-----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, GE/9blpnW+AfZ8Hk96P9TKfCt59bPcpFmaRk0sq2UxvcPGFL3oGiTkWPQepHUVBH 9Y/oDerdkuGKb7/M86G4hA== 0000950112-96-002111.txt : 19960624 0000950112-96-002111.hdr.sgml : 19960624 ACCESSION NUMBER: 0000950112-96-002111 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19960621 SROS: NASD SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPSTAR HOTEL INVESTORS INC CENTRAL INDEX KEY: 0001014764 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-06583 FILM NUMBER: 96584110 BUSINESS ADDRESS: STREET 1: 1010 WISCONSIN AE NW CITY: WASHINGTON STATE: DC ZIP: 20007 BUSINESS PHONE: 2029654455 MAIL ADDRESS: STREET 1: 1010 WISCONSIN AVE NW CITY: WASHINGTON STATE: DC ZIP: 20007 S-1 1 CAPSTAR HOTEL INVESTORS, INC. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- CAPSTAR HOTEL INVESTORS, INC. (Exact name of registrant as specified in its charter) DELAWARE 7011 52-1979383 (State of incorporation) (Primary Standard Industrial (I.R.S. Employer Classification Code Number) Identification No.)
------------------- 1010 WISCONSIN AVENUE, N.W. WASHINGTON, DC 20007 (202) 965-4455 (Address and telephone number of Registrant's principal executive offices) ------------------- PAUL W. WHETSELL PRESIDENT AND CHIEF EXECUTIVE OFFICER CAPSTAR HOTEL INVESTORS, INC. 1010 WISCONSIN AVENUE, N.W. WASHINGTON, DC 20007 (202) 965-4455 (Name, address and telephone number of agent for service) ------------------- COPIES TO: RICHARD S. BORISOFF, ESQ. J. WARREN GORRELL, JR., ESQ. PAUL, WEISS, RIFKIND, WHARTON & GARRISON ALAN L. DYE, ESQ. 1285 AVENUE OF THE AMERICAS HOGAN & HARTSON L.L.P. NEW YORK, NEW YORK 10019-6064 555 THIRTEENTH STREET, N.W. (212) 373-3000 WASHINGTON, DC 20004-1109 (202) 637-5600
------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / ------------------- CALCULATION OF REGISTRATION FEE [CAPTION] TITLE OF CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE AMOUNT TO BE OFFERING AGGREGATE OFFERING REGISTRATION REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) FEE Common Stock, $.01 par value 10,637,500 $21 $223,387,500 $77,030
(1) Includes 1,387,500 shares as to which the Underwriters have been granted an option to cover over-allotments. (2) Estimated pursuant to Rule 457(a) solely for purposes of calculating the registration fee. ------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CAPSTAR HOTEL INVESTORS, INC. CROSS-REFERENCE SHEET SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY THE ITEMS OF PART I OF FORM S-1
ITEM NO. CAPTION LOCATION IN PROSPECTUS - -------- ----------------------------------------- ----------------------------------------- 1 Forepart of the Registration Statement and Outside Front Cover Page of Prospectus............................. Front Cover Page of Prospectus 2 Inside Front and Outside Back Cover Pages of Prospectus.......................... Inside Front and Outside Back Cover Pages of Prospectus 3 Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges..... Prospectus Summary; Risk Factors 4 Use of Proceeds.......................... Prospectus Summary; Use of Proceeds 5 Determination of Offering Price.......... Front Cover Page of Prospectus; Underwriting 6 Dilution................................. Dilution 7 Selling Security Holders................. Not Applicable 8 Plan of Distribution..................... Underwriting 9 Description of Securities to be Registered............................... Dividend Policy; Description of Capital Stock 10 Interests of Named Experts and Counsel... Not Applicable 11 Information with Respect to the Registrant.............................. Prospectus Summary; The Company; The Formation Transactions; Dividend Policy; Capitalization; Selected Financial and Other Data; Unaudited Pro Forma Financial Statements; Management's Discussion and Analysis of Financial Condition and Results of Operations; The Company; Business and Properties; Management; Principal Stockholders and Selling Stockholder; Certain Relationships and Related Transactions; Shares Available For Future Sale; Financial Statements 12 Disclosure of Commission Position on Indemnification for Securities Act Liabilities........................... Not Applicable
SUBJECT TO COMPLETION, DATED JUNE 21, 1996 PROSPECTUS 9,250,000 SHARES [LOGO] CAPSTAR HOTEL INVESTORS, INC. COMMON STOCK ------------------- CapStar Hotel Investors, Inc. ("CapStar" or the "Company") is a hotel investment and management company which acquires, owns, renovates, repositions and manages hotels throughout the United States. CapStar owns 12 upscale, full-service hotels (the "Owned Hotels") which contain 3,516 rooms. The Company has entered into a contract to acquire five additional hotels (the "Additional Hotels") which contain 1,121 rooms. Including the Owned Hotels, the Company manages 48 hotels (the "Hotels") with 8,849 rooms. The Company's business strategy is to identify and acquire hotel properties with the potential for cash flow growth and to renovate, reposition and operate each hotel according to a business plan specifically tailored to the characteristics of the hotel and its market. Of the 9,250,000 shares of common stock, par value $.01 per share (the "Common Stock") offered hereby, 6,750,000 are being sold by the Company and 2,500,000 are being sold by the Selling Stockholder (as defined herein). See "Principal Stockholders and Selling Stockholder." Prior to the Offering (as defined herein), there has been no public market for the Common Stock. It is currently estimated that the initial public offering price per share will be between $ - and $ - . See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company has applied to list the Common Stock on the New York Stock Exchange ("NYSE") under the symbol "CHO," subject to official notice of issuance. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING ON PAGE 14. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO PUBLIC AND COMMISSIONS(1) COMPANY(2) SELLING STOCKHOLDER Per Share....... $ - $ - $ - $ - Total(3)........ $ - $ - $ - $ -
(1) The Company and the Selling Stockholder have agreed to indemnify the several Underwriters (as defined herein) against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $ - . (3) The Company has granted the Underwriters a 30-day option to purchase up to 1,387,500 additional shares on the same terms and conditions as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to the Company will be $ - , $ - and $ - , respectively. See "Underwriting." ------------------- The shares of Common Stock offered by this Prospectus are offered by the several Underwriters, subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the Underwriters and to certain further conditions. It is expected that delivery of the shares will be made at the offices of Lehman Brothers Inc., in New York, New York on or about - , 1996. ------------------- LEHMAN BROTHERS GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. SMITH BARNEY INC. ------------------- - , 1996. 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. [PHOTOGRAPHS/MAPS AND CAPTIONS TO COME] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes (i) the completion of the Formation Transactions (as defined herein) and (ii) that the over-allotment option granted to the Underwriters will not be exercised. Unless the context otherwise requires, references herein to "CapStar" or the "Company" include CapStar Hotel Investors, Inc. and its subsidiaries, and, for the periods prior to the Formation Transactions, CapStar Management Company, L.P. ("CapStar Management"), EquiStar Hotel Investors, L.P. ("EquiStar") and their respective subsidiaries. The offering by the Company and the Selling Stockholder of an aggregate of 9,250,000 shares of Common Stock is referred to herein as the "Offering." All statistics in this Prospectus relating to the lodging industry generally (other than Company statistics) are from, or have been derived from, information published or provided by Smith Travel Research, an independent industry research organization. Smith Travel Research has not provided any form of consultation, advice or counsel regarding any aspect of the Offering, and Smith Travel Research is in no way associated with the Offering. THE COMPANY CapStar is a hotel investment and management company which acquires, owns, renovates, repositions and manages hotels throughout the United States. CapStar owns 12 upscale, full-service hotels (the "Owned Hotels") which contain 3,516 rooms. Including the Owned Hotels, the Company manages 48 hotels (the "Hotels") with 8,849 rooms. The Company's business strategy is to identify and acquire hotel properties with the potential for cash flow growth and to renovate, reposition and operate each hotel according to a business plan specifically tailored to the characteristics of the hotel and its market. Each of the Owned Hotels is located in a market which has recently experienced strong economic growth, including Atlanta, Charlotte, Chicago, Cleveland, Dallas, Los Angeles, Salt Lake City, Seattle and Washington, D.C. The Owned Hotels include hotels operated under nationally recognized brand names such as Hilton(R), Sheraton(R), Westin(R), Marriott(R), Holiday Inn(R) and Radisson(R), and one hotel operated under an independent brand name. The following table sets forth revenues, gross operating profit, average occupancy, average daily rate ("ADR") and revenue per available room ("RevPAR") for the Owned Hotels as of the periods presented:
THREE MONTHS ENDED MARCH 31, --------------------- PERCENTAGE 1996 1995 INCREASE ------- ------- ---------- Revenues (in thousands)....................... $25,590 $23,403 9.3% Gross operating profit (in thousands)......... $ 7,395 $ 6,305 17.3% Average Occupancy............................. 70.7% 67.9% 4.1% ADR........................................... $ 78.22 $ 73.31 6.7% RevPAR........................................ $ 55.30 $ 49.78 11.1%
The 11.1% increase in RevPAR for the Owned Hotels compares favorably with the 4.9% increase for all upscale hotels over the comparable period as reported by Smith Travel Research. As a fully integrated owner and manager, CapStar intends to capitalize on its management experience and expertise by continuing to make opportunistic acquisitions of full-service hotels, securing additional management contracts and improving the operating performance of the Hotels. The Company's senior management team has successfully managed hotels in all segments of the lodging industry, with particular emphasis on upscale, full-service hotels. Senior management has an average of approximately 19 years of experience in the hotel industry. Since the inception of the Company's management business in 1987, the Company has achieved consistent growth, even during periods of 3 relative industry weakness. The Company attributes its management success to its ability (i) to analyze each hotel as a unique property and identify those particular cash flow growth opportunities which each hotel presents, (ii) to create and implement marketing plans that properly position each hotel within its local market, and (iii) to develop management programs that emphasize guest service, labor productivity, revenue yield and cost control. The Company has a distinct management culture that stresses creativity, loyalty and entrepreneurship and was developed to emphasize operations from an owner's perspective. This culture is reinforced by the fact that 33 members of management own an aggregate of 7.8% of the Company's equity. See "Principal Stockholders and Selling Stockholder." The Company is in the process of renovating and repositioning the Owned Hotels based on strategic plans designed to address the opportunities presented by each hotel and local market. Management selects renovations intended to result in a high return on investment and to extend the Owned Hotels' appeal to a broader range of market segments. Examples of these revenue generating renovations include the following: enhancing meeting and banquet facilities to attract lucrative group conferences and conventions; upgrading guest rooms to meet the needs of business travelers and to increase ADRs; renovating restaurants and introducing new food and beverage concepts to attract additional guests and local patrons; and completing necessary repairs and upgrades of interior and exterior spaces to ensure high levels of quality and guest satisfaction. During the 12 months ended March 31, 1996, the Company spent a total of $8.4 million on renovations at the Owned Hotels and intends to spend an additional $21.4 million completing the renovation programs. The Company believes that the upscale, full-service segment of the lodging industry is the most attractive segment in which to acquire, own and manage hotels and further believes that there are currently many attractive opportunities to acquire properties in this segment of the industry at prices below replacement cost. The upscale, full-service segment is attractive for several reasons. First, the Company expects that there will be no significant increases in the supply of upscale, full-service hotels in the next several years because the cost of new construction generally does not justify new hotel development. Second, upscale, full-service hotels appeal to a wide variety of customers, thus reducing the risk of decreasing demand from any particular customer group. Additionally, such hotels have particular appeal to both business executives and upscale leisure travelers, customers who are generally less price sensitive than travelers who use limited-service hotels. Third, full-service hotels afford greater intrinsic operating leverage than limited-service hotels, resulting in increasingly higher profit margins as revenues increase. Finally, full-service hotels require a greater depth of management expertise than limited-service hotels, and the Company believes that its superior management skills provide it with a significant competitive advantage in their operation. In connection with its growth strategy, the Company has entered into a binding contract with MBL Life Assurance Corporation ("MBL") to acquire five upscale, full-service hotels (the "Additional Hotels") which contain 1,121 rooms, for a purchase price of $68.4 million. Four of the Additional Hotels are currently managed by the Company. Since assuming management of these four hotels in 1991, the Company has improved the operating performance of the properties. However, the Company believes that, with appropriate capital spending, the Additional Hotels can achieve further improvements in revenue and cash flow. The Company plans to spend approximately $3.1 million subsequent to the acquisition to renovate and reposition the Additional Hotels. The acquisition is scheduled to close, subject to customary closing conditions, in December 1996. There can be no assurance, however, that the closing will occur. See "Risk Factors--Risks Associated with Expansion" and "Business and Properties--The Properties--The Additional Hotels." 4 BUSINESS AND PROPERTIES The Company seeks to increase shareholder value by (i) continuing to acquire upscale, full-service hotels below replacement cost in selected markets throughout the United States and (ii) implementing its operating strategy to improve hotel operations and increase cash flow. ACQUISITION STRATEGY The Company intends to continue acquiring upscale, full-service hotels. In addition to the direct acquisition of hotels, the Company anticipates that it may make investments in hotels through joint ventures with strategic business partners or through equity contributions or secured loans. The Company identifies acquisition candidates located in markets with economic, demographic and supply dynamics favorable to hotel owners and operators. Through its extensive due diligence process, the Company chooses those acquisition targets where it believes selective capital improvements and intensive management will increase the hotel's ability to attract key demand segments, enhance hotel operations and increase long-term value. In order to evaluate the relative merits of each investment opportunity, senior management and individual operations teams create detailed plans covering all areas of renovation and operation. These plans serve as the basis for the Company's acquisition decisions and guide subsequent renovation and operating plans. At the Owned Hotels, the Company has been able to implement these plans and apply its system of management to create improvements in revenue and profitability. The Company will seek to acquire and invest in hotels that meet the following criteria: MARKET CRITERIA Economic Growth. The Company focuses on metropolitan areas that are approaching, or have already entered, periods of economic growth. Markets that exhibit these characteristics typically have strong demand for hotel facilities and services. Supply Constraints. The Company seeks lodging markets with favorable supply dynamics for hotel owners and operators, including an absence of current new hotel development and barriers to future development such as zoning constraints, the need to undergo lengthy local development approval processes and a limited number of suitable sites. Geographic Diversification. The Company seeks to maintain a geographically diverse portfolio of hotels to offset the effects of regional economic cycles. HOTEL CRITERIA Location and Market Appeal. The Company seeks to acquire upscale, full-service hotels that are located near both business and leisure centers which generate a broad base of demand for hotel accommodations and facilities. Attracting a balanced mix of business, group and leisure guests to the Hotels helps to maintain stable occupancy rates and high ADRs. Size and Facilities. The Company seeks to acquire well-constructed hotels that are less than 20 years old, contain 200 to 500 guest rooms and include accommodations and facilities that are, or are capable of being made, attractive to key demand segments such as business, group and leisure travelers. Potential Performance Improvements. The Company seeks to acquire underperforming hotels where intensive management and selective capital