts on the authorized depositaries of the Corporation signed in such manner as shall be determined by the Board and be responsible for the accuracy of the amounts of all moneys so disbursed; regularly enter or cause to be entered in books or other records maintained for the purpose full and adequate account of all moneys received or paid for the account of the Corporation; have the right to require from time to time reports or statements giving such information as the Treasurer may desire with respect to any and all financial transactions of the Corporation from the officers or agents transacting the same; render to the President or the Board, whenever the President or the Board shall require the Treasurer so to do, an account of the financial condition of the Corporation and of all financial transactions of the Corporation; exhibit at all reasonable times the records and books of account to any of the Directors upon application at the office of the Corporation where such records and books are kept; disburse the funds of the Corporation as ordered by the Board; and, in general, perform all duties incident to the office of Treasurer of a corporation and such other duties as may from time to time be assigned to the Treasurer by the Board or the President. 5.12 Assistant Secretaries and Assistant Treasurers. Assistant ---------------------------------------------- Secretaries and Assistant Treasurers shall perform such duties as shall be assigned to them by the Secretary or by the Treasurer, respectively, or by the Board or by the President. ARTICLE 6 CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. ---------------------------------------------- 6.1 Execution of Contracts. The Board, except as otherwise provided ---------------------- in these By-laws, may prospectively or retroactively authorize any officer or officers, employee or employees or agent or agents, in the name and on behalf of the Corporation, to enter into any contract or execute and deliver any instrument, and any such authority may be general or confined to specific instances, or otherwise limited. 15 6.2 Loans. The Board may prospectively or retroactively authorize ----- the President or any other officer, employee or agent of the Corporation to effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual, and for such loans and advances the person so authorized may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, and, when authorized by the Board so to do, may pledge and hypothecate or transfer any securities or other property of the Corporation as security for any such loans or advances. Such authority conferred by the Board may be general or confined to specific instances, or otherwise limited. 6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the -------------------- payment of money out of the funds of the Corporation and all evidences of indebtedness of the Corporation shall be signed on behalf of the Corporation in such manner as shall from time to time be determined by resolution of the Board. 6.4 Deposits. The funds of the Corporation not otherwise employed -------- shall be deposited from time to time to the order of the Corporation with such banks, trust companies, investment banking firms, financial institutions or other depositaries as the Board may select or as may be selected by an officer, employee or agent of the Corporation to whom such power to select may from time to time be delegated by the Board. ARTICLE 7 STOCK AND DIVIDENDS ------------------- 7.1 Certificates Representing Shares. Certificates representing the -------------------------------- shares of capital stock of the Corporation shall be in such form (consistent with the provisions of Section 158 of the General Corporation Law) as shall be approved by the Board. Such certificates shall be signed by the Chairman, the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and may be impressed with the seal of the Corporation or a facsimile thereof. If the Corporation is authorized to issue direct classes of shares or different series within a class, the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the Board to determine variations for future series) shall be summarized on the front or back of each certificate of shares of such class or series. Alternatively, each certificate may state conspicuously on its front or back that the Corporation will furnish the stockholder this information on request in writing and without charge. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall 16 be entered on the stock transfer books of the Corporation. Any signatures on the stock certificates may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon any certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may, unless otherwise ordered by the Board, be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. 7.2 Transfer of Shares. Transfers of shares of capital stock of the ------------------ Corporation shall be made only on the books of the Corporation by the holder thereof or by the holder's duly authorized attorney appointed by a power of attorney duly executed and filed with the Secretary or a transfer agent of the Corporation, and on surrender of the certificate or certificates representing such shares of capital stock properly endorsed for transfer and upon payment of all necessary transfer taxes. Every certificate exchanged, returned or surrendered to the Corporation shall be marked "Canceled," with the date of cancellation, by the Secretary or an Assistant Secretary or the transfer agent of the Corporation. A person in whose name shares of capital stock shall stand on the books of the Corporation shall be deemed the owner thereof to receive dividends, to vote as such owner and for all other purposes as respects the Corporation. 7.3 Transfer and Registry Agents. The Corporation may from time to ---------------------------- time maintain one or more transfer offices or agents and registry offices or agents at such place or places as may be determined from time to time by the Board. 7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder -------------------------------------------------- of any shares of capital stock of the Corporation shall immediately notify the Corporation of any loss, destruction, theft or mutilation of the certificate representing such shares, and the Corporation may issue a new certificate to replace the certificate alleged to have been lost, destroyed, stolen or mutilated. The Board may, in its discretion, as a condition to the issue of any such new certificate, require the owner of the lost, destroyed, stolen or mutilated certificate, or his or her legal representatives, to make proof satisfactory to the Board of such loss, destruction, theft or mutilation and to advertise such fact in such manner as the Board may require, and to give the Corporation and its transfer agents and registrars, or such of them as the Board may require, a bond in such form, in such sums and with such surety or sureties as the Board may direct, to indemnify the Corporation and its transfer agents and registrars against any claim that may be made against any of them on account of the continued existence of any such certificate so alleged to have been lost, destroyed, stolen or mutilated and against any expense in connection with such claim. 7.5 Rules and Regulations. The Board may make such rules and --------------------- regulations as it may deem expedient, not inconsistent with these By-laws or with the 17 Certificate of Incorporation, concerning the issue, transfer and registration of certificates representing shares of its capital stock. ARTICLE 8 INDEMNIFICATION --------------- 8.1 Indemnity Undertaking. To the extent not prohibited by law, the --------------------- Corporation shall indemnify any person who is or was made, or threatened to be made, a party to any threatened, pending or completed action, suit or proceeding (a "Proceeding"), whether civil, criminal, administrative or investigative, including, without limitation, an action by or in the right of the Corporation to procure a judgment in its favor, by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a Director or officer of the Corporation, or, at the request of the Corporation, is or was serving as a director or officer of any other corporation or in a capacity with comparable authority or responsibilities for any partnership, joint venture, trust, employee benefit plan or other enterprise (an "Other Entity"), against judgments, fines, penalties, excise taxes, amounts paid in settlement and costs, charges and expenses (including attorneys' fees, disbursements and other charges). Persons who are not directors or officers of the Corporation (or otherwise entitled to indemnification pursuant to the preceding sentence) may be similarly indemnified in respect of service to the Corporation or to an Other Entity at the request of the Corporation to the extent the Board at any time specifies that such persons are entitled to the benefits of this Article 8. 8.2 Advancement of Expenses. The Corporation shall reimburse or ----------------------- advance to any Director or officer or other person entitled to indemnification hereunder the funds necessary for payment of expenses, including attorneys' fees and disbursements, incurred in connection with any Proceeding, in advance of the final disposition of such Proceeding; provided, however, that, if required by -------- ------- the General Corporation Law, such expenses incurred by or on behalf of any Director or officer or other person may be paid in advance of the final disposition of a Proceeding only upon receipt by the Corporation of an undertaking, by or on behalf of such Director or officer (or other person indemnified hereunder), to repay any such amount so advanced if it shall ultimately be determined by final judicial decision from which there is no further right of appeal that such Director, officer or other person is not entitled to be indemnified for such expenses. 8.3 Rights Not Exclusive. The rights to indemnification and -------------------- reimbursement or advancement of expenses provided by, or granted pursuant to, this Article 8 shall not be deemed exclusive of any other rights to which a person seeking indemnification or reimbursement or advancement of expenses may have or hereafter be entitled under any statute, the Certificate of Incorporation, these By-laws, any agreement, any vote of stockholders or disinterested Directors or otherwise, both as to action 18 in his or her official capacity and as to action in another capacity while holding such office. 8.4 Continuation of Benefits. The rights to indemnification and ------------------------ reimbursement or advancement of expenses provided by, or granted pursuant to, this Article 8 shall continue as to a person who has ceased to be a Director or officer (or other person indemnified hereunder) and shall inure to the benefit of the executors, administrators, legatees and distributees of such person. 8.5 Insurance. The Corporation shall have power to purchase and --------- maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of an Other Entity, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article 8, the Certificate of Incorporation or under Section 145 of the General Corporation Law or any other provision of law. 8.6 Binding Effect. The rights to indemnification and to the -------------- advancement of expenses conferred in this Article shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the indemnitee's heirs, executors, and administrators. No repeal or modification of this Article 8 shall affect any rights or obligations with respect to any state of facts then or theretofore existing or there after arising or any proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. 8.7 Procedural Rights. The rights to indemnification and ----------------- reimbursement or advancement of expenses provided by, or granted pursuant to, this Article 8 shall be enforceable by any person entitled to such indemnification or reimbursement or advancement of expenses in any court of competent jurisdiction. The burden of proving that such indemnification or reimbursement or advancement of expenses is not appropriate shall be on the Corporation. Neither the failure of the Corporation (including its directors, its independent legal counsel and its stockholders) to have made a determination prior to the commencement of such action that such indemnification or reimbursement or advancement of expenses is proper in the circumstances nor an actual determination by the Corporation (including its directors, its independent legal counsel and its stockholders) that such person is not entitled to such indemnification or reimbursement or advancement of expenses shall constitute a defense to the action or create a presumption that such person is not so entitled. Such a person shall also be indemnified for any expenses incurred in connection with successfully establishing his or her right to such indemnification or reimbursement or advancement of expenses, in whole or in part, in any such proceeding. 19 8.8 Service Deemed at Corporation's Request. Any Director or officer --------------------------------------- of the Corporation serving in any capacity (a) another corporation of which a majority of the shares entitled to vote in the election of its directors is held, directly or indirectly, by the Corporation or (b) any employee benefit plan of the Corporation or any corporation referred to in clause (a) shall be deemed to be doing so at the request of the Corporation. ARTICLE 9 BOOKS AND RECORDS ----------------- 9.1 Books and Records. There shall be kept at the principal office ----------------- of the Corporation correct and complete records and books of account recording the financial transactions of the Corporation and minutes of the proceedings of the stockholders, the Board and any committee of the Board. The Corporation shall keep at its principal office, or at the office of the transfer agent or registrar of the Corporation, a record containing the names and addresses of all stockholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof. 9.2 Form of Records. Any records maintained by the Corporation in --------------- the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs, or any other information storage device, provided that the records so kept can be converted into clearly legible written form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. 9.3 Inspection of Books and Records. Except as otherwise provided by ------------------------------- law, the Board shall determine from time to time whether, and, if allowed, when and under what conditions and regulations, the accounts, books, minutes and other records of the Corporation, or any of them, shall be open to the stockholders for inspection. ARTICLE 10 SEAL ---- The corporate seal, if the Board elects to adopt one, shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. 20 ARTICLE 11 FISCAL YEAR ----------- The fiscal year of the Corporation shall be fixed, and may be changed, by resolution of the Board. ARTICLE 12 PROXIES AND CONSENTS -------------------- Unless otherwise directed by the Board, the Chairman, the President, any Vice President, the Secretary or the Treasurer, or any one of them, may execute and deliver on behalf of the Corporation proxies respecting any and all shares or other ownership interests of any Other Entity owned by the Corporation appointing such person or persons as the officer executing the same shall deem proper to represent and vote the shares or other ownership interests so owned at any and all meetings of holders of shares or other ownership interests, whether general or special, and/or to execute and deliver consents respecting such shares or other ownership interests; or any of the aforesaid officers may attend any meeting of the holders of shares or other ownership interests of such Other Entity and thereat vote or exercise any or all other powers of the Corporation as the holder of such shares or other ownership interests. ARTICLE 13 OFFICES ------- 13.1 Registered Office. The registered office of the Corporation ----------------- shall be at 1209 Orange Street, City of Wilmington, County of Newcastle, State of Delaware; and its registered agent at such address is Corporation Trust Corporation. 13.2 Other Offices. The Corporation may also have offices, including ------------- its principal office, at such other places both within and without the State of Delaware as the Board may from time to time determine or the business of the Corporation may require. ARTICLE 14 EMERGENCY BY-LAWS ----------------- Unless the Certificate of Incorporation provides otherwise, the following provisions of this Article 13 shall be effective during an emergency, which is defined as 21 when a quorum of the Corporation's directors cannot be readily assembled because of some catastrophic event. During such emergency: 14.1 Notice to Board Members. Any one member of the Board or any one ----------------------- of the following officers: Chairman, President, any Vice President, Secretary, or Treasurer, may call a meeting of the Board. Notice of such meeting need be given only to those Directors whom it is practicable to reach, and may be given in any practical manner, including by publication and radio. Such notice shall be given at least six hours prior to commencement of the meeting. 14.2 Temporary Directors and Quorum. One or more officers of the ------------------------------ Corporation present at the emergency Board meeting, as is necessary to achieve a quorum, shall be considered to be Directors for the meeting, and shall so serve in order of rank, and within the same rank, in order of seniority. In the event that less than a quorum of the Directors are present (including any officers who are to serve as Directors for the meeting), those Directors present (including the officers serving as Directors) shall constitute a quorum. 14.3 Actions Permitted To Be Taken. The Board as constituted in ----------------------------- Section 13.2, and after notice as set forth in Section 13.1 may: 14.3.1 prescribe emergency powers to any officer of the Corporation; 14.3.2 delegate to any officer or Director, any of the powers of the Board; 14.3.3 designate lines of succession of officers and agents, in the event that any of them are unable to discharge their duties; 14.3.4 relocate the principal place of business, or designate successive or simultaneous principal places of business; and 14.3.5 take any other convenient, helpful or necessary action to carry on the business of the Corporation. ARTICLE 15 AMENDMENTS ---------- These By-laws of the Corporation may be altered or repealed and new By-laws may be adopted (i) at any annual or special meeting of stockholders, by the affirmative vote of not less than a majority of all votes entitled to be cast by all of the then outstanding shares of capital stock of the Corporation in the election of directors, 22 provided, however, that any proposed alteration or repeal of, or the adoption of any by-law inconsistent with, Sections 2.4, 2.14 and 2.15 of Article 2 of these By-laws, 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6 of Article 3 of these By-laws, by stockholders shall require the affirmative vote of not less than two-thirds of all votes entitled to be cast by all of the then outstanding shares of capital stock of the Corporation in the election of directors, or (ii) by the affirmative vote of a majority of the Board. The undersigned, in his capacity as Secretary of the Corporation, hereby certifies that the foregoing is the Amended and Restated Bylaws of the Corporation adopted by the Board of the Corporation on this ___ day of June, 1998. ___________________________ Secretary, MeriStar Hotels & Resorts, Inc. EX-4.2 4 SPECIMEN SUBSCRIPTION CERTIFICATE Exhibit 4.2 [FRONT OF RIGHTS CERTIFICATE] MERISTAR HOTELS & RESORTS, INC. SUBSCRIPTION CERTIFICATE FOR SHARES CERTIFICATE NUMBER:______ NUMBER OF RIGHTS: ________ SUBSCRIPTION CERTIFICATE REPRESENTING RIGHTS TO PURCHASE SHARES OF COMMON STOCK, $0.01 PAR VALUE, OF MERISTAR HOTELS & RESORTS, INC. ("COMMON STOCK"). VOID IF NOT EXERCISED BEFORE EXPIRATION DATE. THE RIGHTS EVIDENCED BY THIS SUBSCRIPTION CERTIFICATE ARE NON-TRANSFERABLE AND ENTITLE ONLY A RIGHTHOLDER (BUT NOT A SUBSEQUENT TRANSFEREE OF THE REIT COMMON STOCK OR REIT OP UNITS HELD BY SUCH RIGHTHOLDER ON THE RECORD DATE) TO PURCHASE SHARES OF COMMON STOCK AT THE SUBSCRIPTION PRICE. THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING, THE RIGHTS AND THIS SUBSCRIPTION CERTIFICATE ARE SET FORTH IN THE COMPANY'S PROSPECTUS DATED [-------------] (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM THE SUBSCRIPTION AGENT, AT [----------------]. REGISTERED OWNER: The registered owner whose name is inscribed hereon is entitled to subscribe for shares of Common Stock in the Rights Offering upon the terms and subject to the conditions set forth in the Prospectus and instructions to Rightholders relating to the Rights Offering. The Rights represented by this Subscription Certificate may be exercised directly by duly completing Form 1 or may be exercised through a bank or broker by completing Form 2. Special delivery instructions may be specified by completing Form 3. THE RIGHTS EVIDENCED BY THIS SUBSCRIPTION CERTIFICATE MAY NOT BE EXERCISED UNLESS THE REVERSE SIDE HEREOF IS DULY SIGNED WITH THE APPROPRIATE FORM DULY COMPLETED AND, IF APPLICABLE, SIGNATURES GUARANTEED. Dated:___________________ MERISTAR HOTELS & RESORTS, INC. [ Corporate Seal ] Secretary Chairman and Chief Executive Officer [BACK OF RIGHTS CERTIFICATE] MERISTAR HOTELS & RESORTS, INC. RIGHTHOLDERS SHOULD BE AWARE THAT IF THEY CHOOSE TO EXERCISE LESS THAN ALL OF THE RIGHTS EVIDENCED HEREBY, THEY MAY NOT RECEIVE A NEW SUBSCRIPTION CERTIFICATE IN SUFFICIENT TIME TO EXERCISE THE REMAINING RIGHTS EVIDENCED BY SUCH NEW SUBSCRIPTION CERTIFICATE. FORM 1 - EXERCISE AND SUBSCRIPTION: The undersigned hereby irrevocably exercises Rights to subscribe for shares of MeriStar Hotels & Resorts, Inc. Common Stock as indicated below, on the terms and subject to the conditions specified in the prospectus of MeriStar Hotels & Resorts, Inc. dated [---------] (the "Prospectus"), receipt of which is hereby acknowledged. Capitalized terms used herein but not defined herein shall have the meanings ascribed to them in the Prospectus. (a) Number of Rights exercised/shares of Common Stock subscribed for pursuant to the Subscription Privilege (including fractions):_______________________ (b) Total Subscription Price (number of Rights exercised/shares of Common Stock subscribed for pursuant to the Subscription Privilege multiplied by the ------------- Subscription Price):_____________________(1) METHOD OF PAYMENT (CHECK ONE) [ ] CHECK OR BANK DRAFT DRAWN ON A U.S. BANK OR MONEY ORDER PAYABLE TO [-------------], AS SUBSCRIPTION AGENT. [ ] WIRE TRANSFER DIRECTED TO THE ACCOUNT MAINTAINED BY THE SUBSCRIPTION AGENT AT ______________________________________. (1) If the amount enclosed or transmitted is not sufficient to pay the Subscription Price for all shares that are stated to be subscribed for, or if the number of shares being subscribed for is not specified, the number of shares subscribed for will be assumed to be the maximum number that could be subscribed for upon payment of such amount. If the amount enclosed or transmitted exceeds the Subscription Price for all shares purchased pursuant to the Subscription Privilege (the "Subscription Excess"), the Subscription Excess will be returned without interest or deduction. (c) If the number of Rights being exercised pursuant to the Subscription Privilege is less than all of the Rights represented by this Subscription Certificate (check only one): [ ] DELIVER TO ME A NEW SUBSCRIPTION CERTIFICATE EVIDENCING THE REMAINING RIGHTS TO WHICH I AM ENTITLED. [ ] DELIVER A NEW SUBSCRIPTION CERTIFICATE EVIDENCING THE REMAINING RIGHTS IN ACCORDANCE WITH MY FORM 2 INSTRUCTIONS (which include any required signature guarantees). [ ] CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY DELIVERED TO THE SUBSCRIPTION AGENT PRIOR TO THE DATE HEREOF AND COMPLETE THE FOLLOWING Name(s) of Registered Owner(s): ______________________________ ______________________________ ______________________________ Window Ticket Number (if any): ______________________________ Date of Execution of Notice of Guaranteed Delivery:________________ Name of Institution which Guaranteed Delivery:____________________ Address:__________________________ __________________________ __________________________ __________________________ __________________________ (Including Zip Code) FORM 2 - TO EXERCISE RIGHTS THROUGH YOUR BANK OR BROKER: For value received, ________ Rights represented by this Subscription Certificate are hereby assigned for purposes of exercise to (please print name and address and Taxpayer Identification Number of bank or broker in full): Name:______________________________________ Address:__________________________ __________________________ __________________________ __________________________ __________________________ (Including Zip Code) Taxpayer Identification No.:______________ FORM 3 - DELIVERY INSTRUCTIONS (PROVIDE GUARANTEE OF SIGNATURE(S) BELOW): Name and/or address for mailing any stock, new Subscription Certificate or cash payment if other than shown on the reverse hereof: Name:___________________________________ Address:__________________________ __________________________ __________________________ __________________________ __________________________ (Including Zip Code) Social Security or Taxpayer Identification No.:______________ ALL RIGHTHOLDERS MUST SIGN BELOW AND ENCLOSE A DULY COMPLETED FORM W-9. Signature of Rightholder:_______________________________ Name: Signature of Rightholder:_______________________________ Name: Signature of Rightholder:_______________________________ Name: Dated:_____________________ Telephone Number: ( )__________________ Tax Identification or Social Security No.:_______________ A duly completed Form W-9 must be signed by the registered holder(s) exactly as name(s) appear(s) on this Subscription Certificate. If signature is by trustee(s), executor(s), administrator(s), guardian(s), attorney(s)-in-fact, agent(s), officer(s) of a corporation or another acting in a fiduciary capacity, please provide the following information. See Instructions. Name(s): __________________________ Capacity: __________________________ Dated: __________________________ Address: __________________________ __________________________ __________________________ __________________________ __________________________ (Including Zip Code) GUARANTEE OF SIGNATURE(S) (Note: See paragraphs 2, 5 and 6 of Instructions) Authorized Signature:___________________ Name:_______________________________ Title:_________________________________ Name of Firm:__________________________ Address: __________________________ __________________________ __________________________ __________________________ __________________________ (Including Zip Code) Telephone Number: ( )________________ Dated:_____________________ EX-10.1 5 FORM OF EMPLOYMENT AGREEMENT EXHIBIT 10.1 EXECUTIVE EMPLOYMENT AGREEMENT EXECUTIVE EMPLOYMENT AGREEMENT, made as of June ___, 1998 by and between MERISTAR HOTELS & RESORTS, INC., a Delaware corporation (the "Company"), MERISTAR H & R OPERATING PARTNERSHIP, L.P., a Delaware limited partnership (the "Partnership"), and PAUL W. WHETSELL (the "Executive"), an individual residing at 10901 Tara Road, Potomac, Maryland 20854. The Company and the Partnership desire to employ the Executive in the capacities of Chairman of the Board and Chief Executive Officer, and the Executive desires to be so employed, on the terms and subject to the conditions set forth in this agreement (the "Agreement"); Now, therefore, in consideration of the mutual covenants set forth herein and other good and valuable consideration the parties hereto hereby agree as follows: 1. Employment; Term. The Company and the Partnership each hereby ---------------- employ the Executive, and the Executive agrees to be employed by the Company and the Partnership, upon the terms and subject to the conditions set forth herein, for an initial term of five (5) years, commencing on the Spin Off Record Date (the "Commencement Date") as such term is defined in the Company's Registration Statement on Form S-1 (Registration Number 333-49881) (the "Registration Statement"), unless terminated earlier in accordance with Section 5 of this Agreement; provided that such term shall automatically be extended from time to -------- ---- time for additional periods of one calendar year from the date on which it would otherwise expire unless the Executive, on one hand, or the Company and the Partnership, on the other, gives notice to the other party or parties not less than 120 days prior to such date that it elects to permit the term of this Agreement to expire without extension on such date. (The initial term of this Agreement as the same may be extended in accordance with the terms of this Agreement is hereinafter referred to as the "Term"). 2. Positions; Conduct. ------------------ (a) During the Term, the Executive will hold the titles and offices of, and serve in the positions of, Chairman of the Board and Chief Executive Officer of the Company and the Partnership. The Executive shall report to the Board of Directors of the Company (the "Board") and shall perform such specific duties and services (including service as an officer, director or equivalent position of any direct or indirect subsidiary without additional compensation) as they shall reasonably request consistent with the Executive's positions. (b) During the Term, the Executive agrees to devote his full business time and attention to the business and affairs of the Company and the Partnership and to faithfully and diligently perform, to the best of his ability, all of his duties and responsibilities hereunder; provided, that the Executive may devote his business time to -------- providing services to MeriStar Hospitality Corporation, and may provide services as described in Schedule A attached hereto, so long as such activity does not ---------- interfere with the performance of the Executive's duties hereunder. Nothing in this Agreement shall preclude the Executive from devoting reasonable time and attention to (i) serving, with the approval of the Board, as a director, trustee or member of any committee of any organization, (ii) engaging in charitable and community activities and (iii) managing his personal investments and affairs; provided that such activities do not involve any material conflict of interest - -------- ---- with the interests of the Company or, individually or collectively, interfere materially with the performance by the Executive of his duties and responsibilities under this Agreement. Notwithstanding the foregoing and except as expressly provided herein, during the Term, the Executive may not accept employment with any other individual or entity, or engage in any other venture which is directly or indirectly in conflict or competition with the business of the Company or the Partnership. (c) The Executive's office and place of rendering his services under this Agreement shall be in the principal executive offices of the Company which shall be in the Washington, D.C. metropolitan area. Under no circumstances shall the Executive be required to relocate from the Washington, D.C. metropolitan area or provide services under this Agreement in any other location other than in connection with reasonable and customary business travel. During the Term, the Company shall provide the Executive with executive office space, and administrative and secretarial assistance and other support services consistent with his position as Chairman of the Board and Chief Executive Officer and with his duties and responsibilities hereunder. 3. Board of Directors. While it is understood that the right to ------------------ elect directors of the Company is by law vested in the stockholders and directors of the Company, it is nevertheless mutually contemplated that, subject to such rights, during the Term the Executive will serve as a member of the Company's Board of Directors. 4. Salary; Additional Compensation; Perquisites and Benefits. --------------------------------------------------------- (a) During the Term, the Company and the Partnership will pay the Executive a base salary at an aggregate annual rate of not less than $190,000 per annum, subject to annual review by the Compensation Committee of the Board (the "Compensation Committee"), and in the discretion of such Committee, increased from time to time. Once increased, such base salary may not be decreased. Such salary shall be paid in periodic installments in accordance with the Company's standard practice, but not less frequently than semi-monthly. (b) For each fiscal year during the Term, the Executive will be eligible to receive a bonus from the Company. The award and amount of such bonus shall be based upon the achievement of predefined operating or performance goals and other criteria established by the Compensation Committee, which goals shall give the Executive the opportunity to earn a 2 bonus in the following amounts: threshold target - 25% of base salary; target - 125% of base salary; and maximum bonus amount - 150% of base salary. (c) During the Term, the Executive will participate in all plans now existing or hereafter adopted by the Company or the Partnership for their management employees or the general benefit of their employees, such as any pension, profit-sharing, bonuses, stock option or other incentive compensation plans, life and health insurance plans, or other insurance plans and benefits on the same basis and subject to the same qualifications as other senior executive officers. (d) (1) The Executive shall be eligible for stock option grants from time to time pursuant to the Company's Incentive Plan in accordance with the terms thereof. (2) In connection with the spin-off of the Company from CapStar Hotel Company, the Executive received options to purchase 250,000 shares of common stock of the Company (the "Pre-Spinoff Awards"). The Pre-Spinoff Awards will become fully vested if the Executive's employment is terminated voluntarily or involuntarily within twenty-four (24) months of the Spin-Off Date. (e) The Company and the Partnership will reimburse the Executive, in accordance with their standard policies from time to time in effect, for all out-of-pocket business expenses as may be incurred by the Executive in the performance of his duties under this Agreement. (f) The Executive shall be entitled to vacation time to be credited and taken in accordance with the Company's policy from time to time in effect for senior executives, which in any event shall not be less than a total of four weeks per calendar year. (g) The Company, at its sole cost, shall provide the Executive with a life insurance policy with a death benefit of at least $2,000,000 payable to a beneficiary designated by the Executive and a disability policy which, upon a determination of the Executive's Disability (as hereinafter defined), pays at least $2,000,000 to the Executive. (h) The Executive shall be granted a car allowance of up to $___ per month for the lease of an automobile to be leased by the Company for the use of the Executive. (i) In the event that any payment, benefit or other right or compensation due to the Executive hereunder or otherwise from the Company including, without limitation the accelerated vesting of the Executive's rights with respect to stock options, restricted stock or any other benefit or compensation, results in the imposition of an excise tax payable by the Executive under Section 4999 of the Internal Revenue Code, or any successor or other provision with respect to "excess parachute payments" within the meaning of Section 280G(b) of the Internal Revenue Code, the Company shall make a cash payment to the Executive in the 3 amount of such excise tax (the "Excise Tax Payment") and shall also make a cash payment to the Executive in an amount equal to the total of federal, state and local income and excise taxes for which the Executive may be liable on account of such Excise Tax Payment. (j) To the fullest extent permitted by applicable law, the Executive shall be indemnified and held harmless by the Company and the Partnership against any and all judgments, penalties, fines, amounts paid in settlement, and other reasonable expenses (including, without limitation, reasonable attorneys' fees and disbursements) actually incurred by the Executive in connection with any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative, investigative or other) for any