improvements can increase revenue and cash flow. The Company's ability to improve operations is demonstrated by the fact that RevPAR at the Owned Hotels increased 11.1% from the three month period ended March 31, 1995 to the three month period 5 ended March 31, 1996, as compared to an increase of only 4.9% for the upscale, full-service hotel segment as reported by Smith Travel Research. The Company expects that its relationships throughout the industry and its acquisition staff located on both coasts of the United States will continue to provide it with a competitive advantage in identifying, evaluating and purchasing hotels which meet its acquisition criteria. The Company has a record of successfully renovating and repositioning hotels, both at the Owned Hotels and at the Hotels that are managed, but not owned, by the Company (the "Managed Hotels"), varying in levels of service, room rates and market types. As a public company, the Company believes it will have improved access to various debt and equity financing sources to fund acquisitions. In addition, in consummating acquisitions the Company expects that it will benefit from its ability to utilize units of limited partnership interest in its subsidiary Operating Partnership (as defined herein) as an alternative to cash. The Company will have substantial capital available under the $175 million Credit Facility (as defined herein) to pursue acquisitions and make capital investments in subsequently acquired hotels. The Company currently expects to retain earnings for future acquisitions and the renovation and maintenance of the hotels owned by the Company. OPERATING STRATEGY The Company's principal operating objectives are to generate higher RevPAR and to increase net operating income while providing its hotel guests with high-quality service and value. The Company seeks to achieve these objectives by creating and executing management plans that are specifically tailored for each individual Hotel rather than by implementing an operating strategy that is designed to maintain a uniform corporate image or brand. The Company believes that its custom-tailored business plans are the most effective means of addressing the needs of a given hotel or market. The Company believes that skilled management of hotel operations is the most critical element in maximizing revenue and cash flow in full-service hotels. The Company's corporate headquarters carries out financing and acquisition activities and provides services to support as well as monitor the Company's on-site operating executives. Each of the Company's executive departments, including Sales and Marketing, Human Resources and Training, Food and Beverage, Technical Services, Development, and Corporate Finance, is headed by an executive with significant experience in that area. These departments support decentralized decision-making by the hotel operating executives by providing accounting and budgeting services, property management software and other resources which cannot be economically maintained at the individual 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. Through effective and timely use of its comprehensive financial information and reporting systems, the Company can monitor actual performance and rapidly adjust prices, staffing levels and sales efforts to take advantage of changes in the market and to improve yield. Targeted Sales and Marketing. The Company employs a systematic approach to identifying and targeting segments of demand for each Hotel in order to maximize market penetration. The Company supports each Hotel's local sales efforts with corporate sales executives who develop new marketing concepts and monitor and respond to specific market needs and preferences. Strategic Capital Improvements. The Company plans renovations primarily to enhance a Hotel's appeal to targeted market segments, thereby attracting new customers and generating increased revenue and cash flow. During the 12 months ended March 31, 1996, the Company spent a total of $8.4 million on renovations at the Owned Hotels and currently intends to spend an additional $21.4 million 6 completing the renovation programs. Capital spending decisions are based on both strategic needs and the potential rate of return on a given capital investment. Selective Use of Multiple Brand Names. The Company believes that the selection of an appropriate franchise brand is essential in positioning a hotel optimally within its local market. The Company selects brands based on local market factors such as local presence of the franchisor, brand recognition, target demographics and efficiencies offered by franchisors. Emphasis on Food and Beverage. Management believes innovative 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. Commitment to Reinvestment. The Company is committed to reinvesting adequate capital on an ongoing basis to maintain the quality of the hotels it owns. Reinvestment plans include room and facilities refurbishments, renovations and furniture and equipment replacements that are designed to maintain attractive accommodations, updated restaurants and modern equipment. Computerized Reporting Systems. The Company employs computerized reporting systems at each of the Hotels and at its corporate offices to monitor the financial and operating performance of the Hotels. By having the latest hotel operating information available at all times, management is better able to respond to changes in the market of each Hotel. Commitment to Service and Value. The Company is dedicated to providing exceptional service and value to its customers on a consistent basis. The Company conducts extensive employee training programs to ensure personalized service at the highest levels. The Company's practice of tracking customer comments allows investment in services and amenities where they are most effective. Distinct Management Culture. The Company has a distinct management culture that stresses creativity, loyalty and entrepreneurship and was developed to emphasize operations from an owner's perspective. 7 THE PROPERTIES The following table sets forth certain information for each of the Owned Hotels and the Additional Hotels for the 12 months ended March 31, 1996:
TWELVE MONTHS ENDED MARCH 31, 1996 -------------------- GUEST AVERAGE HOTEL LOCATION ROOMS ADR OCCUPANCY - --------------------------------------------- --------------------- ----- ------- --------- OWNED HOTELS Hilton Hotel................................. Irvine, CA 290 $ 71.01 65.2% Sheraton Hotel............................... Colorado Springs, CO 502 61.80 67.6 Georgetown Latham............................ Washington, DC 143 100.36 73.4 Atlanta Airport Westin....................... Atlanta, GA 496 70.02 82.8 Radisson Hotel............................... Schaumburg, IL 202 69.65 65.6 Marriott Hotel............................... Somerset, NJ 434 92.94 73.1 Sheraton Airport Plaza....................... Charlotte, NC 226 76.10 75.2 Holiday Inn.................................. Cleveland, OH 237 65.42 75.1 Hilton Hotel................................. Arlington, TX 310 76.63 74.8 Salt Lake Airport Hilton..................... Salt Lake City, UT 287 72.39 71.5 Renaissance(R) Hotel......................... Arlington, VA 209 103.64 73.1 Hilton Hotel................................. Bellevue, WA 180 84.80 77.5 ----- ------- --- Total/Weighted Average--Owned Hotels........ 3,516 $ 76.66 73.1% ADDITIONAL HOTELS Hilton Hotel................................. Sacramento, CA 326 $ 73.46 71.7% Santa Barbara Inn............................ Santa Barbara, CA 71 122.56 81.7 Holiday Inn.................................. Colorado Springs, CO 201 53.55 70.9 Embassy Row Hotel............................ Washington, DC 195 112.02 58.6 Hilton Hotel & Towers........................ Lafayette, LA 328 66.62 72.1 ----- ------- --- Total/Weighted Average--Additional Hotels... 1,121 $ 77.04 70.1% ----- ------- --- Total/Weighted Average 4,637 $ 76.75 72.4% ----- ------- --- ----- ------- ---
The Company's principal executive offices are located at 1010 Wisconsin Avenue, N.W., Suite 650, Washington, DC 20007, and its telephone number is (202) 965-4455. 8 STRUCTURE OF THE COMPANY Upon consummation of the Formation Transactions, the Company's structure will be as follows: CAPSTAR HOTEL INVESTORS, INC G.P. 100% NON-AFFILIATED CAPSTAR LIMITED PARTNERS (1) LP CORPORATION L.P. L.P. CAPSTAR MANAGEMENT COMPANY, L.P. (THE "OPERATING PARTNERSHIP") 100% THE OWNED HOTELS (2) - ------------ (1) Immediately following the Formation Transactions, no limited partnership units will be held by non-affiliated limited partners. However, in the future, the Company may seek to acquire additional properties and issue limited partnership units in payment of some or all of the purchase price therefor. Such units may be redeemed, subject to certain conditions, for cash or shares of Common Stock. (2) Immediately following the closing of the Offering, all of the Owned Hotels (except the Atlanta Airport Westin) will be wholly-owned by the Company through separate limited liability company and partnership subsidiaries. The Atlanta Airport Westin is majority-owned by the Company through a partnership in which the Company holds an 84.6% limited partner interest, 1% general partner interest and a mortgage which together provide the Company a 92% economic interest in the hotel. 9 THE OFFERING
Common Stock Offered by the Company............................. 6,750,000 shares Common Stock Offered by the Selling Stockholder............... 2,500,000 shares(1) Common Stock to be Outstanding after the Offering...................... 12,754,321 shares(2) Use of Proceeds..................... The net proceeds of the Offering to be received by the Company, together with a portion of the proceeds of the Credit Facility and certain escrowed funds, will be used to repay the Company's currently outstanding indebtedness under a credit facility (to be retired in connection with the Offering) that was provided by Lehman Brothers Holdings, Inc. ("Lehman Holdings"), an affiliate of Lehman Brothers Inc. ("Lehman"). NYSE Symbol......................... "CHO"
- ------------ (1) The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Stockholder in the Offering. (2) Does not include up to 1,387,500 shares of Common Stock subject to an over-allotment option granted to the Underwriters. See "Underwriting." 10 SUMMARY FINANCIAL AND OTHER INFORMATION Prior to the Formation Transactions and the Offering, the business of the Company was conducted through EquiStar Hotel Investors, L.P. ("EquiStar"), which owned the Owned Hotels, and CapStar Management Company, L.P. ("CapStar Management"), which managed the Hotels. CapStar Management has been in the hotel management business since 1987. EquiStar, however, was not formed until January 12, 1995 and the Company did not own any hotels in any prior periods. Therefore, the Company's financial statements prior to 1995 reflect only the management business of CapStar Management. In 1994, the Company began to invest in additional professional staff and incurred related costs in order to position itself to acquire hotel properties. From January 12, 1995 through March 31, 1996, the Company acquired 10 hotels on various dates. Thus, the historical financial statements for the period ended December 31, 1995 and the three months ended March 31, 1996 and 1995 reflect differing numbers of Owned Hotels throughout the periods. The unaudited pro forma financial statements for 1995 and the three months ended March 31, 1996 reflect the operations of the Owned Hotels and the Additional Hotels for the entire periods. 11 SUMMARY FINANCIAL AND OTHER INFORMATION
FISCAL YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ---------------------------------------------------- ---------------------------- PRO PRO FORMA FORMA 1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A) ------ ------ ------ ------ --------- --------- ------- -------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) OPERATING RESULTS: Revenues: Rooms.................... $ 0 $ 0 $ 0 $ 0 $ 14,456 $ 90,563 $ 592 $ 10,714 $ 21,247 Food, beverage and other hotel departments....... 0 0 0 0 7,471 51,692 194 6,283 12,452 Management services and other revenues.......... 2,692 3,479 4,234 4,418 4,436 3,274 996 1,037 831 ------ ------ ------ ------ --------- --------- ------- -------- --------- Total revenues....... 2,692 3,479 4,234 4,418 26,363 145,529 1,782 18,034 34,530 ------ ------ ------ ------ --------- --------- ------- -------- --------- Operating costs and expenses: Departmental expenses: Rooms.................... 0 0 0 0 4,190 23,902 155 2,907 5,663 Food, beverage and other hotel departments....... 0 0 0 0 5,437 40,249 137 4,214 9,258 Undistributed operating costs: Selling, general and administrative.......... 2,239 2,836 4,065 4,508 8,078 31,732 1,140 4,769 8,327 Property operating costs................... 0 0 0 0 3,934 21,454 115 2,325 4,893 Depreciation and amortization............ 16 12 14 23 2,098 10,820 59 1,672 2,777 ------ ------ ------ ------ --------- --------- ------- -------- --------- Total operating costs and expenses........ 2,255 2,848 4,079 4,531 23,737 128,157 1,606 15,887 30,918 ------ ------ ------ ------ --------- --------- ------- -------- --------- Operating income/(loss)... 437 631 155 (113) 2,626 17,372 176 2,147 3,612 Interest expense, net..... 28 0 0 0 2,413 9,138 80 2,783 2,321 Provision for income taxes(B).................. 0 0 0 0 0 3,216 0 0 483 Income/(loss) before extraordinary item and minority interest...... 409 631 155 (113) 213 4,824 95 (636) 725 Extraordinary item(C)..... 0 0 0 0 (888) 0 0 0 0 Net income/(loss)......... 409 631 155 (113) (657) 4,824 95 (642) 725 ------ ------ ------ ------ --------- --------- ------- -------- --------- ------ ------ ------ ------ --------- --------- ------- -------- --------- Net income per common share.................... -- -- -- -- -- $ 0.38 -- -- $ 0.06 OTHER FINANCIAL DATA: EBITDA(D)................. 453 643 169 (90) 4,724 28,192 235 3,819 6,389 Net cash provided by (used in) operating activities............... 182 87 (101) 66 4,357 -- -- 2,373 -- Net cash used in investing activities............... (16) (65) (24) (41) (116,573) -- -- (68,307) -- Net cash provided by (used in) financing activities............... 19 (219) 244 0 119,048 -- -- 67,023 -- BALANCE SHEET DATA: Property and equipment, gross.................... $ 98 $ 110 $ 134 $ 176 $ 110,883 -- $14,658 $168,502 $ 272,054 Total assets.............. 740 586 1,458 1,232 132,650 -- 19,097 205,585 303,412 Long term obligations..... 219 0 0 0 73,574 -- 9,866 140,710 115,598
12 SUMMARY FINANCIAL AND OTHER INFORMATION
THREE MONTHS ENDED MARCH FISCAL YEAR ENDED DECEMBER 31, 31, ---------------------------------------------------------- --------------------------- PRO FORMA PRO FORMA 1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A) ------- -------- -------- -------- -------- --------- ------- ------- --------- OPERATING DATA: Owned Hotels: Number of hotels..... -- -- -- -- 6 17 -- 10 17 Number of guest rooms............... -- -- -- -- 2,101 4,637 -- 2,997 4,637 Total revenues (in thousands).......... -- -- -- -- $ 21,927 $ 142,255 -- $16,997 $ 33,700 Average occupancy.... -- -- -- -- 72.3% 67.8% -- 70.5% 70.7% ADR(E)............... -- -- -- -- $ 71.58 $ 79.57 -- $ 76.92 $ 78.22 RevPAR(F)............ -- -- -- -- $ 51.75 $ 53.95 -- $ 54.23 $ 55.30 All Hotels(G): Number of hotels(H).. 23 34 34 39 46 -- -- -- -- Number of guest rooms(H)............ 3,893 5,918 5,971 5,847 7,895 -- -- -- -- Total revenues (in thousands).......... $65,405 $109,837 $123,124 $128,151 $170,888 -- -- -- -- Certain Managed Hotels(I): Number of hotels..... -- -- 18 18 18 -- -- -- -- Number of guest rooms............... -- -- 2,967 2,967 2,967 -- -- -- -- Total revenues (in thousands).......... -- -- $ 40,691 $ 44,453 $ 46,905 -- -- -- -- Average occupancy.... -- -- 69.7% 70.6% 70.7% -- -- -- -- ADR(E)............... -- -- $ 56.99 $ 60.33 $ 63.71 -- -- -- -- RevPAR(F)............ -- -- $ 39.72 $ 42.59 $ 45.04 -- -- -- --
- ------------ (A) The pro forma Operating Results, Other Financial Data and Operating Data for the three months ended March 31, 1996 and for the year ended December 31, 1995 have been prepared as if the Formation Transactions, the Offering and the acquisition of the Owned Hotels and the Additional Hotels had been consummated at the beginning of the periods presented, and the pro forma Balance Sheet Data as of March 31, 1996 has been prepared as if the Formation Transactions, the Offering and the acquisition of the Owned Hotels and the Additional Hotels had been consummated on such date. (B) No provision for federal income taxes is included in the historical data because CapStar Management and EquiStar are partnerships and all federal income tax liabilities were passed through to the individual partners. (C) During 1995, the Company's loan facility was refinanced, and the write-off of deferred costs associated with the prior facility was recorded as an extraordinary loss. (D) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Management believes that EBITDA is a useful measure of operating performance because it is industry practice to evaluate hotel properties based on operating income before interest, depreciation and amortization, which is generally equivalent to EBITDA, and EBITDA is unaffected by the debt and equity structure of the property owner. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles ("GAAP"), is not necessarily indicative of cash available to fund all cash flow needs and should not be considered as an alternative to net income under GAAP for purposes of evaluating the Company's results of operations. (E) Represents total room revenues divided by total number of rooms occupied by hotel guests on a paid basis. (F) Represents total room revenues divided by total available rooms. (G) Represents operating data for all hotels managed by the Company during all or a portion of the periods presented. (H) As of December 31 for the periods presented. (I) Represents operating data for those hotels managed by the Company during all of the periods presented.
13 RISK FACTORS An investment in the Common Stock involves material risks. In addition to general investment risk and those factors set forth elsewhere in this Prospectus, prospective investors should carefully consider, among other things, the following risks before making an investment. RISKS ASSOCIATED WITH THE LODGING INDUSTRY Operating Risks. The Company's business is subject to all of the operating risks inherent in the lodging industry. These risks include the following: changes in general and local economic conditions; cyclical overbuilding in the lodging industry; varying levels of demand for rooms and related services; competition from other hotels, motels and recreational properties; changes in travel patterns; the recurring need for renovations, refurbishment and improvements of hotel properties; changes in governmental regulations that influence or determine wages, prices and construction and maintenance costs; and changes in interest rates and the availability of credit. Demographic, geographic or other changes in one or more of the Company's markets could impact the convenience or desirability of the sites of certain hotels, which would in turn affect the operations of those hotels. In addition, due to the level of fixed costs required to operate full-service hotels, certain significant expenditures necessary for the operation of hotels generally cannot be reduced when circumstances cause a reduction in revenue. Competition in the Lodging Industry. The lodging industry is highly competitive. There is no single competitor or small number of competitors of the Company that are dominant in the industry. The Hotels operate in areas that contain numerous competitors, many of which have substantially greater resources than the Company. Competition in the lodging industry is based generally on location, room rates and range and quality of services and guest amenities offered. New or existing competitors could significantly lower rates or offer greater conveniences, services or amenities or significantly expand, improve or introduce new facilities in markets in which the Hotels compete, thereby adversely affecting the Company's operations. Seasonality. The lodging industry is seasonal in nature. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters. This seasonality can be expected to cause quarterly fluctuations in the revenues of the Company. Quarterly earnings also may be adversely affected by events beyond the Company's control, such as extreme weather conditions, economic factors and other considerations affecting travel. Franchise Agreements. Upon completion of the Offering, all but one of the Owned Hotels will be operated pursuant to existing franchise or license agreements (the "Franchise Agreements"). The Franchise Agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor system. Those limitations may conflict with the Company's philosophy of creating specific business plans tailored to each Owned Hotel and to each market. Such standards are often subject to change over time, in some cases at the discretion of the franchisor, and may restrict a franchisee's ability to make improvements or modifications to a hotel without the consent of the franchisor. In addition, compliance with such standards could require a franchisee to incur significant expenses or capital expenditures. In connection with changing the franchise affiliation of an Owned Hotel or a subsequently acquired hotel, the Company may be required to incur significant expenses or capital expenditures. The Franchise Agreements covering the Owned Hotels expire or terminate, without specified renewal rights, at various times and have differing remaining terms. As a condition to renewal, the Franchise Agreements frequently contemplate a renewal application process, which may require substantial capital improvements to be made to the hotel. 14 RISKS ASSOCIATED WITH EXPANSION Competition for Expansion Opportunities. The Company competes for the acquisition of hotels with entities that have substantially greater financial resources than the Company. The Company believes that, as a result of the downturn experienced by the lodging industry from the late 1980s through the early 1990s and the significant number of foreclosures and bankruptcies created thereby, the prices for many hotels have for several years been at historically low levels and often well below the cost to build new hotels. The recent economic recovery in the lodging industry and the resulting increase in funds available for hotel acquisitions may cause additional investors to enter the hotel acquisition market, which may in turn cause hotel acquisition costs to increase and the number of attractive hotel acquisition opportunities to decrease. Failure to Consummate Acquisitions. The Company has entered into a binding contract to acquire the Additional Hotels and in the future may enter into contracts to acquire other hotels as well. There can be no assurance that the Company will be able to consummate the acquisition of any such hotels. Failure to consummate such acquisitions could affect the Company's ability to implement its acquisition strategy. Integration Risks. To successfully implement its acquisition strategy, the Company must be able to continue to successfully integrate new hotels into its existing operations. The consolidation of functions and integration of departments, systems and procedures of the new hotels with the Company's existing operations presents a significant management challenge, and the failure to integrate new hotels into the Company's management and operating structures could have a material adverse effect on the results of operations and financial condition of the Company. There can be no assurance that the Company will be able to achieve operating results in its new hotels comparable to the historical performance of its hotels. RISKS ASSOCIATED WITH OWNING REAL ESTATE The Company currently owns 12 hotels. The Company has also entered into a contract to acquire the Additional Hotels. Accordingly, the Company will be subject to varying degrees of risk generally incident to the ownership of real estate. These risks include, among other things, changes in national, regional and local economic conditions, changes in local real estate market conditions, changes in interest rates and in the availability, cost and terms of financing, the potential for uninsured casualty and other losses, the impact of present or future environmental legislation and adverse changes in zoning laws and other regulations. Many of these risks are beyond the control of the Company. In addition, real estate investments are relatively illiquid, resulting in a limited ability of the Company to vary its portfolio of hotels in response to changes in economic and other conditions. HOTEL RENOVATION RISKS The renovation of hotels involves risks associated with construction and renovation of real property, including the possibility of construction cost overruns and delays due to various factors (including the inability to obtain regulatory approvals, inclement weather, labor or material shortages and the unavailability of construction and permanent financing) and market or site deterioration after acquisition or renovation. Any unanticipated delays or expenses in connection with the renovation of hotels could have an adverse effect on the results of operations and financial condition of the Company. RISK OF DEBT FINANCING; NO LIMITS ON INDEBTEDNESS Neither the Company's Certificate of Incorporation nor its By-laws will limit the amount of indebtedness the Company may incur. The Company has entered negotiations regarding a new senior secured revolving line of credit in the amount of $175 million (the "Credit Facility") to be provided by a 15 financial institution to fund the acquisition of hotels (including debt incurred in connection with completing the acquisition of the Additional Hotels), renovations and capital improvements to hotels and general working capital needs. On a pro forma basis, upon completion of the Formation Transactions and the Offering, the Company will have $47.2 million of outstanding indebtedness. Subject to limitations in its debt instruments, including those under the Credit Facility, the Company expects to incur additional debt in the future to finance acquisitions and renovations. The Company's continuing substantial indebtedness could increase its vulnerability to general economic and lodging industry conditions (including increases in interest rates) and could impair the Company's ability to obtain additional financing in the future and to take advantage of significant business opportunities that may arise. The Company's indebtedness is secured by mortgages on all of the Owned Hotels and by the equity of certain subsidiaries of the Company. There can be no assurances that the Company will be able to meet its debt service obligations and, to the extent that it cannot, the Company risks the loss of some or all of its assets, including the Owned Hotels and the Additional Hotels, to foreclosure. Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable. In such circumstances, if the Company is in need of capital to repay indebtedness in accordance with its terms or otherwise, it could be required to liquidate one or more investments in hotels at times which may not permit realization of the maximum return on such investments. It is anticipated that the Credit Facility will contain a number of significant covenants that, among other things, restrict the ability of the Company and its subsidiaries to (i) acquire or dispose of assets or businesses, (ii) incur additional indebtedness, (iii) make capital expenditures, (iv) pay dividends, (v) create liens on assets, (vi) enter into leases, investments or acquisitions, (vii) engage in mergers or consolidations, or (viii) engage in certain transactions with subsidiaries and affiliates, and otherwise restrict corporate activities of the Company (including its ability to acquire additional hotels, hotel businesses or assets, certain changes of control and asset sale transactions) without the consent of the lenders. In addition, the Company is required to maintain specified financial ratios and comply with tests, including minimum interest coverage ratios, maximum leverage ratios, minimum net worth and minimum equity capitalization requirements. All of the Company's outstanding indebtedness upon completion of the Offering, including the Credit Facility, will bear interest at a variable rate. Economic conditions could result in higher interest rates, which could increase debt service requirements on variable rate debt and could reduce the amount of cash available for various corporate purposes. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." CONTROLLING STOCKHOLDERS Upon consummation of the Offering, Acadia Partners, L.P., a private investment partnership, and related entities ("Acadia Partners"), and certain members of management will beneficially own an aggregate of 27.5% (24.8% if the over-allotment option is exercised in full) of the issued and outstanding shares of Common Stock. See "Principal and Selling Stockholders." So long as Acadia Partners and such members of management beneficially own a substantial interest in the Company, they may have the ability to elect or remove members of the Board of Directors of the Company (the "Board"), and thereby control the management and affairs of the Company, and may have the power to approve or block most actions requiring approval of the stockholders of the Company. See "Principal Stockholders and Selling Stockholder" and "Description of Capital Stock." SUBSTANTIAL RELIANCE ON KEY PERSONNEL The Company will place substantial reliance on the lodging industry knowledge and experience and the continued services of its senior management, led by Paul W. Whetsell and David E. McCaslin. The Company's future success and its ability to manage future growth depend in large part upon the efforts of these persons and on the Company's ability to attract and retain other highly qualified personnel. 16 Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. The loss of services of Messrs. Whetsell or McCaslin or the Company's inability to attract and retain other highly qualified personnel may adversely affect the results of operations and financial condition of the Company. The Company currently has employment agreements with Messrs. Whetsell and McCaslin for terms of three years each, which contain certain non-compete clauses. See "Management--Employment Agreements." POTENTIAL FOR CONFLICTS OF INTEREST Mr. Whetsell and Mr. McCaslin and corporations owned by them own, directly or indirectly, (i) a leasehold interest, expiring on December 31, 2001, in one of the Managed Hotels and (ii) minority equity interests in eight of the Managed Hotels. Mr. Whetsell and Mr. McCaslin exercise management control over the owners of five of these Managed Hotels (the "Affiliated Owners") through their ownership of certain entities which serve as general partners of such entities. Such interests were acquired prior to the formation of EquiStar and CapStar Management. During 1995, the Company received approximately $826,000 in management fees from the nine hotels in which Messrs. Whetsell and McCaslin own an equity interest, including approximately $630,000 in management fees from the Affiliated Owners. Conflicts may arise in the future between the Company and the Affiliated Owners with respect to certain Management Agreements (as defined below) between the Company and such Affiliated Owners. These conflicts may arise in connection with the exercise of any rights or the conduct of any negotiations to extend, renew, terminate or amend such agreements. There can be no assurance that such conflicts will be resolved in favor of the Company. Transactions involving the Company and the Affiliated Owners will be passed on for the Company by a majority of the Independent Directors (as defined herein) of the Board. Although none of the Managed Hotels owned by Affiliated Owners now competes with the Owned Hotels, the Company may in the future acquire a hotel in a market in which a hotel owned by an Affiliated Owner now operates. See "Certain Relationships and Related Transactions--Ownership Interests in Certain Managed Hotels." Under the terms of their employment agreements, Messrs. Whetsell and McCaslin are prohibited from hereafter acquiring any interests in hotels or hotel management companies while they serve as officers of the Company. See "Management--Employment Agreements." TERMINATION OF MANAGEMENT AGREEMENTS The Company operates the 36 Managed Hotels pursuant to third party management agreements (the "Management Agreements") with the owners of such Managed Hotels. The Management Agreements have remaining terms ranging from one month to nine years. Substantially all of the Management Agreements permit the owners of the Managed Hotels to terminate such agreements prior to the stated expiration dates if the applicable hotel is sold and several of the Management Agreements permit the owners of the Managed Hotels to terminate such agreements prior to the stated expiration date without cause or by reason of the failure of the applicable hotel to obtain specified levels of performance. During 1995, the Company's revenue from Management Agreements was $3.3 million constituting 2.3% of the Company's total revenue for such period on a pro forma basis. No single Management Agreement currently accounts for more than 5% of the total revenue from the Management Agreements on a pro forma basis. Additionally, no group of Management Agreements for hotels under common ownership or control currently accounts for more than 13% of the total revenue from the Management Agreements on a pro forma basis. The early termination of the Management Agreements or the inability of the Company to negotiate renewals of Management Agreements upon the expiration 17 of their stated terms would have an adverse impact on the revenues received by the Company from its management business. ENVIRONMENTAL RISKS Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to properly remediate such contaminated property, may adversely affect the owner's ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. The operation and removal of certain underground storage tanks are also regulated by federal and state laws. In connection with the ownership and operation of the Hotels, the Company could be held liable for the costs of remedial action with respect to such regulated substances and storage tanks and claims related thereto. Activities have been undertaken to close or remove storage tanks located on the property of two of the Owned Hotels. All of the Owned Hotels have undergone Phase I environmental site assessments ("Phase Is"), which generally provide a physical inspection and database search but not soil or groundwater analyses, by a qualified independent environmental engineer within the last 18 months. The purpose of the Phase Is is to identify potential sources of contamination for which the Owned Hotels may be responsible and to assess the status of environmental regulatory compliance. The Phase Is have not revealed any environmental liability or compliance concerns that the Company believes would have a material adverse effect on the Company's results of operation or financial condition, nor is the Company aware of any such liability or concerns. In addition, the Owned Hotels have been inspected to determine the presence of asbestos. Federal, state and local environmental laws, ordinances and regulations also require abatement or removal of certain asbestos-containing materials ("ACMs") and govern emissions of and exposure to asbestos fibers in the air. Limited quantities of ACMs are present in various building materials such as sprayed-on ceiling treatments, roofing materials or floor tiles at the Owned Hotels. Operations and maintenance programs for maintaining such ACMs have been or are in the process of being designed and implemented, or the ACMs have been scheduled to be or have been abated, at such hotels. Based on third party environmental assessments and due diligence investigations recently conducted by the Company and its lenders, the Company believes that the presence of ACMs in its Owned Hotels will not have a material adverse effect on the Company's results of operations or financial condition. However, there can be no assurance that this will be the case. Any liability resulting from non-compliance or other claims relating to environmental matters could have a material adverse effect on the Company's results of operations or financial condition. GOVERNMENTAL REGULATION A number of states regulate the licensing of hotels and restaurants, including liquor license grants, by requiring registration, disclosure statements and compliance with specific standards of conduct. The Company believes that it is substantially in compliance with these requirements. Managers of hotels are also subject to laws governing their relationship with hotel employees, including minimum wage requirements, overtime, working conditions and work permit requirements. Compliance with, or changes in, these laws could reduce the revenue and profitability of the Owned Hotels and could otherwise adversely affect the Company's results of operations or financial condition. 18 Under the Americans with Disabilities Act (the "ADA"), all public accommodations are required to meet certain requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts have been and continue to be invested in ADA required upgrades to the Owned Hotels, a determination that the Company is not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. The Company is likely to incur additional costs of complying with the ADA; however, such costs are not expected to have a material adverse effect on the Company's results of operations or financial condition. ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY IN STOCK PRICE The initial public offering price has been determined by negotiations among the Company and the representatives of the several Underwriters and may not be indicative of the market price of the Common Stock after the Offering. Prior to the Offering, there has been no public market for the Common Stock. Accordingly, there can be no assurance that an active trading market for the Common Stock will develop and continue upon consummation of the Offering or that the market price of the Common Stock will not decline below the initial public offering price. Following consummation of the Offering, the market price of the Common Stock could be subject to significant fluctuations in response to variations in results of operations, general economic and market conditions and other factors. IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of shares of Common Stock sold in the Offering will experience immediate dilution of $7.07 per share in the net tangible book value per share of Common Stock from the initial public offering price. See "Dilution." SHARES AVAILABLE FOR FUTURE SALE Sales of substantial amounts of Common Stock (including shares issuable upon the exercise of stock options), or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. Upon consummation of the Offering, the Company will have outstanding 12,754,321 shares of Common Stock (assuming no exercise of the over-allotment option). Except for the 9,250,000 shares sold in the Offering, all of these shares will be Restricted Securities (as defined below) under Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). The Company has granted certain registration rights to the recipients of restricted securities issued in connection with the Formation Transactions, which registration rights cover all of the securities issued in connection with the Formation Transactions. The Company and Acadia Partners (who beneficially owns 2,514,804 shares of Common Stock) have agreed not to offer, sell, contract to sell or otherwise dispose of any such shares of Common Stock or any securities convertible into or exercisable for Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Lehman. Certain entities controlled by members of management (who beneficially own an aggregate of 989,517 shares of Common Stock) have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for Common Stock for a period of 360 days after the date of this Prospectus without the prior written consent of Lehman. There can be no assurance that Lehman will not grant any such consent. See "Shares Available for Future Sale." 19 THE FORMATION TRANSACTIONS BACKGROUND CapStar Hotels, Inc. ("CHI"), a hotel management and investment company, was founded in 1987 by Paul W. Whetsell and certain other investors. Acadia Partners was formed in 1987 by a group of institutional investors, including commercial banks, insurance companies and money managers. Acadia Partners pursues both leveraged acquisitions and selected securities investments. Since its inception, Acadia Partners has sponsored or co-sponsored 25 leveraged acquisitions with a combined value of $7 billion in a variety of industries including financial services, insurance, food and consumer products, retailing information services and industrial manufacturing. Acadia Partners also manages active portfolios of public high-yield bonds, common stock and distressed securities in excess of $1 billion. In January 1995, CHI, Acadia Partners and their respective affiliates formed EquiStar and CapStar Management. EquiStar was formed to acquire upscale, full-service hotels throughout the United States and completed its first acquisition in March 1995. CapStar Management was formed to acquire and continue the hotel management business of CHI and its affiliates. In connection with the formation of CapStar Management, all of the Management Agreements of CHI and its affiliates were assigned to CapStar Management. FORMATION TRANSACTIONS Pursuant to agreements executed prior to the initial filing of the Company's Registration Statement with respect to the Offering, each of the following events will occur immediately prior to the closing of the Offering (the "Closing"): (i) a limited partner of CapStar Management will contribute its partnership interest in CapStar Management to the Company in exchange for shares of Common Stock, (ii) the Company will contribute such partnership interest to CapStar LP Corporation, a wholly-owned subsidiary of the Company ("CapStar Sub"), (iii) the remaining partners of CapStar Management (including its general partner but not including CapStar Sub) and the partners of EquiStar will contribute their respective partnership interests in CapStar Management and EquiStar to the Company in exchange for shares of Common Stock, (iv) the Company will contribute all the assets of EquiStar to CapStar Management and CapStar Management will assume all of the liabilities of EquiStar, and (v) the Agreement of Limited Partnership of CapStar Management will be amended and restated to reflect the fact that CapStar Management has succeeded to the business of EquiStar and as otherwise necessary to permit it to function as the Company's operating partnership (the "Operating Partnership"). As a result of these transactions (the "Pre-Closing Transactions"), the Company and CapStar Sub will be the sole partners of the Operating Partnership and the Operating Partnership will own (directly or indirectly) all of the assets currently owned by EquiStar and CapStar Management. Simultaneously with the Closing, the Company will acquire a 100% beneficial interest in a $17 million mortgage note secured by the Atlanta Airport Westin hotel (the "Atlanta Mortgage Acquisition") which mortgage ranks senior to the equity interest of the partners of the limited partnership that owns such hotel, including the Company's 1% general partnership interest and 84.6% limited partnership interest. The Pre-Closing Transactions, the Atlanta Mortgage Acquisition and the Company's initial borrowing of approximately $46.1 million under the Credit Facility are together referred to as the "Formation Transactions." 20 USE OF PROCEEDS The net proceeds to the Company from the Offering are estimated to be approximately $123.8 million (approximately $149 million if the over-allotment option is exercised in full), assuming an initial public offering price of $20 per share and after giving effect to estimated underwriting discounts and commissions and offering expenses payable by the Company. The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Stockholder in the Offering. The Company expects to use the net proceeds of $123.8 million from the Offering, together with approximately $42.8 million from the Credit Facility and $18.2 million of the Company's existing escrowed funds, to repay approximately $184.8 million of outstanding indebtedness under a credit facility (to be retired in connection with the Offering) that is provided by Lehman Holdings, an affiliate of Lehman. The indebtedness to be repaid bears interest at fixed and variable rates, with a weighted average annual rate at March 31, 1996 of 11.3%, and matures at various times through March 1999, with a weighted average maturity at March 31, 1996 of two years and nine months. All of the indebtedness being repaid was incurred since March 3, 1995 to finance the acquisition and renovation of the Owned Hotels. DIVIDEND POLICY The Company has not paid any cash dividends on the Common Stock and does not anticipate that it will do so in the foreseeable future. The Company intends to retain earnings to provide funds for the continued growth and development of the Company's business. The Credit Facility restricts the Company's ability to pay dividends on the Common Stock. Any determination to pay cash dividends in the future will be at the discretion of the Board and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board. 21 DILUTION The net tangible book value of the Company, as adjusted to give effect to the Pre-Closing Transactions, at March 31, 1996 was $43.4 million, or approximately $7.24 per share of Common Stock. Net tangible book value per share represents the amount of tangible assets of the Company, less total liabilities and minority interest, divided by the number of shares of Common Stock outstanding prior to the Offering. After giving effect to the Formation Transactions, including the sale by the Company and the Selling Stockholder of the 9,250,000 shares of Common Stock offered hereby (after deduction of underwriting discounts and commissions and other estimated offering expenses and the application of the estimated net proceeds therefrom), the pro forma net tangible book value of the Company at March 31, 1996 would have been $164.9 million, or $12.93 per share. This represents an immediate increase in net tangible book value of $5.69 per share of Common Stock to existing stockholders and an immediate dilution of approximately $7.07 per share to new investors purchasing shares in the Offering. The sale of shares of Common Stock by the Selling Stockholder in the Offering will have no effect on dilution. The following table illustrates the per share dilution to new investors: Assumed initial public offering price per share............ $20.00 Net tangible book value per share after the Pre-Closing Transactions as of March 31, 1996......................... $7.24 Increase per share attributable to new investors........... 5.69 ----- Pro forma net tangible book value per share after the Formation Transactions and the Offering................... 12.93 ------ Dilution per share to new investors........................ $ 7.07 ------ ------ The following table summarizes, on a pro forma basis as of March 31, 1996, the difference between the number of shares of Common Stock held by the existing equity holders and the net book value of the assets and liabilities contributed by the existing equity holders in the Pre-Closing Transactions, in the aggregate and on a per share basis, and the number of shares of Common Stock purchased by the investors in this Offering and the consideration paid, in the aggregate and on a per share basis, by the investors purchasing shares of Common Stock in this Offering (after deducting underwriting discounts and commissions and estimated Offering expenses):
NET BOOK VALUE OF ASSETS SHARES HELD OR OR CASH ACQUIRED (IN THOUSANDS) AVERAGE --------------------- ------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- -------- ------- --------- Existing Equity Holders.................... 6,004,321 47.1% $ 47,824 27.9% $ 7.96 New Investors.............................. 6,750,000 52.9 123,745 72.1 18.33 ---------- ------- -------- ------- --------- Total................................ 12,754,321 100.0% $171,569 100.0% $ 13.45 ---------- ------- -------- ------- --------- ---------- ------- -------- ------- ---------
22 CAPITALIZATION The following table sets forth the actual capitalization of the Company as of March 31, 1996 and the pro forma capitalization of the Company before and after the acquisition of the Additional Hotels. The information below should be read in conjunction with the combined financial statements and notes thereto and the pro forma financial statements and notes thereto contained elsewhere in this Prospectus.
AS OF MARCH 31, 1996 (IN THOUSANDS) ------------------------------------------------- PRO FORMA AFTER PRO FORMA BEFORE ACQUISITION OF ACQUISITION OF THE THE ADDITIONAL ACTUAL ADDITIONAL HOTELS HOTELS -------- ------------------ --------------- DEBT: Total long-term debt............................... $145,126 $ 47,198 $ 115,598 Minority interest.................................. 685 685 685 STOCKHOLDERS' EQUITY: Common Stock ($.01 par value, 50,000,000 shares authorized, 12,754,321 shares issued and outstanding)..................................... -- 125 125 Preferred Stock ($.01 par value, 25,000,000 shares authorized, no shares issued or outstanding)..... -- -- -- Additional paid-in capital......................... 49,123 172,743 172,743 Retained earnings (deficit)........................ (1,299) (3,702) (3,702) -------- ---------- --------------- -------- ---------- --------------- Total stockholders' equity................... 47,824 169,166 169,166 -------- ---------- --------------- Total capitalization......................... $193,635 $217,049 $ 285,449 -------- ---------- --------------- -------- ---------- ---------------
23 SELECTED FINANCIAL AND OTHER DATA The following table sets forth selected historical and pro forma financial information for the Company. The following information should be read in conjunction with the historical combined financial statements and notes thereto for the Company, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the pro forma financial statements and notes thereto included elsewhere in this Prospectus. The selected financial data of the Company as of March 31, 1996 and December 31, 1995 and 1994 and for the three months ended March 31, 1996, the period from January 12, 1995 to December 31, 1995 and the years ended December 31, 1994 and 1993, have been derived from audited financial statements which are included elsewhere in this Prospectus. The comparable data for the balance sheets of the Company as of March 31, 1995 and December 31, 1993, 1992 and 1991 and for the statements of income and cash flows for the three months ended March 31, 1995 and the years ended December 31, 1992 and 1991 have been derived from financial statements that are not required to be included in this Prospectus. The pro forma operating data and other data for the three months ended March 31, 1996 and for the year ended December 31, 1995 have been prepared as if the Offering, the Formation Transactions and the acquisition of the Owned Hotels and the Additional Hotels had been consummated at the beginning of the periods presented, and the pro forma balance sheet data as of March 31, 1996 have been prepared as if the Offering, the Formation Transactions and the acquisition of the Owned Hotels and the Additional Hotels had been consummated on such date. The pro forma financial information is not necessarily indicative of what the actual financial position and results of operations of the Company would have been as of and for the periods indicated, nor does it purport to represent the Company's future financial position and results of operations. 24 SELECTED FINANCIAL AND OTHER DATA
FISCAL YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ---------------------------------------------------- ---------------------------- PRO PRO FORMA FORMA 1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A) ------ ------ ------ ------ --------- --------- ------- -------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) OPERATING RESULTS: Revenues: Rooms.................... $ 0 $ 0 $ 0 $ 0 $ 14,456 $ 90,563 $ 592 $ 10,714 $ 21,247 Food, beverage and other hotel departments....... 0 0 0 0 7,471 51,692 194 6,283 12,452 Management services and other revenues.......... 2,692 3,479 4,234 4,418 4,436 3,274 996 1,037 831 ------ ------ ------ ------ --------- --------- ------- -------- --------- Total revenues....... 2,692 3,479 4,234 4,418 26,363 145,529 1,782 18,034 34,530 ------ ------ ------ ------ --------- --------- ------- -------- --------- Operating costs and expenses: Departmental expenses: Rooms.................... 0 0 0 0 4,190 23,902 155 2,907 5,663 Food, beverage and other hotel departments........ 0 0 0 0 5,437 40,249 137 4,214 9,258 Undistributed operating costs: Selling, general and administrative....... 2,239 2,836 4,065 4,508 8,078 31,732 1,140 4,769 8,327 Property operating costs................... 0 0 0 0 3,934 21,454 115 2,325 4,893 Depreciation and amortization............ 16 12 14 23 2,098 10,820 59 1,672 2,777 ------ ------ ------ ------ --------- --------- ------- -------- --------- Total operating costs and expenses........ 2,255 2,848 4,079 4,531 23,737 128,157 1,606 15,887 30,918 ------ ------ ------ ------ --------- --------- ------- -------- --------- Operating income/(loss)... 437 631 155 (113) 2,626 17,372 176 2,147 3,612 Interest expense, net..... 28 0 0 0 2,413 9,138 80 2,783 2,321 Provision for income taxes(B)................. 0 0 0 0 0 3,216 0 0 483 Income/(loss) before extraordinary item and minority interest....... 409 631 155 (113) 213 4,824 95 (636) 725 Extraordinary item(C)..... 0 0 0 0 (888) 0 0 0 0 Net income/(loss)......... 409 631 155 (113) (657) 4,824 95 (642) 725 ------ ------ ------ ------ --------- --------- ------- -------- --------- ------ ------ ------ ------ --------- --------- ------- -------- --------- Net income per common share.................... -- -- -- -- -- $ 0.38 -- -- $ 0.06 OTHER FINANCIAL DATA: EBITDA(D)................. 453 643 169 (90) 4,724 28,192 235 3,819 6,389 Net cash provided by (used in) operating activities............... 182 87 (101) 66 4,357 -- -- 2,373 -- Net cash used in investing activities............... (16) (65) (24) (41) (116,573) -- -- (68,307) -- Net cash provided by (used in) financing activities............... 19 (219) 244 0 119,048 -- -- 67,023 -- BALANCE SHEET DATA: Property and equipment, gross.................... $ 98 $ 110 $ 134 $ 176 $ 110,883 -- $14,658 $168,592 $ 272,054 Total assets.............. 740 586 1,458 1,232 132,650 -- 19,097 205,585 303,412 Long term obligations..... 219 0 0 0 73,574 -- 9,866 140,710 115,598
25 SELECTED FINANCIAL AND OTHER DATA
THREE MONTHS ENDED MARCH FISCAL YEAR ENDED DECEMBER 31, 31, ---------------------------------------------------------- --------------------------- PRO PRO FORMA FORMA 1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A) ------- -------- -------- -------- -------- --------- ------- ------- --------- OPERATING DATA: Owned Hotels: Number of hotels..... -- -- -- -- 6 17 -- 10 17 Number of guest rooms.............. -- -- -- -- 2,101 4,637 -- 2,997 4,637 Total revenues (in thousands).......... -- -- -- -- $ 21,927 $ 142,255 -- $16,997 $ 33,700 Average occupancy.... -- -- -- -- 72.3% 67.8% -- 70.5% 70.7% ADR(E)............... -- -- -- -- $ 71.58 $ 79.57 -- $ 76.92 $ 78.22 RevPAR(F)............ -- -- -- -- $ 51.75 $ 53.95 -- $ 54.23 $ 55.30 All Hotels(G):........ Number of hotels(H):............ 23 34 34 39 46 -- -- -- -- Number of guest rooms(H)............ 3,893 5,918 5,971 5,847 7,895 -- -- -- -- Total revenues (in thousands).......... $65,405 $109,837 $123,124 $128,151 $170,888 -- -- -- -- Certain Managed Hotels(I): Number of hotels..... -- -- 18 18 18 -- -- -- -- Number of guest rooms............... -- -- 2,967 2,967 2,967 -- -- -- -- Total revenues (in thousands).......... -- -- $ 40,691 $ 44,453 $ 46,905 -- -- -- -- Average occupancy.... -- -- 69.7% 70.6% 70.7% -- -- -- -- ADR(E)............... -- -- $ 56.99 $ 60.33 $ 63.71 -- -- -- -- RevPAR(F)............ -- -- $ 39.72 $ 42.59 $ 45.04 -- -- -- --
- ------------ (A) The pro forma Operating Results, Other Financial Data and Operating Data for the three months ended March 31, 1996 and for the year ended December 31, 1995 has been prepared as if the Formation Transactions, the Offering and the acquisition of the Owned Hotels and the Additional Hotels had been consummated at the beginning of the periods presented, and the pro forma Balance Sheet Data as of March 31, 1996 has been prepared as if the Formation Transactions, the Offering and the acquisition of the Owned Hotels and the Additional Hotels had been consummated on such date. (B) No provision for federal income taxes is included in the historical data because CapStar Management and EquiStar are partnerships and all federal income tax liabilities were passed through to the individual partners. (C) During 1995, the Company's loan facility was refinanced, and the write-off of deferred costs associated with the prior facility was recorded as an extraordinary loss. (D) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Management believes that EBITDA is a useful measure of operating performance because it is industry practice to evaluate hotel properties based on operating income before interest, depreciation and amortization, which is generally equivalent to EBITDA, and EBITDA is unaffected by the debt and equity structure of the property owner. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles ("GAAP"), is not necessarily indicative of cash available to fund all cash flow needs and should not be considered as an alternative to net income under GAAP for purposes of evaluating the Company's results of operations. (E) Represents total room revenues divided by total number of rooms occupied by hotel guests on a paid basis. (F) Represents total room revenues divided by total available rooms. (G) Represents operating data for all hotels managed by the Company during all or a portion of the periods presented. (H) As of December 31 for the periods presented. (I) Represents operating data for those hotels managed by the Company during all of the periods presented.