action or omission in his capacity as a director, officer or employee of the Company or the Partnership. Indemnification under this Section 4(j) shall be in addition to, and not in substitution of, any other indemnification by the Company or the Partnership of its officers and directors. Expenses incurred by the Executive in defending an action, suit or proceeding for which he claims the right to be indemnified pursuant to this Section 4(j) shall be paid by the Company or the Partnership, as the case may be, in advance of the final disposition of such action suit or proceeding upon the Company's or the Partnership's receipt of (x) a written affirmation by the Executive of his good faith belief that the standard of conduct necessary for his indemnification hereunder and under the provisions of applicable law has been met and (y) a written undertaking by or on behalf of the Executive to repay the amount advanced if it shall ultimately be determined by a court that the Executive engaged in conduct which precludes indemnification under the provisions of such applicable law. Such written undertaking in clause (y) shall be accepted by the Company or the Partnership, as the case may be, without security therefor and without reference to the financial ability of the Executive to make repayment thereunder. The Company and the Partnership shall use commercially reasonable efforts to maintain in effect for the Term of this Agreement a directors' and officers' liability insurance policy, with a policy limit of at least $5,000,000, subject to customary exclusions, with respect to claims made against officers and directors of the Company or the Partnership; provided, however, the Company or the -------- ------- Partnership, as the case may be, shall be relieved of this obligation to maintain directors' and officers' liability insurance if, in the good faith judgment of the Company or the Partnership, it cannot be obtained at a reasonable cost. 5. Termination. ----------- (a) The Term will terminate immediately upon the Executive's death or, upon thirty (30) days' prior written notice by the Company, in the case of a determination of the Executive's Disability. As used herein the term "Disability" means the Executive's inability to perform his duties and responsibilities under this Agreement for a period of more than 120 consecutive days, or for more than 180 days, whether or not continuous, during any 365-day period, due to physical or mental incapacity or impairment. A determination of Disability will be made by a physician reasonably satisfactory to both the Executive and the Company and paid for by the Company or the Partnership whose decision shall be final and 4 binding on the Executive and the Company; provided that if they cannot agree as -------- ---- to a physician, then each shall select and pay for a physician and these two together shall select a third physician whose fee shall be borne equally by the Executive and either the Company or the Partnership and whose determination of Disability shall be binding on the Executive and the Company. Should the Executive become incapacitated, his employment shall continue and all base and other compensation due the Executive hereunder shall continue to be paid through the date upon which the Executive's employment is terminated for Disability in accordance with this section. (b) The Term may be terminated by the Company upon notice to the Executive upon the occurrence of any event constituting "Cause" as defined herein. (c) The Term may be terminated by the Executive upon notice to the Company of any event constituting "Good Reason" as defined herein. 6. Severance. --------- (a) If the Term is terminated by the Company for Cause, the Company and the Partnership will pay to the Executive an aggregate amount equal to the Executive's accrued and unpaid base salary through the date of such termination, and all unvested options will terminate immediately and any vested options issued pursuant to the Company's Incentive Plan and held by the Executive at termination, will expire ninety (90) days after the termination date. (b) If the Term is terminated by the Executive other than because of death, Disability or for Good Reason, the Company and the Partnership will pay to the Executive an aggregate amount equal to the Executive's accrued and unpaid base salary through the date of such termination, and all unvested options will terminate immediately and any vested options issued pursuant to the Company's Incentive Plan and held by the Executive at termination, will expire ninety (90) days after the termination date. (c) If the Term is terminated upon the Executive's death or Disability, the Company and the Partnership will pay to the Executive's estate or the Executive, as the case may be, a lump sum payment equal to the Executive's base salary through the termination date, plus a pro rata portion of the Executive's bonus for the fiscal year in which the termination occurred. In addition, the Company will make payments for one (1) year of all compensation otherwise payable to the Executive pursuant to this Agreement, including, but not limited to, base salary, bonus and welfare benefits. In addition, all of the Executive's unvested stock options and restricted stock awards will immediately vest and become exercisable for a period of one (1) year thereafter and shares of restricted stock of the Company previously granted to the Executive shall become free from all contractual restrictions. (d) Subject to Section 6(e) hereof, if the Term is terminated by the Company without Cause or other than by reason of his death or Disability, in addition to any other 5 remedies available, or if the Executive terminates the Term for Good Reason, the Company and the Partnership shall pay the Executive a lump sum equal to the product of (x) the sum of (A) the Executive's then annual base salary and (B) the amount of the Executive's bonus for the preceding year, or if the Term is terminated in its initial year the Executive's target bonus for such year, multiplied by (y) the greater of (A) two (2) and (B) a fraction, the numerator of which is the number of days remaining in the Term (without further extension) and the denominator of which is 365. In addition, all of the Executive's unvested stock options and restricted stock awards will immediately vest and become exercisable for a period of one (1) year thereafter and shares of restricted stock of the Company previously granted to the Executive shall become free from all contractual restrictions, and the Company shall continue in effect the Executive's benefits under Section 4(g) hereof and the Executive's health benefits noted in Section 4(c) hereof or their equivalent for a period equal to the greater of two (2) years or the remaining Term, without further extension. (e) If, within twenty-four (24) months following a Change in Control, the Term is terminated by the Executive for Good Reason or by the Company without Cause, in addition to any other rights which the Executive may have under law or otherwise, the Executive shall receive the same payments and benefits provided for under Section 6(d) hereof; provided, that the amount of -------- the multiplier described in clause (d)(y)(A) of Section 6 hereof shall be increased from two (2) times to three (3) times. (f) If at any time the Term is not extended pursuant to the proviso to Section 1 hereof as a result of the Company giving notice thereunder that it elects to permit the term of this Agreement to expire without extension, the Company shall be deemed to have terminated the Executive's employment without Cause. (g) Notwithstanding anything in this Section 6 to the contrary: (i) if the Term is terminated for any reason within twenty-four (24) months following the Spin-Off Date, the Pre-Spinoff Awards will immediately vest and remain exercisable in accordance with their respective terms; provided, however, such Pre-Spinoff Awards will have an exercise period of at least one-year from the date of termination, and (ii) if the Term is terminated within twenty-four (24) months of the Spin-Off Date, other than by the Company for Cause (as defined herein), all stock options and restricted stock awards granted to the Executive (other than the Pre-Spinoff Awards which are addressed in clause (i) above) will continue to vest and remain exercisable in accordance with their respective terms as if the termination of the Term had not occurred. (h) As used herein, the term "Cause" means: (i) the Executive's willful and intentional failure or refusal to perform or observe any of his material duties, responsibilities or obligations set forth in this Agreement; provided, however, that the -------- ------- Company shall not be deemed to have Cause pursuant to this clause (i) unless the Company gives the Executive written notice 6 that the specified conduct has occurred and making specific reference to this Section 6(h)(i) and the Executive fails to cure the conduct within thirty (30) days after receipt of such notice; (ii) any willful and intentional act of the Executive involving malfeasance, fraud, theft, misappropriation of funds, embezzlement or dishonesty affecting the Company or the Partnership; or (iii) the Executive's conviction of, or a plea of guilty or nolo contendere to, an offense which is a felony in the jurisdiction involved. Termination of the Executive for Cause shall be communicated by a Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean delivery to the Executive of a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Company's Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and reasonable opportunity for the Executive, together with the Executive's counsel, to be heard before the Board prior to such vote) of finding that in the good faith opinion of the Board, the Executive was guilty of conduct constituting Cause and specifying the particulars thereof in detail, including, with respect to any termination based upon conduct described in clause (i) above that the Executive failed to cure such conduct during the thirty-day period following the date on which the Company gave written notice of the conduct referred to in such clause (i). For purposes of this Agreement, no such purported termination of the Executive's employment shall be effective without such Notice of Termination; (i) As used herein, the term "Good Reason" means the occurrence of any of the following, without the prior written consent of the Executive: (i) assignment of the Executive of duties materially inconsistent with the Executive's positions as described in Section 2(a) hereof, or any significant diminution in the Executive's duties or responsibilities, other than in connection with the termination of the Executive's employment for Cause, Disability or as a result of the Executive's death or by the Executive other than for Good Reason; (ii) the failure of the Company to nominate the Executive to the Board or the failure of the Executive to be elected to the Board; (iii) the change in the location of the Company's principal executive offices or of the Executive's principal place of employment to a location outside the Washington, D.C. metropolitan area; (iv) any material breach of this Agreement by the Company or the Partnership which is continuing; or 7 (v) a Change in Control; provided, however, that the Executive shall not be deemed to have Good Reason - -------- ------- pursuant to clauses (i), (ii) or (iv) above unless the Executive gives the Company or the Partnership, as the case may be, written notice that the specified conduct or event has occurred and the Company or the Partnership fails to cure such conduct or event within thirty (30) days of the receipt of such notice. (j) As used herein, the term "Change in Control" means the occurrence of any one of the following events: (i) the acquisition (other than from the Company) by any "Person" (as the term is used for purposes of Sections 13(d) or 14(d) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty (50%) percent or more of the combined voting power of the Company's then outstanding voting securities; or (ii) the individuals who were members of the Board (the "Incumbent Board") during the previous twelve (12) month period, cease for any reason to constitute at least a majority of the Board; provided, -------- however, that if the election, or nomination for election by the Company's ------- stockholders, of any new director was approved by a vote of at least two- thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; or (iii) approval by stockholders of the Company of (a) merger or consolidation involving the Company if the stockholders of the Company, immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than seventy (70%) percent of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation or (b) a complete liquidation or dissolution of the Company or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to clause (i) above solely because fifty (50%) percent or more of the combined voting power of the Company's then outstanding securities is acquired by (a) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries or (b) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the 8 stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. (k) The amounts required to be paid and the benefits required to be made available to the Executive under this Section 6 are absolute. Under no circumstances shall the Executive, upon the termination of his employment hereunder, be required to seek alternative employment and, in the event that the Executive does secure other employment, no compensation or other benefits received in respect of such employment shall be set-off or in any other way limit or reduce the obligations of the Company under this Section 6. 7. Confidential Information. ------------------------ (a) The Executive acknowledges that the Company and its subsidiaries or affiliated ventures ("Company Affiliates") own and have developed and compile, and will in the future own, develop and compile certain Confidential Information and that during the course of his rendering services hereunder Confidential Information will be disclosed to the Executive by the Company Affiliates. The Executive hereby agrees that, during the Term and for a period of three years thereafter, he will not use or disclose, furnish or make accessible to anyone, directly or indirectly, any Confidential Information of the Company Affiliates. (b) As used herein, the term "Confidential Information" means any trade secrets, confidential or proprietary information, or other knowledge, know-how, information, documents or materials, owned, developed or possessed by a Company Affiliate pertaining to its businesses the confidentiality of which such company takes reasonable measures to protect, including, but not limited to, trade secrets, techniques, know-how (including designs, plans, procedures, processes and research records), software, computer programs, innovations, discoveries, improvements, research, developments, test results, reports, specifications, data, formats, marketing data and business plans and strategies, agreements and other forms of documents, expansion plans, budgets, projections, and salary, staffing and employment information. Notwithstanding the foregoing, Confidential Information shall not in any event include information which (i) was generally known or generally available to the public prior to its disclosure to the Executive, (ii) becomes generally known or generally available to the public subsequent to its disclosure to the Executive through no wrongful act of the Executive, (iii) is or becomes available to the Executive from sources other than the Company Affiliates which sources are not known to the Executive to be under any duty of confidentiality with respect thereto or (iv) the Executive is required to disclose by applicable law or regulation or by order of any court or federal, state or local regulatory or administrative body (provided that the Executive provides the Company with prior notice of the contemplated disclosure and reasonably cooperates with the Company, at the Company's sole expense, in seeking a protective order or other appropriate protection of such information). 9 8. Specific Performance. -------------------- (a) The Executive acknowledges that the services to be rendered by him hereunder are of a special, unique, extraordinary and personal character and that the Company Affiliates would sustain irreparable harm in the event of a violation by the Executive of Section 7 hereof. Therefore, in addition to any other remedies available, the Company shall be entitled to specific enforcement and/or an injunction from any court of competent jurisdiction restraining the Executive from committing or continuing any such violation of this Agreement without proving actual damages or posting a bond or other security. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of damages. (b) If any of the restrictions on activities of the Executive contained in Section 7 hereof shall for any reason be held by a court of competent jurisdiction to be excessively broad, such restrictions shall be construed so as thereafter to be limited or reduced to be enforceable to the maximum extent compatible with the applicable law as it shall then appear; it being understood that by the execution of this Agreement the parties hereto regard such restrictions as reasonable and compatible with their respective rights. (c) Notwithstanding anything in this Agreement to the contrary, in the event that the Company fails to make any payment of any amounts or provide any of the benefits to the Executive when due as called for under Section 6 of this Agreement and such failure shall continue for twenty (20) days after notice thereof from the Executive, all restrictions on the activities of the Executive under Section 7 hereof shall be immediately and permanently terminated. 9. Withholding. The parties agree that all payments to be made to ----------- the Executive by the Company pursuant to the Agreement shall be subject to all applicable withholding obligations of such company. 