26 UNAUDITED PRO FORMA FINANCIAL STATEMENTS The unaudited Pro Forma Balance Sheet of the Company as of March 31, 1996 is presented assuming: (i) the Formation Transactions, the Offering and the application of the net proceeds had been completed on March 31, 1996; and (ii) the Owned Hotels and the Additional Hotels were owned on March 31, 1996. The unaudited Pro Forma Statements of Operations of the Company for the three months ended March 31, 1996 and for the year ended December 31, 1995 present the results of operations of the Company assuming: (i) all of the Owned Hotels and the Additional Hotels had been acquired at the beginning of the periods presented; and (ii) the Formation Transactions and the Offering were completed as of the beginning of the periods presented. In management's opinion, all material adjustments necessary to reflect the transactions are presented in the pro forma adjustments columns, which are further described in the notes to the unaudited Pro Forma Financial Statements. The unaudited Pro Forma Financial Statements are not necessarily indicative of what the Company's financial position or results of operations actually would have been if all the Owned Hotels and Additional Hotels were, in fact, acquired on such dates and if the Formation Transactions and the Offering had, in fact, occurred on such dates. Additionally, the pro forma information does not purport to project the Company's financial position or results of operations at any future date or for any future period. The unaudited Pro Forma Financial Statements should be read in conjunction with the audited historical combined financial statements and related notes thereto of EquiStar and CapStar Management, which are included elsewhere in this Prospectus. 27 CAPSTAR HOTEL INVESTORS, INC. PRO FORMA BALANCE SHEET MARCH 31, 1996
(B) PRO FORMA (H) OWNED OFFERING AND BEFORE ADDITIONAL PRO FORMA HOTELS PRO OTHER PRO ACQUISITION OF HOTELS AFTER (A) FORMA FORMA ADDITIONAL PRO FORMA ACQUISITION OF HISTORICAL ADJUSTMENTS ADJUSTMENTS HOTELS ADJUSTMENTS ADDITIONAL HOTELS ------------ ----------- ------------ -------------- ----------- ----------------- ASSETS Cash.................... $ 7,920,761 2,000,000 (1,335,363)(C) 8,585,398 8,585,398 Escrows and restricted funds.................. 19,639,903 2,961,588 (18,150,000)(D) 4,451,491 -- 4,451,491 Property and equipment, net: Land................... 35,287,661 6,028,446 -- 41,316,107 19,824,546 61,140,653 Buildings and improvements.......... 108,174,567 26,823,617 -- 134,998,184 45,874,825 180,873,009 Furniture, fixtures and equipment............. 19,732,631 3,650,230 -- 23,382,861 3,711,636 27,094,497 Construction-in-progress.... 2,162,197 -- -- 2,162,197 -- 2,162,197 ------------ ----------- ------------ -------------- ----------- ----------------- Total property and equipment, net......... 165,357,056 36,502,293 201,859,349 69,411,007 271,270,356 Other assets............ 12,667,033 4,546,075 (151,000)(E) 17,062,108 2,043,153 19,105,261 ------------ ----------- ------------ -------------- ----------- ----------------- Total assets............ $205,584,753 46,009,956 (19,636,363) 231,958,346 71,454,160 303,412,506 ------------ ----------- ------------ -------------- ----------- ----------------- ------------ ----------- ------------ -------------- ----------- ----------------- LIABILITIES, MINORITY INTERESTS AND EQUITY Other liabilities....... 11,949,473 2,960,504 -- 14,909,977 3,054,160 17,964,137 Long-term debt: Notes payable.......... 143,791,055 43,049,452 (138,746,000)(D) 47,197,507 68,400,000 115,597,507 (897,000)(F) Capital lease obligations........... 1,335,363 -- (1,335,363)(C) -- -- -- ------------ ----------- ------------ -------------- ----------- ----------------- Total liabilities....... 157,075,891 46,009,956 (140,978,363) 62,107,484 71,454,160 133,561,644 Minority interests...... 684,823 -- -- 684,823 -- 684,823 ------------ ----------- ------------ -------------- ----------- ----------------- Equity.................. 47,824,039 -- 121,342,000(G) 169,166,039 -- 169,166,039 ------------ ----------- ------------ -------------- ----------- ----------------- Total liabilities, minority interests and equity................ $205,584,753 46,009,956 (19,636,363) 231,958,346 71,454,160 303,412,506 ------------ ----------- ------------ -------------- ----------- ----------------- ------------ ----------- ------------ -------------- ----------- -----------------
28 CAPSTAR HOTEL INVESTORS, INC. NOTES TO PRO FORMA BALANCE SHEET MARCH 31, 1996 (A) Reflects the historical combined balance sheet of EquiStar and CapStar Management as of March 31, 1996. (B) Reflects the following: (i) EquiStar's cost basis and financing for two hotels acquired subsequent to March 31, 1996 (Hilton Hotel, Arlington, Texas acquired on April 17, 1996 and Renaissance Hotel, Arlington, Virginia which was placed under contract to be purchased on June 14, 1996). (C) Reflects the repayment of capital lease obligations subsequent to the Offering ($1,335,363). (D) A reconciliation of gross proceeds from the Offering to net proceeds is as follows:
Gross proceeds.............................................. $ 135,000,000 Underwriting, advisory and other transaction expenses....... (11,255,000) ------------- Net cash proceeds from Offering............................. $ 123,745,000 ------------- A schedule of sources and uses of funds related to the Offering and the Formation Transactions are as follows: SOURCES Net proceeds from Offering.................................. $ 123,745,000 Release of escrow funds related to certain existing debt facilities................................................. 18,150,000 Proceeds from the Credit Facility........................... 46,097,507 ------------- Total sources............................................... $ 187,992,507 ------------- USES Repayment of outstanding amounts on certain existing debt facilities................................................. $(184,843,507) Payment of prepayment penalties on existing debt to be paid off........................................................ (299,000) Payment of closing costs for Credit Facility................ (2,850,000) ------------- Total uses.................................................. $(187,992,507) ------------- A reconciliation of existing debt facilities to be repaid to pro forma long-term debt is as follows: Total notes payable outstanding immediately preceding the Offering (Columns (A) and (B) from unaudited Pro Forma Balance Sheet)........................ $ 186,840,507 Less: Existing debt to be repaid............................................ (184,843,507) Accrued financing fees on existing debt to be forgiven.................. (897,000) ------------- Existing debt to remain in place........................................ 1,100,000 Add: Proceeds from Credit Facility 46,097,507 ------------- Pro forma long-term debt before purchase of Additional Hotels..................................................... $ 47,197,507
(E) Reflects write-off of deferred financing fees ($3,001,000) related to existing debt facilities to be paid off and deferral of financing fees paid ($2,850,000) for the Credit Facility. (F) Reflects lender's forgiveness of accrued financing fees on existing debt facilities. (G) The components of the adjustment are as follows:
Net cash proceeds from the Offering......................... $ 123,745,000 Add: Forgiven accrued financing fees........................ 897,000 Less: Write off of deferred financing fees.................. (3,001,000) Prepayment penalties.................................... (299,000) ------------- Total adjustment........................................ $ 121,342,000 -------------
(H) Reflects the estimated cost basis and financing for the Additional Hotels which EquiStar has under contract to purchase for $68,400,000.
29 CAPSTAR HOTEL INVESTORS, INC. PRO FORMA STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996
PRO FORMA (B) BEFORE (J) PRO FORMA OWNED OFFERING AND ACQUISITION ADDITIONAL AFTER HOTELS PRO OTHER PRO OF HOTELS PRO ACQUISITION OF (A) FORMA FORMA ADDITIONAL FORMA ADDITIONAL HISTORICAL ADJUSTMENTS ADJUSTMENTS HOTELS ADJUSTMENTS HOTELS ----------- ----------- ------------ ----------- ----------- -------------- Revenue from hotel operations: Rooms........................ $10,714,167 5,373,714 -- 16,087,881 5,158,962 21,246,843 Food and beverage............ 4,755,339 2,795,514 -- 7,550,853 2,567,767 10,118,620 Other revenue................ 1,527,366 423,861 -- 1,951,227 383,022 2,334,249 Hotel management and other fees......................... 1,037,066 -- (39,581)(C) 997,485 (166,895) 830,590 ----------- ----------- ------------ ----------- ----------- -------------- Total revenue................. 18,033,938 8,593,089 (39,581) 26,587,446 7,942,856 34,530,302 ----------- ----------- ------------ ----------- ----------- -------------- Hotel operating expenses by department: Rooms........................ 2,907,133 1,394,730 4,301,863 1,361,223 5,663,086 Food and beverage............ 3,781,670 2,332,255 -- 6,113,925 2,238,050 8,351,975 Other operating departments................. 432,562 256,411 -- 688,973 216,663 905,636 Undistributed operating expenses: Administrative and general... 4,768,757 1,806,976 325,000(D) 6,900,733 1,425,918 8,326,651 Management fees.............. -- 276,540 (276,540)(E) -- -- -- Property operating costs..... 1,532,558 687,803 -- 2,220,361 1,106,018 3,326,379 Property taxes, insurance and other....................... 792,275 458,935 -- 1,251,210 315,981 1,567,191 Depreciation and amortization................ 1,671,612 635,772 (601)(F) 2,306,783 470,000 2,776,783 ----------- ----------- ------------ ----------- ----------- -------------- Total operating expenses...... 15,886,567 7,849,422 47,859 23,783,848 7,133,853 30,917,701 ----------- ----------- ------------ ----------- ----------- -------------- Interest expense, net of interest income............... 2,783,095 1,113,966 (2,958,178)(G) 938,883 1,382,000 2,320,883 Equity in income of partnerships................ -- 4,687 -- 4,687 -- 4,687 ----------- ----------- ------------ ----------- ----------- -------------- Total expenses................ 18,669,662 8,968,075 (2,910,319) 24,727,418 8,515,853 33,243,271 ----------- ----------- ------------ ----------- ----------- -------------- Income (loss) before minority interests and income taxes... (635,724) (374,986) 2,870,738 1,860,028 (572,997) 1,287,031 Minority interests............ 6,405 -- 72,500(H) 78,905 -- 78,905 ----------- ----------- ------------ ----------- ----------- -------------- Income (loss) before income taxes........................ (642,129) (374,986) 2,798,238 1,781,123 (572,997) 1,208,126 Income taxes.................. -- -- 712,449(I) 712,449 (229,000) 483,449 ----------- ----------- ------------ ----------- ----------- -------------- Net income (loss)............. $ (642,129) (374,986) 2,085,789 1,068,674 (343,997) 724,677 ----------- ----------- ------------ ----------- ----------- -------------- ----------- ----------- ------------ ----------- ----------- -------------- Pro forma income per share.... 0.06 Pro forma weighted average shares outstanding........... 12,754,321
30 CAPSTAR HOTEL INVESTORS, INC. NOTES TO PRO FORMA STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 During the twelve month period subsequent to the Formation Transactions and the Offering, the Company expects to incur prepayment penalties to repay existing debt ($299,000) and expenses associated with the write-off of deferred financing costs related to existing debt to be repaid ($3,001,000). These non-recurring costs are expected to be charged to operations as incurred. Such costs have not been included in the unaudited Pro Forma Statements of Operations. (A) Reflects historical combined statement of operations of EquiStar and CapStar Management for the three months ended March 31, 1996. (B) Reflects the pre-acquisition operations of the Owned Hotels to provide a full three months of hotel operations for the unaudited Pro Forma Statement of Operations. For each Owned Hotel, the 1996 pre-acquisition operations were obtained from the hotel's audited pre-acquisition financial statements included elsewhere in this Prospectus. (C) Reflects the elimination of management fee income for the Owned Hotels managed by CapStar Management prior to acquisition ($39,581). (D) Reflects the estimated incremental general and administrative expenses associated with public ownership. These additional expenses include insurance, additional executive salaries, directors' fees and related expenses, legal expenses, expenses associated with preparing quarterly and annual reports, and other miscellaneous expenses. (E) Management services for the Owned Hotels are provided by the Company and any intercompany management fee charges will be eliminated for financial reporting purposes. (F) Reflects the net of the following adjustments:
Elimination of depreciation on hotels for pre-acquisition period............ $ (635,772) Depreciation on hotels for pre-acquisition period based on EquiStar's cost basis...................................................................... 617,171 Elimination of amortization of deferred financing costs on existing debt facilities to be repaid.................................................... (220,000) Amortization of deferred financing costs related to the Credit Facility..... 238,000 ----------- Net adjustment.............................................................. $ (601) -----------
(G) Reflects the net of the following adjustments: Elimination of interest on existing debt facilities to be paid off and interest from pre- acquisition operations.................................. $(3,941,564) Interest on $46,097,507 outstanding under the Credit Facility at interest rate of LIBOR plus 2% (average rate for three months was 8.13 percent) plus Credit Facility maintenance fee of $44,000................................. 983,386 ----------- Net adjustment.............................................................. $(2,958,178) -----------
(H) Reflects the effect of the other pro forma adjustments on the interest of minority owners in pro forma income before minority interest and income taxes for the partnership that owns the Atlanta Airport Westin. After the adjustments, minority interest is calculated as follows:
PRO FORMA INCOME BEFORE MINORITY PERCENTAGE INTEREST MINORITY MINORITY AND INCOME TAXES INTEREST INTEREST ---------------- ---------- -------- Atlanta Airport Westin................................ $547,954 14.4% $ 78,905
(I) Historical combined financial data does not include a provision for income taxes because both EquiStar and CapStar Management were partnerships not subject to income taxes. The pro forma adjustment reflects federal and state income taxes (assuming a 40% combined effective rate) as if these entities had been taxed as a C-corporation during the three months. (J) Reflects the historical operations of the Additional Hotels adjusted for (i) depreciation on the new cost basis ($470,000), (ii) interest on the debt to finance the purchase ($1,382,000), and (iii) income taxes ($229,000 benefit). Also reflects the elimination of management fee income earned by CapStar Management for managing four of the five Additional Hotels in 1996 ($166,895). Historical operations of the Additional Hotels before adjustments were obtained from the hotels' audited combined financial statements included elsewhere in this Prospectus.