10. Notices. All notices required or permitted hereunder shall be in ------- writing and shall be deemed given and received when delivered personally, four (4) days after being mailed if sent by registered or certified mail, postage pre-paid, or by one (1) day after delivery if sent by air courier (for next-day delivery) with evidence of receipt thereof or by facsimile with receipt confirmed by the addressee. Such notices shall be addressed respectively: If to the Executive, to: 10901 Tara Road Potomac, Maryland 20854 10 If to the Company or to the Partnership, to: MeriStar Hotel & Resorts, Inc. 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 or to any other address of which such party may have given notice to the other parties in the manner specified above. 11. Miscellaneous. ------------- (a) This Agreement is a personal contract calling for the provision of unique services by the Executive, and the Executive's rights and obligations hereunder may not be sold, transferred, assigned, pledged or hypothecated by the Executive. The rights and obligations of the Company and the Partnership hereunder will be binding upon and run in favor of their respective successors and assigns. The Company will not be deemed to have breached this Agreement if any obligations of the Company to make payments to the Executive are satisfied by the Partnership. (b) This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to conflict of laws principles. (c) Any controversy arising out of or relating to this Agreement or any breach hereof shall be settled by arbitration in Washington, D.C. by a single neutral arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon any award rendered may be entered in any court having jurisdiction thereof, except in the event of a controversy relating to any alleged violation by the Executive of Section 7 hereof, in which case the Company shall be entitled to seek injunctive relief from a court of competent jurisdiction without the requirement to seek arbitration. (d) The headings of the various sections of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. (e) The provisions of this Agreement which by their terms call for performance subsequent to the expiration or termination of the Term shall survive such expiration or termination. (f) The Company and the Partnership shall reimburse the Executive for all costs incurred by the Executive in any proceeding for the successful enforcement of the terms of this Agreement, including without limitation all costs of investigation and reasonable attorneys fees and expenses. 11 (g) This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof, all of which shall be terminated on the Commencement Date. In addition, the parties hereto hereby waive all rights such party may have under all other prior agreements and undertakings, both written and oral, among the parties hereto, or among the Executive, CapStar Hotel Company and CapStar Management Co., L.P., with respect to the subject matter hereof. (h) This Agreement is conditioned upon and subject to the occurrence of the Spin-Off as defined in the Registration Statement and shall not be effective until the Spin-Off has occurred. [SIGNATURE PAGE FOLLOWS] 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. EXECUTIVE: _____________________________________ Paul W. Whetsell COMPANY: MERISTAR HOTELS & RESORTS, INC. By:___________________________________ Name: Title: PARTNERSHIP: MERISTAR H & R OPERATING PARTNERSHIP L.P. By:____________________________, its general partner By:___________________________________ Name: Title: 13 EX-10.2 6 FORM OF EMPLOYMENT AGREEMENT EXHIBIT 10.2 EXECUTIVE EMPLOYMENT AGREEMENT EXECUTIVE EMPLOYMENT AGREEMENT, made as of June ___, 1998 by and between MERISTAR HOTELS & RESORTS, INC., a Delaware corporation (the "Company"), MERISTAR H & R OPERATING PARTNERSHIP, L.P., a Delaware limited partnership (the "Partnership"), and STEVEN D. JORNS (the "Executive"), an individual residing at 900 Kingsbury Way, Southlake, Texas 76092. The Company and the Partnership desire to employ the Executive in the capacities of Vice Chairman and Chief Operating Officer, and the Executive desires to be so employed, on the terms and subject to the conditions set forth in this agreement (the "Agreement"); Now, therefore, in consideration of the mutual covenants set forth herein and other good and valuable consideration the parties hereto hereby agree as follows: 1. Employment; Term. The Company and the Partnership each hereby ---------------- employ the Executive, and the Executive agrees to be employed by the Company and the Partnership, upon the terms and subject to the conditions set forth herein, for an initial term of five (5) years, commencing on the Spin Off Record Date (the "Commencement Date") as such term is defined in the Company's Registration Statement on Form S-1 (Registration Number 333-49881) (the "Registration Statement"), unless terminated earlier in accordance with Section 5 of this Agreement; provided that such term shall automatically be extended from time to -------- ---- time for additional periods of one calendar year from the date on which it would otherwise expire unless the Executive, on one hand, or the Company and the Partnership, on the other, gives notice to the other party or parties not less than 120 days prior to such date that it elects to permit the term of this Agreement to expire without extension on such date. (The initial term of this Agreement as the same may be extended in accordance with the terms of this Agreement is hereinafter referred to as the "Term"). 2. Positions; Conduct. ------------------ (a) During the Term, the Executive will hold the titles and offices of, and serve in the positions of, Vice Chairman and Chief Operating Officer of the Company and the Partnership. The Executive shall report to the Board of Directors of the Company (the "Board") and shall perform such specific duties and services (including service as an officer, director or equivalent position of any direct or indirect subsidiary without additional compensation) as they shall reasonably request consistent with the Executive's positions. (b) During the Term, the Executive agrees to devote his full business time and attention to the business and affairs of the Company and the Partnership and to faithfully and diligently perform, to the best of his ability, all of his duties and responsibilities hereunder; provided, that the Executive may devote his business time to -------- providing services to MeriStar Hospitality Corporation, so long as such activity does not interfere with the performance of the Executive's duties hereunder. Nothing in this Agreement shall preclude the Executive from devoting reasonable time and attention to (i) serving, with the approval of the Board, as a director, trustee or member of any committee of any organization, (ii) engaging in charitable and community activities and (iii) managing his personal investments and affairs; provided that such activities do not involve any -------- ---- material conflict of interest with the interests of the Company or, individually or collectively, interfere materially with the performance by the Executive of his duties and responsibilities under this Agreement. Notwithstanding the foregoing and except as expressly provided herein, during the Term, the Executive may not accept employment with any other individual or entity, or engage in any other venture which is directly or indirectly in conflict or competition with the business of the Company or the Partnership. (c) The Executive's office and place of rendering his services under this Agreement shall be in the Dallas, Texas metropolitan area with a satellite office in the Washington, D.C. metropolitan area. Under no circumstances shall the Executive be required to relocate from the Dallas, Texas metropolitan area or provide services under this Agreement in any other location other than (i) in Washington, D.C. or (ii) in connection with reasonable and customary business travel. During the Term, the Company shall provide the Executive with executive office space, and administrative and secretarial assistance and other support services consistent with his position as Vice Chairman and Chief Operating Officer and with his duties and responsibilities hereunder. 3. Board of Directors. While it is understood that the right to ------------------ elect directors of the Company is by law vested in the stockholders and directors of the Company, it is nevertheless mutually contemplated that, subject to such rights, during the Term the Executive will serve as a member of the Company's Board of Directors. 4. Salary; Additional Compensation; Perquisites and Benefits. --------------------------------------------------------- (a) During the Term, the Company and the Partnership will pay the Executive a base salary at an aggregate annual rate of not less than $190,000 per annum, subject to annual review by the Compensation Committee of the Board (the "Compensation Committee"), and in the discretion of such Committee, increased from time to time. Once increased, such base salary may not be decreased. Such salary shall be paid in periodic installments in accordance with the Company's standard practice, but not less frequently than semi-monthly. (b) For each fiscal year during the Term, the Executive will be eligible to receive a bonus from the Company. The award and amount of such bonus shall be based upon the achievement of predefined operating or performance goals and other criteria established by the Compensation Committee, which goals shall give the Executive the opportunity to earn a 2 bonus in the following amounts: threshold target - 25% of base salary; target - 125% of base salary; and maximum bonus amount - 150% of base salary. (c) During the Term, the Executive will participate in all plans now existing or hereafter adopted by the Company or the Partnership for their management employees or the general benefit of their employees, such as any pension, profit-sharing, bonuses, stock option or other incentive compensation plans, life and health insurance plans, or other insurance plans and benefits on the same basis and subject to the same qualifications as other senior executive officers. (d) (1) The Executive shall be eligible for stock option grants from time to time pursuant to the Company's Incentive Plan in accordance with the terms thereof. (2) The Compensation Committee has granted to the Executive, effective on the Commencement Date, options to purchase 250,000 shares of the common stock of the Company at an exercise price equal to the fair market value at the time of grant. Subject to the terms of this Agreement as to the acceleration of vesting of stock options, such options shall vest as follows: First Anniversary of the Commencement Date 33-1/3% vested Second Anniversary of the Commencement Date 66-2/3% vested Third Anniversary of the Commencement Date 100% vested Such options shall be exercisable, subject to vesting and continued service, for ten (10) years from the date of grant and in all other respects shall be subject to the terms and conditions of the Incentive Plan. (e) The Company and the Partnership will reimburse the Executive, in accordance with their standard policies from time to time in effect, for all out-of-pocket business expenses as may be incurred by the Executive in the performance of his duties under this Agreement. (f) The Executive shall be entitled to vacation time to be credited and taken in accordance with the Company's policy from time to time in effect for senior executives, which in any event shall not be less than a total of four weeks per calendar year. (g) The Company, at its sole cost, shall provide the Executive with a life insurance policy with a death benefit of at least $2,000,000 payable to a beneficiary designated 3 by the Executive and a disability policy which, upon a determination of the Executive's Disability (as hereinafter defined), pays at least $2,000,000 to the Executive. (h) The Executive shall be granted a car allowance of up to $___ per month for the lease of an automobile to be leased by the Company for the use of the Executive. (i) In the event that any payment, benefit or other right or compensation due to the Executive hereunder or otherwise from the Company including, without limitation the accelerated vesting of the Executive's rights with respect to stock options, restricted stock or any other benefit or compensation, results in the imposition of an excise tax payable by the Executive under Section 4999 of the Internal Revenue Code, or any successor or other provision with respect to "excess parachute payments" within the meaning of Section 280G(b) of the Internal Revenue Code, the Company shall make a cash payment to the Executive in the amount of such excise tax (the "Excise Tax Payment") and shall also make a cash payment to the Executive in an amount equal to the total of federal, state and local income and excise taxes for which the Executive may be liable on account of such Excise Tax Payment. (j) To the fullest extent permitted by applicable law, the Executive shall be indemnified and held harmless by the Company and the Partnership against any and all judgments, penalties, fines, amounts paid in settlement, and other reasonable expenses (including, without limitation, reasonable attorneys' fees and disbursements) actually incurred by the Executive in connection with any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative, investigative or other) for any action or omission in his capacity as a director, officer or employee of the Company or the Partnership. Indemnification under this Section 4(j) shall be in addition to, and not in substitution of, any other indemnification by the Company or the Partnership of its officers and directors. Expenses incurred by the Executive in defending an action, suit or proceeding for which he claims the right to be indemnified pursuant to this Section 4(j) shall be paid by the Company or the Partnership, as the case may be, in advance of the final disposition of such action suit or proceeding upon the Company's or the Partnership's receipt of (x) a written affirmation by the Executive of his good faith belief that the standard of conduct necessary for his indemnification hereunder and under the provisions of applicable law has been met and (y) a written undertaking by or on behalf of the Executive to repay the amount advanced if it shall ultimately be determined by a court that the Executive engaged in conduct which precludes indemnification under the provisions of such applicable law. Such written undertaking in clause (y) shall be accepted by the Company or the Partnership, as the case may be, without security therefor and without reference to the financial ability of the Executive to make repayment thereunder. The Company and the Partnership shall use commercially reasonable efforts to maintain in effect for the Term of this Agreement a directors' and officers' liability insurance policy, with a policy limit of at least $5,000,000, subject to customary exclusions, with respect to claims made against officers and directors of the Company or the Partnership; provided, however, the Company or the -------- ------- Partnership, as the case may be, shall be relieved of 4 this obligation to maintain directors' and officers' liability insurance if, in the good faith judgment of the Company or the Partnership, it cannot be obtained at a reasonable cost. 5. Termination. ----------- (a) The Term will terminate immediately upon the Executive's death or, upon thirty (30) days' prior written notice by the Company, in the case of a determination of the Executive's Disability. As used herein the term "Disability" means the Executive's inability to perform his duties and responsibilities under this Agreement for a period of more than 120 consecutive days, or for more than 180 days, whether or not continuous, during any 365-day period, due to physical or mental incapacity or impairment. A determination of Disability will be made by a physician reasonably satisfactory to both the Executive and the Company and paid for by the Company or the Partnership whose decision shall be final and binding on the Executive and the Company; provided -------- that if they cannot agree as to a physician, then each shall select and pay for - ---- a physician and these two together shall select a third physician whose fee shall be borne equally by the Executive and either the Company or the Partnership and whose determination of Disability shall be binding on the Executive and the Company. Should the Executive become incapacitated, his employment shall continue and all base and other compensation due the Executive hereunder shall continue to be paid through the date upon which the Executive's employment is terminated for Disability in accordance with this section. (b) The Term may be terminated by the Company upon notice to the Executive upon the occurrence of any event constituting "Cause" as defined herein. (c) The Term may be terminated by the Executive upon notice to the Company of any event constituting "Good Reason" as defined herein. 6. Severance. --------- (a) If the Term is terminated by the Company for Cause, the Company and the Partnership will pay to the Executive an aggregate amount equal to the Executive's accrued and unpaid base salary through the date of such termination, and all unvested options will terminate immediately and any vested options issued pursuant to the Company's Incentive Plan and held by the Executive at termination, will expire ninety (90) days after the termination date. (b) If the Term is terminated by the Executive other than because of death, Disability or for Good Reason, the Company and the Partnership will pay to the Executive an aggregate amount equal to the Executive's accrued and unpaid base salary through the date of such termination, and all unvested options will terminate immediately and any vested options issued pursuant to the Company's Incentive Plan and held by the Executive at termination, will expire ninety (90) days after the termination date. 5 (c) If the Term is terminated upon the Executive's death or Disability, the Company and the Partnership will pay to the Executive's estate or the Executive, as the case may be, a lump sum payment equal to the Executive's base salary through the termination date, plus a pro rata portion of the Executive's bonus for the fiscal year in which the termination occurred. In addition, the Company will make payments for one (1) year of all compensation otherwise payable to the Executive pursuant to this Agreement, including, but not limited to, base salary, bonus and welfare benefits. In addition, all of the Executive's unvested stock options and restricted stock awards will immediately vest and become exercisable for a period of one (1) year thereafter and shares of restricted stock of the Company previously granted to the Executive shall become free from all contractual restrictions, and the Company shall continue in effect the Executive's benefits under Section 4(g) hereof and the Executive's health benefits noted in Section 4(c) hereof or their equivalent for a period equal to the greater of two (2) years or the remaining Term, without further extension. (d) Subject to Section 6(e) hereof, if the Term is terminated by the Company without Cause or other than by reason of his death or Disability, in addition to any other remedies available, or if the Executive terminates the Term for Good Reason, the Company and the Partnership shall pay the Executive a lump sum equal to the product of (x) the sum of (A) the Executive's then annual base salary and (B) the amount of the Executive's bonus for the preceding year, or if the Term is terminated in its initial year the Executive's target bonus for such year, multiplied by (y) the greater of (A) two (2) and (B) a fraction, the numerator of which is the number of days remaining in the Term (without further extension) and the denominator of which is 365. In addition, all of the Executive's unvested stock options and restricted stock awards will immediately vest and become exercisable for a period of one (1) year thereafter and shares of restricted stock of the Company previously granted to the Executive shall become free from all contractual restrictions. (e) If, within twenty-four (24) months following a Change in Control, the Term is terminated by the Executive for Good Reason or by the Company without Cause, in addition to any other rights which the Executive may have under law or otherwise, the Executive shall receive the same payments and benefits provided for under Section 6(d) hereof; provided, that the amount of -------- the multiplier described in clause (d)(y)(A) of Section 6 hereof shall be increased from two (2) times to three (3) times. (f) If at any time the Term is not extended pursuant to the proviso to Section 1 hereof as a result of the Company giving notice thereunder that it elects to permit the term of this Agreement to expire without extension, the Company shall be deemed to have terminated the Executive's employment without Cause. (g) Notwithstanding anything in this Section 6 to the contrary if the Term is terminated within twenty-four (24) months of the Spin-Off Date, other than by the Company for Cause (as defined herein), all stock options and restricted stock awards granted to the 6 Executive will continue to vest and remain exercisable in accordance with their respective terms as if the termination of the Term had not occurred. (h) As used herein, the term "Cause" means: (i) the Executive's willful and intentional failure or refusal to perform or observe any of his material duties, responsibilities or obligations set forth in this Agreement; provided, however, that the -------- ------- Company shall not be deemed to have Cause pursuant to this clause (i) unless the Company gives the Executive written notice that the specified conduct has occurred and making specific reference to this Section 6(h)(i) and the Executive fails to cure the conduct within thirty (30) days after receipt of such notice; (ii) any willful and intentional act of the Executive involving malfeasance, fraud, theft, misappropriation of funds, embezzlement or dishonesty affecting the Company or the Partnership; or (iii) the Executive's conviction of, or a plea of guilty or nolo contendere to, an offense which is a felony in the jurisdiction involved. Termination of the Executive for Cause shall be communicated by a Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean delivery to the Executive of a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Company's Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and reasonable opportunity for the Executive, together with the Executive's counsel, to be heard before the Board prior to such vote) of finding that in the good faith opinion of the Board, the Executive was guilty of conduct constituting Cause and specifying the particulars thereof in detail, including, with respect to any termination based upon conduct described in clause (i) above, that the Executive failed to cure such conduct during the thirty-day period following the date on which the Company gave written notice of the conduct referred to in such clause (i). For purposes of this Agreement, no such purported termination of the Executive's employment shall be effective without such Notice of Termination; (i) As used herein, the term "Good Reason" means the occurrence of any of the following, without the prior written consent of the Executive: (i) assignment of the Executive of duties materially inconsistent with the Executive's positions as described in Section 2(a) hereof, or any significant diminution in the Executive's duties or responsibilities, other than in connection with the termination of the Executive's employment for Cause, Disability or as a result of the Executive's death or by the Executive other than for Good Reason; 7 (ii) the failure of the Company to nominate the Executive to the Board or the failure of the Executive to be elected to the Board; (iii) the change in the location of the Company's principal executive offices to a location outside the Washington, D.C. metropolitan area or the change in the location of the Executive's principal place of employment to a location outside the Dallas, Texas metropolitan area; (iv) any material breach of this Agreement by the Company or the Partnership which is continuing; or (v) a Change in Control; provided, however, that the Executive shall not be deemed to have Good Reason - -------- ------- pursuant to clauses (i), (ii) or (iv) above unless the Executive gives the Company or the Partnership, as the case may be, written notice that the specified conduct or event has occurred and the Company or the Partnership fails to cure such conduct or event within thirty (30) days of the receipt of such notice. (j) As used herein, the term "Change in Control" means the occurrence of any one of the following events: (i) the acquisition (other than from the Company) by any "Person" (as the term is used for purposes of Sections 13(d) or 14(d) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty (50%) percent or more of the combined voting power of the Company's then outstanding voting securities; or (ii) the individuals who were members of the Board (the "Incumbent Board") during the previous twelve (12) month period, cease for any reason to constitute at least a majority of the Board; provided, -------- however, that if the election, or nomination for election by the Company's ------- stockholders, of any new director was approved by a vote of at least two- thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; or (iii) approval by stockholders of the Company of (a) merger or consolidation involving the Company if the stockholders of the Company, immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than seventy (70%) percent of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding 8 immediately before such merger or consolidation or (b) a complete liquidation or dissolution of the Company or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to clause (i) above solely because fifty (50%) percent or more of the combined voting power of the Company's then outstanding securities is acquired by (a) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries or (b) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. (k) The amounts required to be paid and the benefits required to be made available to the Executive under this Section 6 are absolute. Under no circumstances shall the Executive, upon the termination of his employment hereunder, be required to seek alternative employment and, in the event that the Executive does secure other employment, no compensation or other benefits received in respect of such employment shall be set-off or in any other way limit or reduce the obligations of the Company under this Section 6. 7. Confidential Information. ------------------------ (a) The Executive acknowledges that the Company and its subsidiaries or affiliated ventures ("Company Affiliates") own and have developed and compile, and will in the future own, develop and compile certain Confidential Information and that during the course of his rendering services hereunder Confidential Information will be disclosed to the Executive by the Company Affiliates. The Executive hereby agrees that, during the Term and for a period of three years thereafter, he will not use or disclose, furnish or make accessible to anyone, directly or indirectly, any Confidential Information of the Company Affiliates. (b) As used herein, the term "Confidential Information" means any trade secrets, confidential or proprietary information, or other knowledge, know-how, information, documents or materials, owned, developed or possessed by a Company Affiliate pertaining to its businesses the confidentiality of which such company takes reasonable measures to protect, including, but not limited to, trade secrets, techniques, know-how (including designs, plans, procedures, processes and research records), software, computer programs, innovations, discoveries, improvements, research, developments, test results, reports, specifications, data, formats, marketing data and business plans and strategies, agreements and other forms of documents, expansion plans, budgets, projections, and salary, staffing and employment information. Notwithstanding the foregoing, Confidential Information shall not in any event include information which (i) was generally known or generally available to the public prior to its disclosure to the Executive, (ii) becomes generally known or generally available to the public subsequent to its disclosure to the Executive through no wrongful act of the Executive, 9 (iii) is or becomes available to the Executive from sources other than the Company Affiliates which sources are not known to the Executive to be under any duty of confidentiality with respect thereto or (iv) the Executive is required to disclose by applicable law or regulation or by order of any court or federal, state or local regulatory or administrative body (provided that the Executive provides the Company with prior notice of the contemplated disclosure and reasonably cooperates with the Company, at the Company's sole expense, in seeking a protective order or other appropriate protection of such information). 8. Specific Performance. -------------------- (a) The Executive acknowledges that the services to be rendered by him hereunder are of a special, unique, extraordinary and personal character and that the Company Affiliates would sustain irreparable harm in the event of a violation by the Executive of Section 7 hereof. Therefore, in addition to any other remedies available, the Company shall be entitled to specific enforcement and/or an injunction from any court of competent jurisdiction restraining the Executive from committing or continuing any such violation of this Agreement without proving actual damages or posting a bond or other security. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of damages. (b) If any of the restrictions on activities of the Executive contained in Section 7 hereof shall for any reason be held by a court of competent jurisdiction to be excessively broad, such restrictions shall be construed so as thereafter to be limited or reduced to be enforceable to the maximum extent compatible with the applicable law as it shall then appear; it being understood that by the execution of this Agreement the parties hereto regard such restrictions as reasonable and compatible with their respective rights. (c) Notwithstanding anything in this Agreement to the contrary, in the event that the Company fails to make any payment of any amounts or provide any of the benefits to the Executive when due as called for under Section 6 of this Agreement and such failure shall continue for twenty (20) days after notice thereof from the Executive, all restrictions on the activities of the Executive under Section 7 hereof shall be immediately and permanently terminated. 9. Withholding. The parties agree that all payments to be made to ----------- the Executive by the Company pursuant to the Agreement shall be subject to all applicable withholding obligations of such company. 10. Notices. All notices required or permitted hereunder shall be in ------- writing and shall be deemed given and received when delivered personally, four (4) days after being mailed if sent by registered or certified mail, postage pre-paid, or by one (1) day after delivery if sent by air courier (for next-day delivery) with evidence of receipt thereof or by facsimile with receipt confirmed by the addressee. Such notices shall be addressed respectively: 10 If to the Executive, to: 900 Kingsbury Way Southlake, Texas 76092 If to the Company or to the Partnership, to: MeriStar Hotel & Resorts, Inc. 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 or to any other address of which such party may have given notice to the other parties in the manner specified above. 11. Miscellaneous. ------------- (a) This Agreement is a personal contract calling for the provision of unique services by the Executive, and the Executive's rights and obligations hereunder may not be sold, transferred, assigned, pledged or hypothecated by the Executive. The rights and obligations of the Company and the Partnership hereunder will be binding upon and run in favor of their respective successors and assigns. The Company will not be deemed to have breached this Agreement if any obligations of the Company to make payments to the Executive are satisfied by the Partnership. (b) This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to conflict of laws principles. (c) Any controversy arising out of or relating to this Agreement or any breach hereof shall be settled by arbitration in Dallas, Texas by a single neutral arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon any award rendered may be entered in any court having jurisdiction thereof, except in the event of a controversy relating to any alleged violation by the Executive of Section 7 hereof, in which case the Company shall be entitled to seek injunctive relief from a court of competent jurisdiction without the requirement to seek arbitration. (d) The headings of the various sections of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 11 (e) The provisions of this Agreement which by their terms call for performance subsequent to the expiration or termination of the Term shall survive such expiration or termination. (f) The Company and the Partnership shall reimburse the Executive for all costs incurred by the Executive in any proceeding for the successful enforcement of the terms of this Agreement, including without limitation all costs of investigation and reasonable attorneys fees and expenses. (g) This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof, all of which shall be terminated on the Commencement Date. In addition, the parties hereto hereby waive all rights such party may have under all other prior agreements and undertakings, both written and oral, among the parties hereto, or between the Executive and American General Hospitality Corporation, with respect to the subject matter hereof. (h) This Agreement is conditioned upon and subject to the occurrence of the Spin-Off as defined in the Registration Statement and shall not be effective until the Spin-Off has occurred. [SIGNATURE PAGE FOLLOWS] 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. EXECUTIVE: _____________________________________ Steven D. Jorns COMPANY: MERISTAR HOTELS & RESORTS, INC. By:___________________________________ Name: Title: PARTNERSHIP: MERISTAR H & R OPERATING PARTNERSHIP L.P. By:____________________________, its general partner By:___________________________________ Name: Title: 13 EX-10.6 7 FORM OF EQUITY INCENTIVE PLAN Exhibit 10.6 MERISTAR HOTELS & RESORTS, INC. INCENTIVE PLAN TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS............................................... -1- ----------- 1.1 Affiliate............................................ -1- --------- 1.2 AGHI................................................. -1- ---- 1.3 Agreement............................................ -1- --------- 1.4 Award................................................ -1- ----- 1.5 Board................................................ -1- ----- 1.6 Code................................................. -1- ---- 1.7 Committee............................................ -1- --------- 1.8 Common Stock......................................... -1- ------------ 1.9 Company.............................................. -1- ------- 1.10 Exchange Act........................................ -1- ------------ 1.11 Fair Market Value................................... -1- ----------------- 1.12 Incentive Award..................................... -2- --------------- 1.13 Lessee.............................................. -2- ------ 1.14 MeriStar............................................ -2- -------- 1.15 Option.............................................. -2- ------ 1.16 Participant......................................... -2- ----------- 1.17 Performance Shares.................................. -2- ------------------ 1.18 Permitted Family Members............................ -2- ------------------------ 1.19 Plan................................................ -2- ---- 1.20 Stock Award......................................... -2- ----------- 1.21 Ten Percent Shareholder............................. -2- ----------------------- ARTICLE II PURPOSES.................................................. -3- -------- ARTICLE III ADMINISTRATION............................................ -3- -------------- ARTICLE IV ELIGIBILITY............................................... -4- ----------- ARTICLE V STOCK SUBJECT TO PLAN..................................... -4- --------------------- 5.1 Shares Issued........................................ -4- ------------- 5.2 Aggregate Limit...................................... -4- --------------- 5.3 Reallocation of Shares............................... -5- ---------------------- -i- ARTICLE VI OPTIONS.................................................. -5- ------- 6.1 Award............................................... -5- ----- 6.2 Option Price........................................ -5- ------------ 6.3 Maximum Option Period............................... -5- --------------------- 6.4 Nontransferability.................................. -6- ------------------ 6.5 Transferable Options................................ -6- -------------------- 6.6 Employee Status..................................... -6- --------------- 6.7 Exercise............................................ -6- -------- 6.8 Payment............................................. -6- ------- 6.9 Shareholder Rights.................................. -7- ------------------ 6.10 Disposition of Stock............................... -7- -------------------- ARTICLE VII STOCK AWARDS............................................. -7- ------------ 7.1 Award............................................... -7- ----- 7.2 Vesting............................................. -7- ------- 7.3 Performance Objectives.............................. -7- ---------------------- 7.4 Employee Status..................................... -8- --------------- 7.5 Shareholder Rights.................................. -8- ------------------ ARTICLE VIII PERFORMANCE SHARE AWARDS................................. -8- ------------------------ 8.1 Award............................................... -8- ----- 8.2 Earning the Award................................... -8- ----------------- 8.3 Payment............................................. -9- ------- 8.4 Shareholder Rights.................................. -9- ------------------ 8.5 Nontransferability.................................. -9- ------------------ 8.6 Transferable Performance Shares..................... -9- ------------------------------- 8.7 Employee Status..................................... -9- --------------- ARTICLE IX INCENTIVE AWARDS......................................... -10- ---------------- 9.1 Award............................................... -10- ----- 9.2 Terms and Conditions................................ -10- -------------------- 9.3 Nontransferability.................................. -10- ------------------ 9.4 Transferable Incentive Awards....................... -10- ----------------------------- 9.5 Employee Status..................................... -11- --------------- 9.6 Shareholder Rights.................................. -11- ------------------ ARTICLE X..................................................... -11- -ii- ARTICLE XI ADJUSTMENT UPON CHANGE IN COMMON STOCK................... -11- -------------------------------------- ARTICLE XII COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES; GOVERNING LAW............. -12- -------------------------------------------- ARTICLE XIII GENERAL PROVISIONS....................................... -12- ------------------ 13.1 Effect on Employment and Service................... -12- -------------------------------- 13.2 Unfunded Plan...................................... -13- ------------- 13.3 Rules of Construction.............................. -13- --------------------- ARTICLE XIV AMENDMENT................................................ -13- --------- ARTICLE XV DURATION OF PLAN......................................... -13- ---------------- ARTICLE XVI EFFECTIVE DATE OF PLAN................................... -13- ---------------------- -iii- ARTICLE I DEFINITIONS ----------- 1.1 Affiliate means any "subsidiary" or "parent" corporation --------- (within the meaning of Section 424 of the Code) of the Company and MeriStar H&R Operating Partnership, L.P. 1.2 Agreement means a written agreement (including any amendment --------- or supplement thereto) between the Company and a Participant specifying the terms and conditions of a Stock Award, an award of Performance Shares or an Option or Incentive Award granted to such Participant. 1.3 Award means any of an Incentive Award, an Option, an award of ----- Performance Shares, or a Stock Award. 1.4 Board means the Board of Directors of the Company. ----- 1.5 Code means the Internal Revenue Code of 1986, and any ---- amendments thereto. 1.6 Committee means the Compensation Committee of the Board or a --------- subcommittee thereof comprised of at least two (2) directors each of whom is a non-employee director within the meaning of Securities and Exchange Commission Rule 16b-3. 1.7 Common Stock means the common stock, $0.01 par value, of the ------------ Company. 1.8 Company means MeriStar Hotels & Resorts, Inc., a Delaware ------- corporation. 1.9 Exchange Act means the Securities Exchange Act of 1934, as ------------ amended and as in effect on the effective date of this Plan. 1.10 Fair Market Value means, on any given date, the current fair ----------------- market value of the shares of Common Stock as determined below: If the Common Stock is not listed on an established stock exchange, the Fair Market Value shall be the average of the final bid and asked quotations on the over-the-counter market in which the Common Stock is traded or, if applicable, the reported "closing" price of a share of Common Stock in the New York over-the-counter market as reported by the National Association of Securities Dealers, Inc. If the Common Stock is listed on one or more established stock exchanges, Fair Market Value shall be deemed to be the highest closing price of a share of Common Stock reported on any such exchange. In any case, if no sale of Common Stock is made on any stock exchange or over-the-counter market on that date, then Fair Market Value shall be determined as of the next preceding day on which there was a sale. If the Common Stock is not traded, Fair Market Value shall be determined by the Board using any reasonable method in good faith. 1.11 Incentive Award means an award which, subject to such terms --------------- and conditions as may be prescribed by the Administrator, entitles the Participant to receive a cash payment from the Company or an Affiliate. 1.12 MeriStar means MeriStar Hospitality Corporation, a Maryland -------- corporation. 1.13 Option means a stock option that entitles the holder to ------ purchase from the Company a stated number of shares of Common Stock at the price set forth in an Agreement. 1.14 Participant means an employee of the Company or an Affiliate, ----------- including an employee who is a member of the Board, or an individual whose efforts contribute to the performance or success of the Company or an Affiliate, who satisfies the requirements of Article IV and is selected by the Committee to receive a Stock Award, an Option, an Incentive Award, an award of Performance Shares or a combination thereof. 1.15 Performance Shares means an award, in the amount determined ------------------ by the Committee and specified in an Agreement, stated with reference to a specified number of shares of Common Stock, that entitles the holder to receive a payment for each specified share equal to the Fair Market Value of Common Stock on the date of payment. 1.16 Permitted Family Members shall have the meaning set forth in ------------------------ Section 6.5 hereof. 1.17 Plan means the MeriStar Hotels & Resorts, Inc. Incentive ---- Plan. 1.18 Spin-Off means the effective time of the spin-off of the -------- Company by Capstar Hotel Company, a Delaware corporation, and certain of its affiliates. 1.19 Stock Award means Common Stock awarded to a Participant under ----------- Article VIII. 1.20 Ten Percent Shareholder means any individual owning more than ----------------------- ten percent (10%) of the total combined voting power of all classes of stock of the Company or of an Affiliate. An individual shall be considered to own any voting stock owned (directly or indirectly) by or for his brothers, sisters, spouse, ancestors or lineal descendants and shall be considered to own proportionately any voting stock owned (directly or indirectly) by or for a corporation, partnership, estate or trust of which such individual is a shareholder, partner or beneficiary. -2- ARTICLE II PURPOSES -------- The Plan is intended to assist the Company and its Affiliates in recruiting and retaining individuals with ability and initiative by enabling such persons to participate in the future success of the Company and its Affiliates and to associate their interests with those of the Company and its stockholders. The Plan is intended to permit the grant of both Options qualifying under Section 422 of the Code ("incentive stock options") and Options not so qualifying, and the grant of Stock Awards, Performance Shares and Incentive Awards. No Option that is intended to be an incentive stock option shall be invalid for failure to qualify as an incentive stock option. The proceeds received by the Company from the sale of Common Stock pursuant to this Plan shall be used for general corporate purposes. ARTICLE III ADMINISTRATION -------------- The Plan shall be administered by the Committee. The Committee shall have authority to grant Stock Awards, Performance Shares, Incentive Awards and Options upon such terms (not inconsistent with the provisions of this Plan) as the Committee may consider appropriate. Such terms may include conditions (in addition to those contained in this Plan) on the exercisability of all or any part of an Option or on the transferability or forfeitability of a Stock Award, Incentive Award or Performance Shares. Notwithstanding any such conditions, the Committee may, in its discretion, accelerate the time at which any Option may be exercised, or the time at which a Stock Award may become transferable or nonforfeitable or the time at which an Incentive Award or Performance Shares may be settled. In addition, the Committee shall have complete authority to interpret all provisions of this Plan; to prescribe the form of Agreements; to adopt, amend, and rescind rules and regulations pertaining to the administration of the Plan; and to make all other determinations necessary or advisable for the administration of this Plan. The express grant in the Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. Any decision made, or action taken, by the Committee or in connection with the administration of this Plan shall be final and conclusive. Neither the Committee nor any member of the Committee shall be liable for any act done in good faith with respect to this Plan or any Agreement, Option, Stock Award, Incentive Award or award of Performance Shares. All expenses of administering this Plan shall be borne by the Company. The Committee, in its discretion, may delegate to one or more officers of the Company all or part of the Committee's authority and duties with respect to grants and awards to individuals who are not subject to the reporting and other provisions of Section 16 of the Exchange Act; provided, however, the -------- ------- Committee shall not delegate its authority (i) to appoint delegates or its authority to amend or revoke any delegation, (ii) under Articles XI and XII hereof and (iii) to accelerate the exercisability of Options, the transferability of Stock Awards or the -3- time at which Incentive Awards or awards of Performance Shares may be settled. The Committee may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Committee's delegate or delegates that were consistent with the terms of the Plan. ARTICLE IV ELIGIBILITY ----------- Any employee of the Company or an Affiliate (including a corporation that becomes an Affiliate after the adoption of this Plan) or a person whose efforts contribute to the performance or success of the Company or an Affiliate (including a corporation that becomes an Affiliate after the adoption of this Plan) (other than a Board member or an employee of MeriStar who is not also an employee of the Company or an Affiliate) is eligible to participate in this Plan if the Committee, in its sole discretion, determines that such person has contributed significantly or can be expected to contribute significantly to the profits or growth of the Company or an Affiliate. Directors of the Company who are employees of the Company or an Affiliate may be selected to participate in this Plan. ARTICLE V STOCK SUBJECT TO PLAN --------------------- 5.1 Shares Issued. Upon the award of shares of Common Stock ------------- pursuant to a Stock Award or the settlement of a Performance Share award, the Company may issue shares of Common Stock from its authorized but unissued Common Stock. Upon the exercise of an Option, the Company may deliver to the Participant (or the Participant's broker if the Participant so directs), shares of Common Stock from its authorized but unissued Common Stock. 5.2 Aggregate Limit. With respect to calendar year 1998, the --------------- maximum number of shares of Common Stock that may be issued pursuant to Awards granted under the Plan shall be the total of (i) twelve (12%) percent of the number of shares of Common Stock outstanding immediately after the Spin-Off. Thereafter, at any given time, the maximum number of shares of Common Stock that may be issued pursuant to Awards granted under the Plan shall be the total of (i) twelve (12%) percent of the number of shares of Common Stock that were outstanding as of the end of the immediately preceding calendar year (rounded downward if necessary to eliminate fractional shares), minus (ii) the number of shares subject to Awards which were granted under the Plan through the last day of the immediately preceding calendar year, plus (iii) as of the last day of the immediately preceding calendar year, the number of shares with respect to which previously granted Awards have expired. In addition to the foregoing, in no event may the total number of shares of Common Stock covered by outstanding Incentive Stock Options granted under the Plan, plus the number of shares of Common Stock issued pursuant to the exercise of Incentive Stock Options, whenever granted under the Plan, exceed 1,400,000 shares. -4- The maximum aggregate number of shares that may be issued under this Plan shall be subject to adjustment as provided in XI. 5.3 Reallocation of Shares. If an Award is terminated (for any ---------------------- reason other than its exercise), forfeited or expires unexercised, the number of shares of Common Stock allocated to the Award or portion thereof which was terminated, forfeited or expired unexercised may be reallocated to other Awards to be granted under this Plan. ARTICLE VI OPTIONS ------- 6.1 Award. In accordance with the provisions of Article IV, the ----- Committee will designate each individual to whom an Option is to be granted and will specify the number of shares of Common Stock covered by such awards; provided, however, that no individual may be granted Options in any calendar year covering more than 750,000 shares of Common Stock. 6.2 Option Price. The price per share for Common Stock purchased ------------ on the exercise of an Option shall be determined by the Committee on the date of grant; provided, however, that the price per share for Common Stock purchased on the exercise of any Option shall not be less than the Fair Market Value on the date of grant or, with respect to Options granted in connection with the initial employment of an individual, eighty-five (85%) percent of the Fair Market Value on the date the Option is granted; provided, however, that no more than ten percent (10%) of the shares of Common Stock issued under the Plan be may granted at less than one hundred percent (100%) of Fair Market Value. Notwithstanding the preceding sentence, the price per share for Common Stock purchased on the exercise of any Option that is an incentive stock option shall not be less than the Fair Market Value on the date the Option is granted or, in the case of an incentive stock option granted to an individual who is a Ten Percent Shareholder on the date such option is granted, shall not be less than one hundred ten percent (110%) of the Fair Market Value on the date the Option is granted. 6.3 Maximum Option Period. The maximum period in which an Option --------------------- may be exercised shall be determined by the Committee on the date of grant, except that no Option that is an incentive stock option shall be exercisable after the expiration of ten years from the date such Option was granted. In the case of an incentive stock option that is granted to a Participant who is a Ten Percent Shareholder on the date of grant, such Option shall not be exercisable after the expiration of five years from the date of grant. The terms of any Option that is an incentive stock option may provide that it is exercisable for a period less than such maximum period. 6.4 Nontransferability. Except as provided in Section 6.5 hereof, ------------------ each Option granted under this Plan shall be nontransferable except by will or by the laws of descent and distribution. During the lifetime of the Participant to whom the option is granted, the Option -5- may be exercised only by the Participant. No right or interest of a Participant in any Option shall be liable for, or subject to, any lien, obligation, or liability of such Participant. 6.5 Transferable Options. Section 6.4 hereof to the contrary -------------------- notwithstanding, if the Agreement provides, an Option that is not an incentive stock option may be transferred by a Participant to the Participant's children, grandchildren, spouse, one or more trusts for the benefit of such family members or a partnership in which such family members are the only partners (collectively, "Permitted Family Members"); provided, however, that the Participant may not receive any consideration for the transfer. The holder of an Option transferred pursuant to this section shall be bound by the same terms and conditions that governed the Option during the period that it was held by the Participant. 6.6 Employee Status. For purposes of determining the applicability --------------- of Section 422 of the Code (relating to incentive stock options), or in the event that the terms of any Option provide that it may be exercised only during employment or within a specified period of time after termination of employment, the Committee may decide to what extent leaves of absence for governmental or military service, illness, temporary disability, or other reasons, shall not be deemed interruptions of continuous employment. 