31 CAPSTAR HOTEL INVESTORS, INC. PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995
PRO FORMA (B) OFFERING BEFORE (J) PRO FORMA OWNED AND ACQUISITION ADDITIONAL AFTER HOTELS PRO OTHER PRO OF HOTELS PRO ACQUISITION OF (A) FORMA FORMA ADDITIONAL FORMA ADDITIONAL HISTORICAL ADJUSTMENTS ADJUSTMENTS HOTELS ADJUSTMENTS HOTELS ----------- ----------- ----------- ----------- ----------- -------------- Revenue from hotel operations: Rooms....................... $14,456,387 54,180,629 68,637,016 21,925,991 90,563,007 Food and beverage........... 5,900,238 27,829,525 33,729,763 10,442,474 44,172,237 Other revenue............... 1,570,295 4,335,818 5,906,113 1,613,934 7,520,047 Hotel management and other fees........................ 4,436,428 -- (235,524)(C) 4,200,904 (926,737) 3,274,167 ----------- ----------- ----------- ----------- ----------- -------------- Total revenue................ 26,363,348 86,345,972 (235,524) 112,473,796 33,055,662 145,529,458 ----------- ----------- ----------- ----------- ----------- -------------- Hotel operating expenses by department: Rooms....................... 4,190,299 13,959,847 -- 18,150,146 5,751,406 23,901,552 Food and beverage........... 4,923,790 22,432,673 -- 27,356,463 9,198,740 36,555,203 Other operating departments................ 512,791 2,276,848 -- 2,789,639 904,143 3,693,782 Undistributed operating expenses: Administrative and general.................... 8,078,304 16,691,140 1,300,000(D) 26,069,444 5,662,170 31,731,614 Management fees............. -- 3,103,406 (3,103,406)(E) -- -- -- Property operating costs.... 2,623,626 6,863,382 -- 9,487,008 4,407,863 13,894,871 Property taxes, insurance and other................. 1,310,517 4,858,999 -- 6,169,516 1,390,174 7,559,690 Depreciation and amortization............... 2,097,512 7,267,137 (423,811)(F) 8,940,838 1,879,198 10,820,036 ----------- ----------- ----------- ----------- ----------- -------------- Total operating expenses..... 23,736,839 77,453,432 (2,227,217) 98,963,054 29,193,694 128,156,748 ----------- ----------- ----------- ----------- ----------- -------------- Interest expense, net of interest income............. 2,413,348 11,152,294 (9,886,288)(G) 3,679,354 5,458,320 9,137,674 Equity in income of partnerships............... (36,510) (36,510) (36,510) ----------- ----------- ----------- ----------- ----------- -------------- Total expenses............... 26,150,187 88,569,216 (12,113,505) 102,605,898 34,652,014 137,257,912 ----------- ----------- ----------- ----------- ----------- -------------- Income (loss) before minority interests and income taxes.. 213,161 (2,223,244) 11,877,981 9,867,898 (1,596,352) 8,271,546 Minority interests........... (17,415) (24,985) 273,334(H) 230,934 -- 230,934 ----------- ----------- ----------- ----------- ----------- -------------- Income (loss) before income taxes....................... 230,576 (2,198,259) 11,604,647 9,636,964 (1,596,352) 8,040,612 Income taxes................. -- -- 3,854,786(I) 3,854,786 (638,541) 3,216,245 ----------- ----------- ----------- ----------- ----------- -------------- Net income (loss)............ $ 230,576 (2,198,259) 7,749,861 5,782,178 (957,811) 4,824,367 ----------- ----------- ----------- ----------- ----------- -------------- ----------- ----------- ----------- ----------- ----------- -------------- Pro forma income per share... 0.38 Pro forma weighted average shares outstanding.......... 12,754,321
32 CAPSTAR HOTEL INVESTORS, INC. NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 During the twelve month period subsequent to the Formation Transactions and the Offering, the Company expects to incur prepayment penalties to repay existing debt ($299,000) and expenses associated with the write-off of deferred financing costs related to existing debt to be repaid ($3,001,000). These non-recurring costs are expected to be charged to operations as incurred. Such costs have not been included in the unaudited Pro Forma Statements of Operations. (A) Reflects historical combined statement of operations of EquiStar and CapStar Management for the year ended December 31, 1995. (B) Reflects the pre-acquisition operations of the Owned Hotels to provide a full year of hotel operations for the unaudited Pro Forma Statement of Operations. For each hotel, except for the Radisson Hotel, Schaumburg, Illinois, the 1995 pre-acquisition operations were obtained from the hotel's audited pre-acquisition financial statements included elsewhere in this Prospectus. As the financial records of the Radisson Hotel, Schaumburg, Illinois were not available, its pre-acquisition operations ($2,501,548 of revenues and $2,605,619 of expenses) were estimated based on the hotel's operating budget for the same period in 1996. (C) Reflects the elimination of management fee income for the Owned Hotels managed by CapStar Management prior to acquisition ($235,524). (D) Reflects the estimated incremental general and administrative expenses associated with public ownership. These additional expenses include insurance, additional executive salaries, directors' fees and related expenses, legal expenses, expenses associated with preparing quarterly and annual reports, and other miscellaneous expenses. (E) Management services for the Owned Hotels are provided by the Company and any intercompany management fee charges will be eliminated for financial reporting purposes. (F) Reflects the net of the following adjustments:
Elimination of depreciation on hotels for pre-acquisition period........... $ (7,267,137) Depreciation on hotels for pre-acquisition period based on EquiStar's cost basis..................................................................... 5,976,862 Elimination of amortization of deferred financing fees on existing debt facilities to be repaid.................................................... (83,536) Amortization of deferred financing costs related to the Credit Facility.... 950,000 ------------ Net adjustment............................................................ $ (423,811) ------------
(G) Reflects the net of the following adjustments: Elimination of interest on existing debt facilities to be paid off and interest from pre- acquisition operations................................. $(13,755,828) Interest on $46,097,507 outstanding on the Credit Facility at an interest rate of LIBOR plus 2% (average rate for 1995 was 7.98%) plus the Credit Facility maintenance fee of $175,000.................................................................. 3,869,540 ------------ Net adjustment............................................................ $ (9,886,288) ------------
(H) Reflects the effect of the other pro forma adjustments on the interest of minority owners in pro forma income before minority interest and income taxes for the partnership that owns the Atlanta Airport Westin. After the adjustments, minority interest is calculated as follows:
PRO FORMA INCOME BEFORE MINORITY PERCENTAGE INTEREST MINORITY MINORITY AND INCOME TAXES INTEREST INTEREST ---------------- ---------- -------- Atlanta Airport Westin.................................... $1,539,564 15% $230,934
(I) Historical combined financial data does not include a provision for income taxes because both EquiStar and CapStar Management were partnerships not subject to income taxes. The pro forma adjustment reflects federal and state income taxes (assuming a 40% combined effective rate) as if these entities had been taxed as a C-corporation in 1995. (J) Reflects the historical operations of the Additional Hotels adjusted for (i) depreciation on the new cost basis ($1,879,198) (ii) interest on the debt to finance the purchase ($5,458,320), and (iii) income taxes ($638,461 benefit). Also reflects the elimination of management fee income earned by CapStar Management for managing four of the five Additional Hotels in 1995 ($926,737). Historical operations of the Additional Hotels before adjustments were obtained from the hotels' audited combined financial statements included elsewhere in this Prospectus.
33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Prior to the Formation Transactions and the Offering, the business of the Company was conducted through EquiStar, which owned the Owned Hotels, and CapStar Management, which managed the Hotels. CapStar Management has been in the hotel management business since 1987. EquiStar, however, was not formed until January 12, 1995 and the Company did not own any hotels in any prior periods. Therefore, the Company's financial statements prior to 1995 reflect only the management business of CapStar Management. The economics of the management business are based on fees paid to the Company for management services and the costs related to the performance of these services. The fee management business is labor intensive and requires relatively little capital. Beginning in 1994, the Company began to invest in additional professional staff and incurred related costs in order to position itself to acquire hotel properties. From January 12, 1995 through March 31, 1996, the Company acquired 10 hotels on the following dates: March 3, 1995; June 30, 1995 (two hotels), August 4, 1995, October 3, 1995, November 15, 1995, February 2, 1996, February 16, 1996, February 22, 1996 and March 8, 1996. Thus, the historical financial statements for the year ended December 31, 1995 and the three months ended March 31, 1996 and 1995 reflect differing numbers of Owned Hotels throughout the periods. The economics associated with the acquisition and ownership of hotels is significantly different from the fee management business in that capital is required to both acquire and maintain hotels. Due to the timing and magnitude of the acquisitions made in 1995 and 1996, it is difficult to compare results of these periods either to each other or to prior years. The pro forma financial statements for 1995 and the three months ended March 31, 1996 reflect the operations of the Owned Hotels and the Additional Hotels for the entire periods. For some or all of such periods, such hotels were owned and/or operated by other companies. Furthermore, it is the Company's policy to seek to acquire underperforming hotels where intensive management and selective capital improvements can increase revenue and cash flow. Therefore, the Company does not believe it is meaningful to compare its results of operations for 1995 and the first quarter of 1996 with comparable prior periods. Except as noted in the following period to period comparison discussions, the changes in historical income statement items between periods are attributable to the changes in the Company's business. RESULTS OF OPERATIONS PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE HISTORICAL RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 On a pro forma basis, after giving effect to the acquisition of the Owned Hotels and the Additional Hotels and the Offering, pro forma total revenues increased to $145.5 million for 1995 from $26.4 million for the same historical period. The increase resulted from the recognition of revenue for the Owned Hotels and Additional Hotels as if they had been acquired at the beginning of the period. Management services and other revenues are reduced by $1.2 million to reflect the elimination of management fee revenues from the Owned Hotels prior to acquisition and from those Additional Hotels which were managed by the Company during that period. The pro forma revenues for the period prior to acquiring each Owned Hotel and the Additional Hotels (except for the Radisson Hotel, Schaumburg, Illinois, where such revenues were estimated based on the hotel's operating budget for 1996) reflect the actual revenues of the previous owners. 34 Pro forma expenses give effect to the acquisition of the Owned Hotels and the Additional Hotels and the Offering. Total pro forma operating expenses increased to $128.2 million for 1995 from $23.7 million for the same historical period. Departmental, selling, general, administrative and other operating expenses reflect the actual costs incurred by the previous owners prior to each acquisition and the actual costs incurred by the Company thereafter. Depreciation, amortization, interest and income taxes reflect the expenses that would have been incurred by the Company if the Offering and the Formation Transactions had taken place at the beginning of the period. Pro forma EBITDA improved to $28.2 million for 1995 from $4.7 million for the same historical period. Pro forma EBITDA as a percentage of revenue increased to 19.4% for 1995 from 17.9% for the same historical period. Management believes that EBITDA is a useful measure of operating performance because it is industry practice to evaluate hotel properties based on operating income before interest, depreciation and amortization, which is generally equivalent to EBITDA, and EBITDA is unaffected by the debt and equity structure of the property owner. EBITDA does not represent cash flow from operations as defined by GAAP, and is not necessarily indicative of cash available to fund all cash flow needs and should not be considered as an alternative to net income under GAAP for purposes of evaluating the Company's operating performance. THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 1995 Total revenues increased to $18.0 million in the three months ended March 31, 1996 from $1.8 million in the three months ended March 31, 1995. Room revenues for the three months ended March 31, 1996 increased to $10.7 million from $0.6 million while food, beverage and other department revenues increased to $6.3 million from $0.2 million predominantly due to the acquisition of nine Owned Hotels and the inclusion of a tenth Owned Hotel acquired on March 3, 1995 for the entire 1996 period. Operating costs and expenses increased to $15.9 million in the three months ended March 31, 1996 from $1.6 million in the three months ended March 31, 1995, resulting from the acquisition of nine Owned Hotels and the inclusion of a tenth hotel for the entire 1996 period. The costs related to management of the Managed Hotels remained relatively constant. Operating income increased to $2.1 million for the three months ended March 31, 1996 from $0.2 million for the three months ended March 31, 1995. Operating income as a percentage of revenue increased to 11.9% for the three months ended March 31, 1996 from 9.9% for the three months ended March 31, 1995, resulting from increased operating efficiencies. Net interest expense increased to $2.8 million in the three months ended March 31, 1996 from $0.1 million in the three months ended March 31, 1995, resulting from the debt incurred related to the acquisition of nine Owned Hotels and the inclusion of a tenth hotel acquired on March 3, 1995 for the entire 1996 period. The net loss of $0.6 million for the three months ended March 31, 1996 is a decrease from the net income of $0.1 million for the three months ended March 31, 1995 and is due to the acquisition of nine Owned Hotels. This loss was caused primarily by increased interest expense incurred to acquire the properties and seasonal factors. EBITDA increased to $3.8 million for the three months ended March 31, 1996 from $0.2 million for the three months ended March 31, 1995. EBITDA as percentage of revenue increased to 21.2% for the three months ended March 31, 1996 from 13.2% for the three months ended March 31, 1995. 35 YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994 Total revenues increased to $26.4 million in 1995 from $4.4 million in 1994. Room revenues and food, beverage and other hotel department revenues for 1995 reflect the operating revenues of five Owned Hotels acquired during the period. There were no Owned Hotels acquired during 1994. Operating costs and expenses increased to $23.7 million in 1995 from $4.5 million in 1994. Departmental expenses and property operating costs for 1995 reflect the operations of five Owned Hotels acquired during the period. Selling, general and administrative costs and depreciation expense reflect increases due to the acquisition of five Owned Hotels and the interest in the Atlanta Airport Westin during 1995. The costs related to management of the Managed Hotels remained relatively constant between the periods. Operating income increased to $2.6 million for the period from 1995 from a loss of $0.1 million in 1994. The increase from 1994 is due to the operating income by the Owned Hotels and to increased efficiencies in the management of the Managed Hotels. Net interest expense of $2.4 million for 1995 results from the debt incurred related to the acquisition of the Owned Hotels. The Company incurred an extraordinary loss on extinguishment of debt during 1995 from the write-off of deferred financing fees in connection with a refinancing transaction. The net loss increased to $0.7 million for 1995 from $0.1 million for 1994. The primary reason for the extraordinary loss was the extinguishment of debt. YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1993 Management services and other revenues increased to $4.4 million in 1994 from $4.2 million in 1993, due to the improved performance of the Managed Hotels. The Management Agreements provide for incentive payments based on the favorable performance of the Managed Hotels. Operating costs and expenses increased to $4.5 million in 1994 from $4.1 million in 1993. Selling, general and administrative costs reflect increases due to the addition of development, accounting and administrative personnel and leased office space as the Company began to actively seek acquisitions of hotel properties. The net loss for 1994 was $0.1 million compared to net income of $0.2 million in 1993. The variance in net operating results was due to the additional operating costs incurred. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity are cash on hand, cash generated from operations and borrowings under credit facilities as well as the proceeds from the Offering. The Company's continuing operations are funded through cash generated from hotel operations. Hotel acquisitions are financed through a combination of internally generated cash and borrowings under credit facilities. At March 31, 1996, the Company had $7.9 million in cash and cash equivalents, an increase of $1.1 million from the balance of $6.8 million on December 31, 1995. During the twelve months ended March 31, 1996, the Company invested $8.4 million in capital improvements in connection with renovations of the Owned Hotels. The Company plans to spend an additional $19.3 million in 1996 and 2.1 million in 1997 for the completion of the renovation of the Owned Hotels. Renovations on the Additional Hotels will commence after consummation of their acquisition at the end of 1996 and are projected to total $3.1 million. Capital for renovation work has been and will be provided by a combination of internally generated cash and borrowings under credit facilities. The Company is 36 committed to reinvesting adequate capital on an ongoing basis to maintain the quality of the hotels it owns. Once existing planned renovation programs are complete, the Company expects to spend approximately 4% of revenues on an annual basis for ongoing capital expenditures, including room and facilities refurbishments, renovations and furniture and equipment replacements. The Company believes that these investments will enhance the Company's competitive position. Prior to the completion of the offering, the Company expects to have the Credit Facility in place in an aggregate amount of $175 million. On a pro forma basis, approximately $42.8 million of this facility will be used at closing to retire existing debt. Remaining amounts under the Credit Facility will be available to finance future acquisitions. The Company believes that it has sufficient funds available to complete the acquisition of the Additional Hotels and other future acquisitions as well. SEASONALITY Demand at many of the Hotels is affected by recurring seasonal patterns. Demand is lower in the winter months due to decreased travel and higher in the spring and summer months during peak travel season. Accordingly, the Company's operations are seasonal in nature, with lower revenue, operating profit and cash flow in the first and fourth quarters and higher revenue, operating profit and cash flow in the second and third quarters. INFLATION The rate of inflation has not had a material effect on the revenues or operating results of the Company during the three most recent fiscal years. 37 THE COMPANY CapStar is a hotel investment and management company which acquires, owns, renovates, repositions and manages hotels throughout the United States. CapStar owns 12 upscale, full-service Owned Hotels which contain 3,516 rooms. Including the Owned Hotels, the Company manages 48 Hotels with 8,849 rooms. The Company's business strategy is to identify and acquire hotel properties with the potential for cash flow growth and to renovate, reposition and operate each hotel according to a business plan specifically tailored to the characteristics of the hotel and its market. Each of the Owned Hotels is located in a market which has recently experienced strong economic growth, including Atlanta, Charlotte, Chicago, Cleveland, Dallas, Los Angeles, Salt Lake City, Seattle and Washington, D.C. The Owned Hotels include hotels operated under nationally recognized brand names such as Hilton, Sheraton, Westin, Marriott, Holiday Inn and Radisson, and one hotel operated under an independent brand name. The following table sets forth certain information for the Owned Hotels as of the periods presented:
THREE MONTHS ENDED MARCH 31, -------------------- PERCENTAGE 1996 1995 INCREASE ------- --------- ---------- Revenues (in thousands)........................ $25,590 $23,403 9.3% Gross operating profit (in thousands).......... $ 7,395 $ 6,305 17.3% Average Occupancy.............................. 70.7% 67.9% 4.1% ADR............................................ $ 78.22 $ 73.31 6.7% RevPAR......................................... $ 55.30 $ 49.78 11.1%