6.7 Exercise. Subject to the provisions of this Plan and the -------- applicable Agreement, an Option shall become exercisable in such installments (which need not be equal) and at such times as may be designated by the Committee and set forth in the Agreement; provided, however, that incentive stock options (granted under the Plan and all plans of the Company and its Affiliates) may not be first exercisable in a calendar year for stock having a Fair Market Value (determined as of the date an option is granted) exceeding $100,000. To the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, at any time after becoming exercisable, but not later than the date the Option expires in accordance with Section 6.3 hereof. An Option granted under this Plan may be exercised with respect to any number of whole shares less than the full number for which the Option could be exercised. A partial exercise of an Option shall not affect the right to exercise the Option from time to time in accordance with this Plan and the applicable Agreement with respect to the remaining shares subject to the Option. 6.8 Payment. Unless otherwise provided by the Agreement, payment ------- of the Option price shall be made in cash or a cash equivalent acceptable to the Committee. If the Agreement provides, payment of all or part of the Option price may be made by surrendering shares of Common Stock to the Company. If Common stock is used to pay all or part of the Option price, the sum of the cash and cash equivalent and the Fair Market Value (determined as of the day preceding the date of exercise) of the shares surrendered must not be less than the Option price of the shares for which the Option is being exercised. In addition, a Participant may provide instructions to the Company that upon receipt of the Option price in cash from a broker -6- or dealer acting at the direction of the Participant in payment for any shares of Common Stock pursuant to the exercise of an Option, the Company shall issue such shares of Common Stock directly to the designated broker or dealer. 6.9 Shareholder Rights. No Participant shall have any rights as a ------------------ shareholder with respect to shares subject to his Option until the date of exercise of such Option. 6.10 Disposition of Stock. A Participant shall notify the Company -------------------- of any sale or other disposition of Common Stock acquired pursuant to an Option that was an incentive stock option if such sale or disposition occurs: (i) within two years of the grant of an Option or (ii) within one year of the issuance of the Common Stock to the Participant. Such notice shall be in writing and directed to the Secretary of the Company. ARTICLE VII STOCK AWARDS ------------ 7.1 Award. In accordance with the provisions of Article IV, the ----- Committee will designate each individual to whom a Stock Award is to be made and will specify the number of shares of Common Stock covered by such awards; provided, however, that no individual may receive Stock Awards with respect to more than 50,000 shares of Common Stock in any calendar year and no more than thirty (30%) percent of the shares of Common Stock available under the Plan may be issued in the form of Stock Awards. 7.2 Vesting. The Committee, on the date of the award, may ------- prescribe that a Participant's rights in the Stock Award shall be forfeitable or otherwise restricted for a period of time or subject to such conditions as may be set forth in the Agreement. Except with respect to Stock Awards any portion of which are immediately vested, the period of restriction shall be at least three years; provided, however, that the minimum period of restriction shall be at least one year in the case of (i) the restricted portion of a Stock Award with an immediately vested portion and (ii) a Stock Award that will become transferable and nonforfeitable on account of the satisfaction of performance objectives prescribed by the Committee. 7.3 Performance Objectives. In accordance with Section 7.2 hereof, ---------------------- the Committee may prescribe that Stock Awards will be vested immediately upon grant or will become vested or transferable or both based on objectives stated with respect to the Company's, an Affiliate's or an operating unit's return on equity, earnings per share, total earnings, earnings growth, return on capital, return on assets, funds from operations or Fair Market Value. If the Committee, on the date of award, prescribes that a Stock Award shall become nonforfeitable and -7- transferable only upon the attainment of performance objectives stated with respect to one or more of the foregoing criteria, the shares subject to such Stock Award shall become nonforfeitable and transferable only to the extent that the Committee certifies that such objectives have been achieved. 7.4 Employee Status. In the event that the terms of any Stock --------------- Award provide that shares may become transferable and nonforfeitable thereunder only after completion of a specified period of employment, the Committee may decide in each case to what extent leaves of absence for governmental or military service, illness, temporary disability, or other reasons shall not be deemed interruptions of continuous employment. 7.5 Shareholder Rights. Prior to their forfeiture (in accordance ------------------ with the applicable Agreement and while the shares of Common Stock granted pursuant to the Stock Award may be forfeited or are nontransferable), a Participant will have all rights of a shareholder with respect to a Stock Award, including the right to receive dividends and vote the shares; provided, however, that during such period (i) a Participant may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of shares of Common Stock granted pursuant to a Stock Award, (ii) the Company shall retain custody of the certificates evidencing shares of Common Stock granted pursuant to a Stock Award, and (iii) the Participant will deliver to the Company a stock power, endorsed in blank, with respect to each Stock Award. The limitations set forth in the preceding sentence shall not apply after the shares of Common Stock granted under the Stock Award are transferable and are no longer forfeitable. ARTICLE VIII PERFORMANCE SHARE AWARDS ------------------------ 8.1 Award. In accordance with the provisions of Article IV, the ----- Committee will designate each individual to whom an award of Performance Shares is to be made and will specify the number of shares of Common Stock covered by such awards; provided, however, that no Participant may receive an award of Performance Shares in any calendar year for more than 12,500 shares of Common Stock. 8.2 Earning the Award. The Committee, on the date of the grant of ----------------- an award, may prescribe that the Performance Shares, or portion thereof, will be earned, and the Participant will be entitled to receive payment pursuant to the award of Performance Shares only upon the satisfaction of certain requirements or the attainment of certain objectives. By way of example and not of limitation, the restrictions may provide that Performance Shares will be forfeited without payment if the Participant separates from the service of the Company and its Affiliates before the expiration of a stated term or unless the Company, an Affiliate or an operating unit achieves objectives stated with reference to the Company's, an Affiliate's or an operating unit's return on equity, earnings per share, total earnings, earnings growth, return on capital, return on assets, funds from operations or Fair Market Value. If the Committee, on the date of award, -8- prescribes that no payments will be made with respect to Performance Shares unless performance objectives stated with respect to the foregoing criteria are attained, no such payment will be made unless, and then only to the extent that, the Committee certifies that such objectives have been achieved. 8.3 Payment. In the discretion of the Committee, the amount ------- payable when an award of Performance Shares is earned may be settled in cash, by the issuance of Common Stock or a combination of cash and Common Stock. A fractional share shall not be deliverable when an award of Performance Shares is earned, but a cash payment will be made in lieu thereof. 8.4 Shareholder Rights. No Participant shall, as a result of ------------------ receiving an award of Performance Shares, have any rights as a shareholder until and to the extent that the award of Performance Shares is earned and settled by the issuance of Common Stock. After an award of Performance Shares is earned, if settled completely or partially in Common Stock, a Participant will have all the rights of a shareholder with respect to such Common Stock. 8.5 Nontransferability. Except as provided in Section 8.6 hereof, ------------------ Performance Shares granted under this Plan shall be nontransferable except by will or by the laws of descent and distribution. No right or interest of a Participant in any Performance Shares shall be liable for, or subject to, any lien, obligation, or liability of such Participant. 8.6 Transferable Performance Shares. Section 8.5 hereof to the ------------------------------- contrary notwithstanding, the Committee may grant Performance Shares which are transferable to Permitted Family Members to the extent that, and on such terms and conditions as may be permitted by, Securities Exchange Commission Rule 16b-3 as in effect from time to time. The holder of Performance Shares transferred pursuant to this section shall be bound by the same terms and conditions that governed the Performance Shares during the period that they were held by the Participant. 8.7 Employee Status. In the event that the terms of any --------------- Performance Share award provide that no payment will be made unless the Participant completes a stated period of employment, the Committee may decide to what extent leaves of absence for government or military service, illness, temporary disability, or other reasons shall not be deemed interruptions of continuous employment. ARTICLE IX INCENTIVE AWARDS ---------------- 9.1 Award. In accordance with the provisions of Article IV, the ----- Committee shall designate Participants to whom Incentive Awards are made. All Incentive Awards shall be finally determined exclusively by the Committee under the procedures established by the Committee; provided, however, that no Participant may receive an Incentive Award payment in -9- any calendar year that exceeds the lesser of (i) one hundred (100%) percent of the Participant's base salary (prior to any salary reduction or deferral elections) as of the date of grant of the Incentive Award or (ii) $250,000. 9.2 Terms and Conditions. The Committee, at the time an Incentive -------------------- Award is made, shall specify the terms and conditions which govern the award. Such terms and conditions shall prescribe that the Incentive Award shall be earned only to the extent that the Company, an Affiliate or an operating unit, during a performance period of at least one year, achieves objectives stated with respect to the Company's, an Affiliate's or an operating unit's return on equity, earnings per share, total earnings, earnings growth, return on capital, return on assets, funds from operations or Fair Market Value. Such terms and conditions also may include other limitations on the payment of Incentive Awards including, by way of example and not of limitation, requirements that the Participant complete a specified period of employment with the Company or an Affiliate or that the Company, an Affiliate, or the Participant attain stated objectives or goals (in addition to those prescribed in accordance with the preceding sentence) as a prerequisite to payment under an Incentive Award. The Committee, at the time an Incentive Award is made, shall also specify when amounts shall be payable under the Incentive Award and whether amounts shall be payable in the event of the Participant's death, disability, or retirement. No payment shall be made under an Incentive Award except to the extent that the Committee certifies that the objectives governing such award have been achieved. 9.3 Nontransferability. Except as provided in Section 9.4 hereof, ------------------ Incentive Awards granted under this Plan shall be nontransferable except by will or by the laws of descent and distribution. No right or interest of a Participant in an Incentive Award shall be liable for, or subject to, any lien, obligation, or liability of such Participant. 9.4 Transferable Incentive Awards. Section 9.3 hereof to the ----------------------------- contrary notwithstanding, the Committee may grant Incentive Awards which are transferable to Permitted Family Members to the extent that, and on such terms and conditions as may be permitted by, Securities Exchange Commission Rule 16b-3 as in effect from time to time. The holder of an Incentive Award transferred pursuant to this section shall be bound by the same terms and conditions that governed the Incentive Award during the period that it was held by the Participant. 9.5 Employee Status. If the terms of an Incentive Award provide --------------- that a payment will be made thereunder only if the Participant completes a stated period of employment, the Committee may decide to what extent leaves of absence for governmental or military service, illness, temporary disability or other reasons shall not be deemed interruptions of continuous employment. -10- 9.6 Shareholder Rights. No Participant shall, as a result of ------------------ receiving an Incentive Award, have any rights as a shareholder of the Company or any Affiliate on account of such award. ARTICLE X ACCELERATION UPON CERTAIN EVENTS -------------------------------- In the event (i) of the commencement of a public tender offer for all or any portion of the Common Stock, (ii) a proposal to merge, consolidate or otherwise combine with another company is submitted to the stockholders of the Company for approval, or (iii) the Board approves any transaction or event that would constitute a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of the Securities Exchange Act of 1934, as amended, all outstanding Options and awards shall become fully vested or exercisable, as the case may be, in each case as of the date of the consummation of such tender offer or other transaction or event. ARTICLE XI ADJUSTMENT UPON CHANGE IN COMMON STOCK -------------------------------------- The maximum number of shares as to which Options, Stock Awards and Performance Shares may be granted under this Plan, the terms of outstanding Stock Awards, Options, Performance Share awards and Incentive Awards, and the per individual limitations on the number of shares for which Options, Stock Awards and Performance Shares may be granted, shall be adjusted as the Committee shall determine to be equitably required in the event that there is an increase or reduction in the number of shares of Common Stock, or any change (including, but not limited to, a change in value) in the shares of Common Stock or exchange of shares of Common Stock for a different number or kind of shares or other securities of the Company by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, subdivision or consolidation of shares, extraordinary dividend, change in corporate structure or otherwise. Any determination made under this Article XI by the Committee shall be final and conclusive. The issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the maximum number of shares as to which Options, Stock Awards and Performance Shares may be granted, the per individual limitations on the number of shares for which Options, Stock Awards -11- and Performance Shares may be granted or the terms of outstanding Stock Awards, Options, Incentive Awards or Performance Shares. The Committee may make Stock Awards and may grant Options, Incentive Awards and Performance Shares in substitution for performance shares, phantom shares, stock awards, stock options, stock appreciation rights, or similar awards held by an individual who becomes an employee of the Company or an Affiliate in connection with a transaction described in the first paragraph of this Article XI. Notwithstanding any provision of the Plan (other than the limitation of Section 5.2 hereof), the terms of such substituted Stock Awards, Option, Incentive Awards or Performance Share grants shall be as the Committee, in its discretion, determines is appropriate. ARTICLE XII COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES; GOVERNING LAW -------------------------------------------- No Option shall be exercisable, no Common Stock shall be issued, no certificates for shares of Common Stock shall be delivered, and no payment shall be made under this Plan except in compliance with all applicable federal and state laws and regulations (including, without limitation, withholding tax requirements), any listing agreement to which the Company is a party, and the rules of all domestic stock exchanges on which the Company's shares may be listed. The Company shall have the right to rely on an opinion of its counsel as to such compliance. Any share certificate issued to evidence Common Stock when a Stock Award is granted or for which an option is exercised or a Performance Share settled may bear such legends and statements as the Committee may deem advisable to assure compliance with federal and state laws and regulations. No Option shall be exercisable, no Stock Award shall be granted, no Common Stock shall be issued, no certificate for shares shall be delivered, and no payment shall be made under this Plan until the Company has obtained such consent or approval as the Committee may deem advisable from regulatory bodies having jurisdiction over such matters. Except as to matters of federal law, this Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of Delaware without giving effect to conflicts of law principles. ARTICLE XIII GENERAL PROVISIONS 13.1 Effect on Employment and Service. Neither the adoption of this Plan, its operation, nor any documents describing or referring to this Plan (or any part thereof) shall confer upon any individual any right to continue in the employ or service of the Company or an Affiliate or in any way affect any right and power of the Company or an Affiliate to terminate the employment or service of any individual at any time with or without assigning a reason therefor. -12- 13.2 Unfunded Plan. The Plan, insofar as it provides for grants, ------------- shall be unfunded, and the Company shall not be required to segregate any assets that may at any time be represented by grants under this Plan. Any liability of the Company to any person with respect to any grant under this Plan shall be based solely upon any contractual obligations that may be created pursuant to this Plan. No such obligation of the Company shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company. 