The 11.1% increase in RevPAR for the Owned Hotels compares favorably with the 4.9% increase for all upscale hotels over the comparable period as reported by Smith Travel Research. As a fully integrated owner and manager, CapStar intends to capitalize on its management experience and expertise by continuing to make opportunistic acquisitions of full-service hotels, securing additional management contracts and improving the operating performance of the hotels. The Company's senior management team has successfully managed hotels in all segments of the lodging industry, with particular emphasis on upscale, full-service hotels. Senior management has an average of approximately 19 years of experience in the hotel industry. Since the inception of the Company's management business in 1987, the Company has achieved consistent growth, even during periods of relative industry weakness. The Company attributes its management success to its ability (i) to analyze each hotel as a unique property and identify those particular cash flow growth opportunities which each hotel presents, (ii) to create and implement marketing plans that properly position each hotel within its local market, and (iii) to develop management programs that emphasize guest service, labor productivity, revenue yield and cost control. The Company has a distinct management culture that stresses creativity, loyalty and entrepreneurship and was developed to emphasize operations from an owner's perspective. This culture is reinforced by the fact that 33 members of management hold, directly or indirectly, an aggregate of 7.8% of the Company's equity. See "Principal and Selling Stockholders." The Company is in the process of renovating and repositioning the Owned Hotels based on strategic plans designed to address the opportunities presented by each hotel and local market. Management selects renovations intended to result in a high return on investment and to extend the Owned Hotels' appeal to a broader range of market segments. Examples of these revenue generating renovations include the following: enhancing meeting and banquet facilities to attract lucrative group conferences and conventions; upgrading guest rooms to meet the needs of business travelers and to increase ADRs; renovating restaurants and introducing new food and beverage concepts to attract additional guests and local patrons; and completing necessary repairs and upgrades of interior and exterior spaces to ensure high levels of quality and guest satisfaction. During the 12 months ended 38 March 31, 1996, the Company spent a total of $8.4 million on renovations at the Owned Hotels and currently intends to spend an additional $21.4 million completing the renovation programs. The Company believes that the upscale, full-service segment of the lodging industry is the most attractive segment in which to acquire, own and manage hotels and further believes that there are currently many attractive opportunities to acquire properties in this segment of the industry at prices below replacement cost. The upscale, full-service segment is attractive for several reasons. First, the Company expects that there will be no significant increases in the supply of upscale, full-service hotels in the next several years because the cost of new construction generally does not justify new hotel development. Second, upscale, full-service hotels appeal to a wide variety of customers, thus reducing the risk of decreasing demand from any particular customer group. Additionally, such hotels have particular appeal to business executives and upscale leisure travelers, customers who are generally less price sensitive than travelers who use limited-service hotels. Third, full-service hotels afford greater intrinsic operating leverage than limited-service hotels, resulting in increasingly higher profit margins as revenues increase. Finally, full-service hotels require a greater depth of management expertise than limited-service hotels, and the Company believes that its superior management skills provide it with a significant competitive advantage in their operation. In connection with its growth strategy, the Company has entered into a binding contract with MBL to acquire the five Additional Hotels which contain 1,121 rooms, for a purchase price of $68.4 million. Four of the Additional Hotels are currently managed by the Company. Since assuming management of these four hotels in 1991, the Company has improved the operating performance of the properties. The Company, however, believes that with appropriate capital spending the Additional Hotels can achieve further improvements in revenue and cash flow. The Company plans to spend approximately $3.1 million subsequent to the acquisition to renovate and reposition the Additional Hotels. The acquisition is scheduled to close in December 1996. There can be no assurance, however, that the closing will occur. See "Risk Factors--Risks Associated with Expansion" and "Business and Properties--The Properties--The Additional Hotels." BUSINESS AND PROPERTIES The Company seeks to increase shareholder value by (i) continuing to acquire upscale, full-service hotels below replacement cost in selected markets throughout the United States and (ii) implementing its operating strategy to improve hotel operations and increase cash flow. ACQUISITION STRATEGY The Company intends to continue acquiring upscale, full-service hotels. In addition to the direct acquisition of hotels, the Company anticipates that it may make investments in hotels through joint ventures with strategic partners or through equity contributions or secured loans. The Company identifies acquisition candidates located in markets with economic, demographic and supply dynamics favorable to hotel owners and operators. Through its extensive due diligence process, the Company chooses those acquisition targets where it believes selective capital improvements and intensive management will increase the hotel's ability to attract key demand segments, enhance hotel operations and increase long-term value. In order to evaluate the relative merits of each investment opportunity, senior management and individual operations teams create detailed plans covering all areas of renovation and operation. These plans serve as the basis for the Company's acquisition decisions and guide subsequent renovation and operating plans. At the Owned Hotels, the Company has been able to implement these plans and apply its system of management to create improvements in revenue and profitability. 39 The Company will seek to acquire and invest in hotels that meet the following criteria: MARKET CRITERIA Economic Growth. The Company focuses on metropolitan areas that are approaching, or have already entered, periods of economic growth. Such areas generally show above average growth in the business community as measured by (i) job formation rates, (ii) population growth rates, (iii) tourism and convention activity, (iv) airport traffic volume, (v) local commercial real estate occupancy, and (vi) retail sales volume. Markets that exhibit these characteristics typically have strong demand for hotel facilities and services. Supply Constraints. The Company seeks lodging markets with favorable supply dynamics for hotel owners and operators, including an absence of current new hotel development and barriers to future development such as zoning constraints, the need to undergo lengthy local development approval processes and a limited number of suitable sites. Other factors limiting the supply of new hotels are the current lack of financing available for new development and the inability to generate adequate returns on investment to justify new development. Geographic Diversification. The Company seeks to maintain a geographically diverse portfolio of hotels to offset the effects of regional economic cycles. The Hotels are located in 23 states across the nation, with 11 Hotels located in California, four in Virginia, three in Colorado, three in Maryland, three in New Jersey, two in Arizona, two in Indiana, two in Louisiana, two in New York, two in Washington, D.C., two in Pennsylvania and one Hotel each in 12 additional states. HOTEL CRITERIA Location and Market Appeal. The Company seeks to acquire upscale, full-service hotels that are situated near both business and leisure centers which generate a broad base of demand for hotel accommodations and facilities. These demand generators include (i) business parks, (ii) airports, (iii) shopping centers and other retail areas, (iv) convention centers, (v) sports arenas and stadiums, (vi) major highways, (vii) tourist destinations, (viii) major universities, and (ix) cultural and entertainment centers with nightlife and restaurants. The confluence of nearby business and leisure centers enables the Company to attract both weekday business travelers and weekend leisure guests. Attracting a balanced mix of business, group and leisure guests to the Hotels helps to maintain stable occupancy rates and high ADRs. Size and Facilities. The Company seeks to acquire well-constructed hotels that are less than 20 years old, contain 200 to 500 guest rooms and include accommodations and facilities that are, or are capable of being made, attractive to key demand segments such as business, group and leisure travelers. These facilities typically include large, upscale guest rooms, food and beverage facilities, extensive meeting and banquet space, and amenities such as health clubs, swimming pools and adequate parking. Potential Performance Improvements. The Company seeks to acquire underperforming hotels where intensive management and selective capital improvements can increase revenue and cash flow. Underperforming hotels typically serve less than their "fair share" of lodging industry demand (as measured by RevPAR), achieve lower profit margins than the Company believes it can maintain and receive inadequate funding to make needed capital improvements. These hotels represent opportunities where a systematic management approach and targeted renovations should result in improvements in revenue and cash flow. The Company's ability to improve operations is demonstrated by the fact that RevPAR at the Owned Hotels increased 11.1% from the three month period ended March 31, 1995 to the three month period ended March 31, 1996, as compared to an increase of only 4.9% for the upscale, full-service hotel segment as reported by Smith Travel Research. 40 The Company expects that its relationships throughout the industry and its acquisition staff located on both coasts of the United States will continue to provide it with a competitive advantage in identifying, evaluating and purchasing hotels which meet its acquisition criteria. The Company has a record of successfully renovating and repositioning hotels, both at the Owned Hotels and at the Managed Hotels (varying in levels of service, room rates and market types). As a public company, the Company believes it will have improved access to various debt and equity financing sources to fund acquisitions. In addition, in consummating acquisitions the Company expects that it will benefit from its ability to utilize units of limited partnership interest in its subsidiary Operating Partnership as an alternative to cash. The Company will have substantial capital available under the $175 million Credit Facility to pursue acquisitions and make capital investments in subsequently acquired hotels. The Company currently expects to retain earnings for future acquisitions and the renovation and maintenance of the hotels owned by the Company. OPERATING STRATEGY The Company's principal operating objectives are to generate higher RevPAR and to increase net operating income while providing its hotel guests with high-quality service and value. The Company seeks to achieve these objectives by creating and executing management plans that are specifically tailored for each individual Hotel rather than by implementing an operating strategy that is designed to maintain a uniform corporate image or brand. Management believes that its custom-tailored business plans are the most effective means of addressing the needs of a given hotel or market. The Company believes that skilled management of hotel operations is the most critical element in maximizing revenue and cash flow in full-service hotels. The Company's corporate headquarters carries out financing and acquisition activities and provides services to support as well as monitor the Company's on-site hotel operating executives. Each of the Company's executive departments, including Sales and Marketing, Human Resources and Training, Food and Beverage, Technical Services, Development, and Corporate Finance, is headed by an executive with significant experience in that area. These departments support decentralized decision-making by the hotel operating executives by providing accounting and budgeting services, property management software and other resources which cannot be economically maintained at the individual Hotels. Key elements of the Company's management programs include the following: Comprehensive Budgeting and Monitoring. The Company's operating strategy begins with an integrated budget planning process that is implemented by individual on-site managers and monitored by the Company's corporate staff. Management sets targets for cost and revenue categories at each of the Hotels based on historical operating performance, planned renovations, operational efficiencies and local market conditions. On-site managers coordinate with the central office staff to ensure that such targets are realistic. Through effective and timely use of its comprehensive financial information and reporting systems, the Company can monitor actual performance and rapidly adjust prices, staffing levels and sales efforts to take advantage of changes in the market and to improve yield. Targeted Sales and Marketing. The Company employs a systematic approach toward identifying and targeting segments of demand for each Hotel in order to maximize market penetration. Executives at the Company's corporate headquarters and property-based managers divide such segments into smaller subsegments, typically ten or more for each Hotel, and develop narrowly tailored marketing plans to suit each such segment. The Company supports each Hotel's local sales efforts with corporate sales executives who develop new marketing concepts and monitor and respond to specific market needs and preferences. These executives are active in implementing on-site marketing programs developed in the central management office. The Company employs computerized revenue yield management systems to manage each Hotel's use of the various distribution channels in the lodging industry. 41 Management control over those channels, which include franchisor reservation systems and "800" numbers, travel agent and airline global distribution systems, corporate travel offices and office managers, and convention and visitor bureaus, enables the Company to maximize revenue yields on a day-to-day basis. Sales teams are recruited locally and receive incentive-based compensation bonuses. All of the Company's sales managers complete a highly developed sales training program. Strategic Capital Improvements. The Company plans renovations primarily to enhance a Hotel's appeal to targeted market segments, thereby attracting new customers and generating increased revenue and cash flow. During the 12 months ended March 31, 1996, the Company spent a total of $8.4 million on renovations at the Owned Hotels and currently intends to spend an additional $21.4 million completing the renovation programs. For example, at all of the Owned Hotels, the Company has renovated banquet and meeting spaces and upgraded guest rooms to better accommodate the needs of business travelers and to increase ADRs. Capital spending decisions are based on both strategic needs and potential rate of return on a given capital investment. Selective Use of Multiple Brand Names. The Company believes that the selection of an appropriate franchise brand is essential in positioning a hotel optimally within its local market. The Company selects brands based on local market factors such as local presence of the franchisor, brand recognition, target demographics and efficiencies offered by franchisors. The Company believes that its relationships with many major hotel franchisors, established both as a manager and an owner of hotels operated under their respective franchises, places the Company in a favorable position when dealing with those franchisors and allows it to negotiate favorable franchise agreements with franchisors. The Company believes that its growth through acquisition of additional hotels will further strengthen its relationship with franchisors. 42 The following chart summarizes certain information with respect to the national franchise affiliations of the Hotels and the Additional Hotels:
PERCENTAGE OF COMPANY'S TOTAL PERCENTAGE OF GUEST ROOMS-- OWNED NUMBER OF NUMBER OF COMPANY'S TOTAL HOTELS AND FRANCHISE HOTELS(1) GUEST ROOMS(1) GUEST ROOMS(1) ADDITIONAL HOTELS(2) - --------------------------------- --------- -------------- --------------- -------------------- Hilton........................... 6 1,721 19.4% 37.1% Sheraton......................... 4 1,137 12.8 15.7 Holiday Inn...................... 7 1,132 12.8 9.4 Best Western(R).................. 6 728 8.2 -- Ramada(R)........................ 4 725 8.2 -- Westin........................... 1 496 5.6 10.7 Marriott......................... 1 434 4.9 9.4 Radisson......................... 2 328 3.7 4.4 Days Inn(R)...................... 2 277 3.1 -- Quality(R)....................... 2 277 3.1 -- Renaissance...................... 1 209 2.4 4.5 Doubletree(R).................... 1 208 2.4 -- Clarion(R)....................... 1 194 2.2 -- Comfort Suites(R)................ 1 119 1.3 -- Residence Inn(R)................. 1 104 1.2 -- Independent...................... 8 760 8.6 8.8 -- ----- ----- ----- Total............................ 48 8,849 100.0% 100.0% -- -- ----- ----- ----- ----- ----- -----
------------------- (1) Excludes the one Additional Hotel that the Company does not currently manage. (2) Includes the one Additional Hotel that the Company does not currently manage. Emphasis on Food and Beverage. Management believes popular food and beverage ideas are a critical component in the overall success of a hotel. The Company utilizes its food and beverage operations to create local awareness of its hotel facilities, to improve the profitability of its hotel operations and to enhance customer satisfaction. The Company is committed to competing for patrons with restaurants and catering establishments by offering high-quality restaurants that garner positive reviews and strong local and/or national reputations. The Company has engaged food and beverage experts to develop several proprietary restaurant concepts. The Owned Hotels contain restaurants ranging from Michel Richard's highly acclaimed CITRONELLE(R), to Morgan's, a Company-designed concept which offers popular, moderately-priced American cuisine. The Company has also successfully placed national food franchises such as Starbuck's Coffee(R) and "TCBY"(R) Yogurt in casual, delicatessen-style restaurants in several of the Owned Hotels. Popular food concepts have strengthened the Company's ability to attract business travelers and group meetings and improved the name recognition of the Owned Hotels. Commitment to Reinvestment. The Company is committed to reinvesting adequate capital on an ongoing basis to maintain the quality of the hotels it owns. Reinvestment is expected to include room and facilities refurbishments, renovations and furniture and equipment replacements that are designed to maintain attractive accommodations, updated restaurants and modern equipment. The Company believes that these investments will enhance the Company's competitive position. Computerized Reporting Systems. The Company employs computerized reporting systems at each of the Hotels and at its corporate offices to monitor the financial and operating performance of the Hotels. Management information services have been fully integrated through the installation of Novell and Unix networks. Management also utilizes programs like Data Plus(R) and cc:Mail(R) to 43 facilitate daily communication. Such programs have enabled the Company to create and implement detailed reporting systems at each of the Hotels and its corporate headquarters. Corporate executives utilize information systems that track each of the Hotel's daily occupancy, ADR, and revenue from rooms, food and beverage. By having the latest hotel operating information available at all times, management is better able to respond to changes in the market of each Hotel. Commitment to Service and Value. The Company is dedicated to providing exceptional service and value to its customers on a consistent basis. The Company conducts extensive employee training programs to ensure personalized service at the highest levels. Programs such as "Be A Star" have been created and implemented by the Company to ensure the efficacy and uniformity of its employee training. The Company's practice of tracking customer comments allows investment in services and amenities where they are most effective. The Company's focus on these areas has enabled it to attract lucrative group business. Distinct Management Culture. The Company has a distinct management culture that stresses creativity, loyalty and entrepreneurship and was developed to emphasize operations from an owner's perspective. Management believes in realistic solutions to problems, and innovation is always encouraged. Incentive programs and awards have been established to encourage individual property managers to seek new ways of increasing revenues and operating cash flow. This creative, entrepreneurial spirit is prevalent from the corporate staff and the general managers down to the operations staff. Individual general managers work closely with the corporate staff and they and their employees are rewarded for achieving target operating and financial goals. IMPLEMENTATION OF STRATEGIES Since January 1, 1995, CapStar has implemented its acquisition and operating strategies by acquiring and assuming management of 12 upscale, full-service hotels containing approximately 3,500 rooms and contracting to acquire Additional Hotels containing approximately 1,125 rooms. The Company believes that it has improved the performance of each of the Owned Hotels since acquiring them between March 1995 and June 1996. The following three examples illustrate the manner in which the Company has implemented its acquisition and operating strategies at the Owned Hotels: Atlanta Airport Westin. Built in 1982, the 496-room hotel is located on Interstate 85 near Interstate 285, Atlanta's central highway, and adjacent to Hartsfield International airport (the nation's third busiest airport). After acquiring the hotel, the Company began the process of converting the franchise affiliation from Renaissance to Westin. It is expected that the conversion will be completed by July 1996. The hotel's facilities and amenities feature over 15,000 square feet of meeting and banquet space, an indoor/outdoor pool, a health club, a voice mail telephone answering system, a gift shop, a business center, a club lounge, two restaurants, a lounge and a nightclub. The economy of greater Atlanta, host of the 1996 Summer Olympic Games, is among the strongest in the nation. Prior to the Company's acquisition, the hotel had been leased to a tenant that was involved in prolonged disputes with the hotel's owners, which had resulted in inadequate maintenance of the hotel's physical plant and generally poor employee morale. The Company acquired the first mortgage loan on this hotel from a major insurance company during 1995 and in November 1995 acquired a majority limited partnership interest and the sole general partner interest in the limited partnership that owns the hotel (the limited partnership was in its fourth year of Chapter 11 reorganization at the time). The Company took over management of the hotel in March 1996 after confirmation of the hotel's reorganization plan and has implemented an operating strategy (outlined in the chart below) which 44 includes a $7.1 million renovation program that is expected to be substantially completed by November 1996.