13.3 Rules of Construction. Headings are given to the articles and --------------------- sections of this Plan solely as a convenience to facilitate reference. The reference to any statute, regulation, or other provision of law shall be construed to refer to any amendment to or successor of such provision of law. ARTICLE XIV AMENDMENT --------- The Board may amend or terminate this Plan from time to time; provided, however, that no amendment may become effective until shareholder - -------- ------- approval is obtained if the amendment materially (i) increases the aggregate number of shares of Common Stock that may be issued under the Plan, (ii) changes the class of individuals eligible to become Participants or (iii) increases the benefits that may be provided under the Plan. No amendment shall, without a Participant's consent, adversely affect any rights of such Participant under any outstanding Stock Award, Option, Incentive Award or Performance Share award outstanding at the time such amendment is made. ARTICLE XV DURATION OF PLAN ---------------- No Stock Award, Option, Incentive Award or Performance Share award may be granted under this Plan more than ten years after the earlier of the date this Plan was adopted by the Board or the date this Plan was originally approved by stockholders, as reflected in Article XVI. Stock Awards, Options, Incentive Awards and Performance Share awards granted before that date shall remain valid in accordance with their terms. ARTICLE XVI EFFECTIVE DATE OF PLAN ---------------------- The Plan was originally adopted by the Board on _____________, 1998, and approved by shareholders on ____________, 1998. -13- EX-10.7 8 FORM OF NON-EMPLOYEE DIRECTORS' INCENTIVE PLAN Exhibit 10.7 MERISTAR HOTELS & RESORTS, INC. NON-EMPLOYEE DIRECTORS' INCENTIVE PLAN ARTICLE I DEFINITIONS 1.1 Award Date means the first business day following the ---------- Company's annual meeting of stockholders, beginning with the annual meeting of stockholders in 1999. 1.2 Board means the Board of Directors of the Company. ----- 1.3 Committee means the Board or the committee appointed by --------- the Board to administer the Plan. 1.4 Common Stock means the common stock of the Company. ------------ 1.5 Company means MeriStar Hotels & Resorts, Inc., a Delaware ------- corporation. 1.6 Fair Market Value means, on any given date: if the Common ----------------- Stock is not listed on an established stock exchange, Fair Market Value shall be the average of the final bid and asked quotations on the over-the-counter market in which the Common Stock is traded or, if applicable, the reported "closing" price of a share of Common Stock in the New York over-the-counter market as reported by the National Association of Securities Dealers, Inc. If the Common Stock is listed on one or more established stock exchanges, Fair Market Value shall be deemed to be the highest closing price of a share of Common Stock reported on any of such exchanges. In any case, if no sale of Common Stock is made on any stock exchange or over-the-counter market on that date, then Fair Market Value shall be determined as of the next preceding day on which there was a sale. 1.7 First Award Date means the date following the initial ---------------- commencement of service as a member of the Board after the Spin-Off, whether by election or appointment. 1.8 Internal Revenue Code means the Internal Revenue Code of --------------------- 1986, as amended. 1.9 Option means a stock option that entitles the holder to ------ purchase shares of Common Stock from the Company on the terms set forth in Article IV of this Plan. 1.10 Participant means a member of the Board who, on the First ----------- Award Date or applicable Award Date, is not an employee or officer of the Company or any "subsidiary" or "parent" corporation of the Company within the meaning of Section 424 of the Internal Revenue Code. 1.11 Plan means the MeriStar Hotels & Resorts, Inc. Non-Employee ---- Directors' Incentive Plan. 1.12 Spin-Off means the effective time of the spin-off of the -------- Company by CapStar Hotel Company, a Delaware corporation, and certain of its affiliates. ARTICLE II PURPOSES -------- The Plan is intended to (i) assist the Company in recruiting and retaining non-employee directors and (ii) promote a greater identity of interest between Participants and stockholders by enabling Participants to participate in the Company's future success. ARTICLE III ADMINISTRATION -------------- The Plan shall be administered by the Committee. The Committee shall have complete authority to interpret all provisions of the Plan; to adopt, amend, and rescind rules and regulations pertaining to the administration of the Plan and to make all other determinations 2 necessary or advisable for the administration of the Plan. The express grant in the Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. Any decision made, or action taken, by the Committee in connection with the administration of the Plan shall be final and conclusive. No member of the Committee shall be liable for any act done in good faith with respect to the Plan. All expenses of administering the Plan shall be borne by the Company. ARTICLE IV OPTIONS ------- 4.1 Grant of Options. Each Participant shall be granted an Option ---------------- for 7,500 shares of Common Stock on the applicable First Award Date. Thereafter, each Participant shall receive an annual grant of an Option to purchase 5,000 shares of Common Stock on each Award Date. All Options shall be evidenced by Agreements that shall be subject to the applicable provisions of this Plan and to such other provisions as the Committee may adopt which are not inconsistent with the provisions of this Plan. 4.2 Option Price. The price per share of Common Stock purchased ------------ on the exercise of an Option shall be the Fair Market Value on the date that the Option is granted. 4.3 Maximum Option Period. The maximum period during which an --------------------- Option may be exercised shall be ten years from the date of grant. 4.4 Exercise of Options. All Options granted under the Plan shall ------------------- vest in three annual installments beginning on the date of grant and on subsequent anniversaries thereof (each, 3 a "Vesting Date"), provided the Participant continues to serve as a director of the Company on such Vesting Date. 4.5 Effect of Termination of Services or Death. If a Participant ------------------------------------------ ceases to serve as a director of the Company for any reason, the Options that have been previously granted to that Participant and that are not vested as of that date shall be forfeited. Options that have vested as of the date of such cessation of services may be exercised by the Participant, in accordance with and subject to the terms of the Plan, after the date such Participant ceases to be a director of the Company. If a Participant dies, the Options that have been previously granted to that Participant and that are vested as of the date of death may be exercised by the administrator of the Participant's estate, or by the person to whom such Options are transferred by will or the laws of descent and distribution. In no event, however, may any Option be exercised after the expiration date of such Option. Any Option or portion thereof that is not exercised during the applicable time period specified above shall be deemed terminated at the end of the applicable time period for purposes of Article VI hereof. 4.6 Effect of a Change in Control. All Options granted pursuant ----------------------------- to this Plan shall immediately vest upon a Change in Control of the Company. For purposes of the Plan, a "Change in Control" shall mean (i) the commencement of a public tender offer for all or any portion of the Common Stock, (ii) a proposal to merge, consolidate or otherwise combine with another company is submitted to the stockholders of the Company for approval, or (iii) the Board approves any transaction or event that would constitute a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of the Securities Exchange Act of 1934, as amended. 4 4.7 Payment of Option Price. Payment of the Option price shall be ----------------------- made in cash, cash equivalent acceptable to the Committee, Company Common Stock, or a combination thereof. In addition, a Participant may provide instructions to the Company that upon receipt of the Option price in cash from a broker or dealer acting at the direction of the Participant in payment for any shares of Common Stock pursuant to the exercise of an Option, the Company shall issue such shares of Common Stock directly to the designated broker or dealer. If shares of Common Stock are surrendered in payment of the Option price, the shares surrendered must have an aggregate Fair Market Value (determined as of the day preceding the exercise date) that, together with any cash or cash equivalent paid, is not less than the Option price for the number of shares of Common Stock for which this Option is being exercised. 4.8 Nontransferability. Each Option granted under this Plan shall ------------------ be nontransferable except by will or by the laws of descent and distribution. During the lifetime of the Participant to whom an Option is granted, the Option may be exercised only by the Participant. No right or interest of a Participant in any Option shall be liable for, or subject to, any lien, obligation, or liability of such Participant. 4.9 Transferable Options. Section 4.8 hereof to the contrary -------------------- notwithstanding, an Option may be transferred by a Participant to the Participant's children, grandchildren, spouse, one or more trusts for the benefit of such family members or a partnership in which such family members are the only partners; provided, however, that the Participant may not receive any consideration for the transfer. The holder of an Option transferred pursuant to this section shall be bound by the same terms and conditions that governed the Option during the period that it was held by the Participant. 5 4.10 Stockholder Rights. No Participant shall have any rights as ------------------ a stockholder with respect to shares of Common Stock subject to his or her Option until the date of exercise of such option. ARTICLE V SHARES IN LIEU OF FEES ---------------------- 5.1 Each Participant shall have the right to elect to receive payment of any or all director fees in shares of Common Stock rather than cash. Unless a Participant elects otherwise, fees paid in shares of Common Stock will be paid at the same time as are fees paid in cash. ARTICLE VI STOCK SUBJECT TO PLAN --------------------- 6.1 Shares Issued. Upon the exercise of an Option, the Company ------------- may deliver to the Participant (or the Participant's broker if the Participant so directs), shares of Common Stock from its authorized but unissued Common Stock. 6.2 Aggregate Limit. The maximum aggregate number of shares of --------------- Common Stock that may be issued under this Plan is 125,000 shares. The maximum aggregate number of shares that may be issued under this Plan shall be subject to adjustment as provided in Article VII. 6.3 Reallocation of Shares. If an Option is terminated, in whole ---------------------- or in part, for any reason other than its exercise, the number of shares of Common Stock allocated to the Option or portion thereof may be reallocated to other Options to be granted under this Plan. 6 ARTICLE VII ADJUSTMENT UPON CHANGE IN COMMON STOCK -------------------------------------- The provisions of this Plan and the terms of outstanding Options shall be adjusted as the Committee shall determine to be equitably required in the event that there is an increase or reduction in the number of shares of Common Stock, or any change (including, but not limited to, a change in value) in the shares of Common Stock or exchange of shares of Common Stock for a different number or kind of shares or other securities of the Company by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, subdivision or consolidation of shares, extraordinary dividend, change in corporate structure or otherwise. Any determination made under this Article VII by the Committee shall be final and conclusive. The issuance by the Company of shares of any class, or securities convertible into shares of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares of obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the provisions of this Plan or the terms of outstanding Options. 7 ARTICLE VIII COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES; GOVERNING LAW No Common Stock shall be issued and no certificates for shares of Common Stock shall be delivered under the Plan except in compliance with all applicable federal and state laws and regulations, any listing agreement to which the Company is a party, and the rules of all domestic stock exchanges on which the Company's Common Stock may be listed. The Company shall have the right to rely on an opinion of its counsel as to such compliance. Any certificate issued to evidence Common Stock issued upon the exercise of an Option granted under the Plan may bear such legends and statements as the Committee may deem advisable to assure compliance with federal and state laws and regulations. No Common Stock shall be issued and no certificate for shares of Common Stock shall be delivered upon the exercise of an Option granted under the Plan until the Company has obtained such consent or approval as the Committee may deem advisable from regulatory bodies having jurisdiction over such matters. Except as to matters of federal law, this Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of Delaware without giving effect to conflicts of law principles. ARTICLE IX GENERAL PROVISIONS 9.1 Unfunded Plan. The Plan, insofar as it provides for awards, ------------- shall be unfunded, and the Company shall not be required to segregate any assets that may at any time be 8 represented by awards under the Plan. Any liability of the Company to any person with respect to any award to be made under the Plan shall be based solely upon any contractual obligations that may be created pursuant to the Plan. No such obligation of the Company shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company. 9.2 Rules of Construction. Headings are given to the articles and --------------------- sections of the Plan solely as a convenience to facilitate reference. The reference to any statute, regulation, or other provision of law shall be construed to refer to any amendment to or successor of such provision of law. ARTICLE X AMENDMENT --------- The Board may amend from time to time or terminate the Plan at any time; provided, however, that no amendment may become effective until -------- ------- stockholder approval is obtained if the amendment (i) materially increases the aggregate number of shares of Common Stock that may be issued under this Plan or (ii) stockholder approval would be required for compliance with stock exchange rules. No amendment shall, without a Participant's consent, adversely affect any rights of such Participant under any outstanding Option. ARTICLE XI DURATION OF PLAN ---------------- No Option may be made under this Plan after December 31, 2008. Options made before that date shall remain valid in accordance with their terms. 9 ARTICLE XII EFFECTIVE DATE OF PLAN ---------------------- The Plan was originally adopted by the Board on ___________, 1998 and approved by shareholders on ______________, 1998. 10 EX-23.1 9 CONSENT OF KPMG EXHIBIT 23.1 ACCOUNTANTS' CONSENT The Board of Directors CapStar Hotel Company: We consent to the use of our report dated May 19, 1998 related to the balance sheet of MeriStar Hotels & Resorts, Inc. as of March 31, 1998 and the use of our report dated March 30, 1998 related to the combined balance sheets of the management and leasing business of CapStar Hotel Company and subsidiaries ("OpCo") as of December 31, 1997 and 1996 and the related combined statements of operations, owners' equity and cash flows for each of the years in the three-year period ended December 31, 1997, included in the registration statement on Form S-1 of MeriStar Hotels & Resorts, Inc. We also consent to the reference to our firm under the heading "Experts" in the registration statement. /s/ KPMG Peat Marwick LLP Washington, D.C. June 18, 1998 EX-23.2.1 10 CONSENT OF COOPERS & LYBRAND EXHIBIT 23.2.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Amendment No. 3 to Registration Statement of MeriStar Hotels & Resorts, Inc. on Form S-1 (File No. 333-49881) of our report dated January 30, 1998, except for Note 6, as to which the date is March 16, 1998, on our audits of the financial statements of AGH Leasing, L.P. and our report dated April 1, 1998, on our audits of the financial statements of American General Hospitality, Inc., included in the Report on Form 8-K dated and filed on April 17, 1998 and the Form 8-K/A filed on May 22, 1998. We also consent to the references to our firm under the caption "Experts". /s/ COOPERS & LYBRAND L.L.P. Dallas, Texas June 18, 1998 EX-23.2.2 11 CONSENT OF COOPERS & LYBRAND (RALEIGH OFFICE) EXHIBIT 23.2.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Amendment No. 3 to Registration Statement of MeriStar Hotels & Resorts, Inc. on Form S-1 (File No. 333-49881) of our report dated February 6, 1998 on our audits of the financial statements of Winston Hospitality, Inc. as of October 31, 1997 and December 31, 1996 and for the ten months ended October 31, 1997 and the years ended December 31, 1996 and 1995. We also consent to the references to our firm under the caption "Experts". /s/ COOPERS & LYBRAND L.L.P. Raleigh, North Carolina June 18, 1998 -----END PRIVACY-ENHANCED MESSAGE-----