BUSINESS PLAN ELEMENT BUSINESS PLAN STRATEGY STATUS - ----------------------------- ----------------------------- ----------------------------- 1. Change franchise brand . Complete property Westin franchise is expected affiliation from improvements specified by to become effective in July Renaissance to Westin. Westin. 1996. 2. Replace property . Install new management New general manager and management committee to team. executive staff installed. facilitate shift in marketing and management direction. 3. Shift demand segment from . Renovate 250 guest rooms to Club room and telephone heavily-discounted airline Westin Premier(R) standard system installed. Westin crew business to premium and install Guest Office Premier rooms completed and business and leisure features. remaining rooms in process of travelers. . Install dedicated club room being renovated (as airline for top tier guests. contracts expire). . Upgrade remaining guest rooms. . Replace telephone system. . Repair health club equipment and pool area. 4. Increase group meeting . Renovate meeting and Renovations complete and use. banquet space in marketing plan under way. coordination with local and national Westin sales office system. 5. Improve profitability by . Install computer network Gross operating profit margin eliminating non-essential for more efficient increased from 34.0% for the job functions. management oversight. three months ended March 31, 1995 to 37.6% for the three months ended March 31, 1996. 6. Execute accelerated . Repair and upgrade HVAC and Deferred maintenance programs capital improvement plan to mechanical system. underway. address defined maintenance . Refinish guest room program. corridors. . Repair building exterior and grounds.
Marriott Hotel, Somerset, NJ. Built in 1978, the 434-room hotel is centrally located on Interstate 287, approximately 25 miles from Newark International Airport, 40 minutes from midtown Manhattan and convenient to all major traffic arteries in Northern New Jersey. The hotel's facilities and amenities feature over 9,000 square feet of meeting and banquet space, tennis courts, volleyball courts, an indoor/outdoor pool, a sauna/whirlpool, an exercise room, a shuffleboard/badminton court, two restaurants and a pool-side bar. The hotel is surrounded by a significant number of corporate headquarters, commercial office buildings, retail centers, an affluent residential community and extensive, well-maintained local highways and road systems. Somerset and its neighboring communities have been experiencing moderate economic growth in recent years. Prior to the Company's acquisition, a widely syndicated investment partnership owned the hotel and contracted the management to Marriott International. The hotel had a conservative marketing strategy that did not penetrate the multiple demand segments that the Company believed the hotel could successfully serve. Data from Smith Travel Research indicated that the hotel was operating at above its fair share of demand among the competitive set of area hotels during 1994 and 1995, but at a significantly lower premium than it had consistently maintained during prior years. Since acquiring the hotel in October 1995, the Company has implemented an operating strategy (outlined in the chart 45 below) which includes a $3.3 million renovation program that is expected to be substantially completed by October 1996.
BUSINESS PLAN ELEMENT BUSINESS PLAN STRATEGY STATUS - ----------------------------- ----------------------------- ----------------------------- 1. Pursue higher ADR through . Convert 180 guest rooms to Renovations and conversions more aggressive rate Marquis(R) level. to be completed by August structure in premium . Redecorate the lobby and 1996 (time table based on commercial segment. the corporate club. vacancy patterns so that . Reduce number of premium premium room service guest rooms available at interruption is minimized). discounts. 2. Increase weekend . Target leisure demand Direct sales and marketing occupancy. segment with direct sales plans in place. and advertising. 3. Pursue higher food and . Convert formal dining room Renovations completed. beverage sales. to banquet space to attract local catering demand. . Enlarge cocktail lounge to attract non-restaurant demand. 4. Reduce operating expenses . Install computer network Gross operating profit margin by restructuring staff and for more efficient increased from 27.6% for the training programs. management oversight. three months ended March 31, 1995 to 32.3% for the three months ended March 31, 1996. 5. Execute accelerated . Replace HVAC units in 140 Deferred maintenance programs capital improvement plan to guest rooms. underway. address deferred . Refinish corridors. maintenance program. . Install fire sprinkler system.
Salt Lake Airport Hilton. Built in 1980, the 287-room hotel is centrally located within a commercial office park, approximately five minutes from the Salt Lake City International Airport and 15 minutes from downtown Salt Lake City. The hotel's facilities and amenities feature 10,000 square feet of meeting and banquet facilities, indoor and outdoor pools, a basketball court, lake and dock facilities, a putting green, a health club, a video room and a restaurant and lounge with 150 seats. The hotel is well-positioned to serve strong business segment demand generated by the commercial office park, as well as leisure segment demand from visitors to nearby attractions like the Mormon Temple, the Great Salt Lake and seven world-class ski resorts in the Wasatch Range of the Rocky Mountains. Salt Lake City has experienced strong economic growth in recent years as a result of a growing high-tech business community, the renovation and expansion of the Salt Palace Convention Center and the selection of the city as the site of the 2002 Winter Olympic Games. Prior to the Company's acquisition, the Salt Lake Airport Hilton was owned and operated by its original developer, a local development company that owned no other hotel properties. The hotel's first mortgage had passed its original maturity date. The hotel suffered from deferred maintenance, a deteriorating market share and low employee morale. Specific operational deficiencies included the lack of a yield management system, a low operating margin in the rooms department and an inefficient marketing plan that failed to attract upscale business travelers and group business. Data from Smith Travel Research indicated that the hotel was operating at approximately 83% of its fair share of demand among its competitive set of area hotels during 1994. However, the Company felt that the hotel had a fundamentally sound physical plant, facilities and amenities to serve a full range of lodging demand segments and strong marketing support from the Hilton reservation system. Since acquiring 46 the hotel in March 1995, the Company has implemented an operating strategy (outlined in the chart below) which includes a $1.8 million renovation program that is substantially completed.
BUSINESS PLAN ELEMENT BUSINESS PLAN STRATEGY STATUS - ----------------------------- ----------------------------- ----------------------------- 1. Recapture business . Upgrade 48 guest rooms to Renovations completed and new travelers in premium rate create corporate floor with restaurant operating. segment during peak business services and business periods. dedicated club room. . Redecorate lobby and small meeting rooms. . Install new restaurant. 2. Generate higher revenues . Fully renovate meeting Renovations completed and from group demand segment facilities. local/corporate sales program in rooms and food & . Install cocktail lounge. continuing. beverage department. . Upgrade VIP and hospitality suites. 3. Apply yield management . Install new computer system Completed and in effect. practices. and upgrade software. 4. Reduce Rooms Department . Reduce payroll costs. Rooms Department profit expense margin. . Scale back on excessive margin increased from 31.7% guest premium program. for the three months ended March 31, 1995 to 38.4% for the three months ended March 31, 1996. 5. Eliminate unproductive . Redirect promotional Program underway. promotional costs. dollars to priority business plan items.
THE PROPERTIES The Owned Hotels and the Additional Hotels feature, or after the Company's renovation program has 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 travellers as well as banquets and receptions from the local community. 47 The following table sets forth certain information with respect to the Owned Hotels and the Additional Hotels for the 12 months ended March 31, 1996:
PLANNED OR TWELVE MONTHS ENDED MARCH COMPLETED 31, 1996 NUMBER OF RENOVATION ---------------------------- GUEST YEAR MONTH EXPENDITURE(1) AVERAGE HOTEL LOCATION ROOMS BUILT ACQUIRED (000'S) OCCUPANCY ADR REVPAR(2) - --------------------- --------------------- --------- ----- -------- -------------- --------- ------ --------- OWNED HOTELS Hilton Hotel......... Irvine, CA 290 1976 2/96 $ 2,006 65.2% $71.01 $ 46.32 Sheraton Hotel....... Colorado Springs, CO 502 1974 6/95 3,393 67.6 61.80 41.77 Georgetown Latham.... Washington, DC 143 1981 3/96 802 73.4 100.36 73.64 Atlanta Airport Westin(3)........... Atlanta, GA 496 1982 11/95 7,100 82.8 70.02 58.00 Radisson Hotel....... Schaumburg, IL 202 1979 6/95 1,652 65.6 69.65 45.70 Marriott Hotel....... Somerset, NJ 434 1978 10/95 3,311 73.1 92.94 67.92 Sheraton Airport Plaza............... Charlotte, NC 226 1985 2/96 1,529 75.2 76.10 57.25 Holiday Inn.......... Cleveland, OH 237 1978 2/96 2,900 75.1 65.42 49.15 Hilton Hotel......... Arlington, TX 310 1983 4/96 2,700 74.8 76.63 57.35 Salt Lake Airport Hilton.............. Salt Lake City, UT 287 1980 3/95 1,823 71.5 72.39 51.78 Renaissance Hotel.... Arlington, VA 209 1990 6/96 1,500 73.1 103.64 75.76 Hilton Hotel......... Bellevue, WA 180 1979 8/95 1,063 77.5 84.80 65.71 --- ------ --- ------ --------- Total/Weighted Average--Owned Hotels..... 3,516 $ 29,779 73.1% $76.66 $ 56.05 ADDITIONAL HOTELS Hilton Hotel......... Sacramento, CA 326 1983 12/96 750 71.7% $73.46 $ 52.70 Santa Barbara Inn.... Santa Barbara, CA 71 1959 12/96 419 81.7 122.56 100.08 Holiday Inn.......... Colorado Springs, CO 201 1974 12/96 200 70.9 53.55 37.99 Embassy Row Hotel.... Washington, DC 195 1969 12/96 1,500 58.6 112.02 65.69 Hilton Hotel & Towers.............. Lafayette, LA 328 1981 12/96 249 72.1 66.62 48.03 --- ------ --- ------ --------- Total/Weighted Average--Additional Hotels................................. 1,121 $ 3,118 70.1% $77.04 $ 53.97 Total/Weighted Average................... 4,637 $ 32,897 72.4% $76.75 $ 55.55 --- ------ --- ------ --------- --- ------ --- ------ ---------
- ------------ (1) Represents the total planned or completed capital expenditures at each hotel. As of March 31, 1996, $8.4 million had been spent and an additional $21.4 million was planned for the Owned Hotels and $3.1 million was planned for the Additional Hotels. (2) Represents total room revenue divided by total available rooms. (3) The Atlanta Airport Westin is majority-owned by the Company through a partnership in which the Company holds an 84.6% limited partner interest, 1% general partner interest and a mortgage which together provide the Company a 92% economic interest in the hotel. THE OWNED HOTELS The following is a brief description of each of the Owned Hotels and their respective locations: Hilton Hotel, Irvine, CA. Built in 1976, the 290-room hotel is centrally located across the street from the John Wayne International Airport in an area densely developed with Class A commercial office space, upscale retail establishments and high density residential housing. The hotel's facilities and amenities feature over 11,000 square feet of banquet and meeting space, an outdoor pool, two tennis courts, a health and fitness center, a business center, valet services, a gift shop and a grill restaurant. Orange County has experienced minimal economic growth during the 1990s and has trailed the national average during that time due to (i) the negative impact of cutbacks in defense spending and (ii) sharp declines in the value of certain investments that led Orange County to seek bankruptcy protection. The Company believes that Orange County and nearby Los Angeles are currently emerging from recession, demonstrated by the fact that these counties are projected to lead the state in job growth during 1996. As of March 31, 1996, the Company had spent $0.1 million on renovations at the hotel with an additional $1.9 million planned. 48 Sheraton Hotel, Colorado Springs, CO. Built in 1974, the 502-room hotel is centrally located approximately eight miles from Colorado Springs International Airport, three miles from downtown Colorado Springs and adjacent to Interstate 25. The hotel's facilities and amenities feature over 42,000 square feet of meeting and banquet space (one of the largest meeting and banquet facilities in Colorado), a health club, a putting green, three pools, two restaurants and a lobby bar. Colorado Springs has experienced strong economic growth in recent years which has led to a major airport expansion program which was completed in 1995. Such growth is attributable to a number of factors, including a low regional average cost of living and a rapidly expanding, young population. As of March 31, 1996, the Company had spent $2.5 million on renovations at the hotel with an additional $0.9 million planned. Georgetown Latham, Washington, D.C. Built in 1981, the 143-room hotel is located in the center of Georgetown, an historic district in central Washington, D.C. The hotel is approximately 15 minutes from Washington National Airport and convenient to several of Washington's commercial office concentrations, particularly those in the area of Georgetown, the West End and the Golden Triangle. The hotel's facilities and amenities feature 19,000 square feet of meeting and banquet space, valet services, secretarial services, concierge services, a roof top pool and deck and the renowned CITRONELLE restaurant. The hotel is also surrounded by upscale retail establishments, restaurants, galleries, museums and historic homes, making it broadly appealing to business travelers, as well as group meetings and leisure travelers. The economy of the Washington, D.C. metropolitan area is currently among the strongest in the nation and economic growth is forecast to continue into the near future. A major new convention center downtown is expected to open within four years. As of March 31, 1996, the Company had spent $0.1 million on renovations at the hotel with an additional $0.7 million planned. Atlanta Airport Westin. Built in 1982, the 496-room hotel is located on Interstate 85 near Interstate 285, Atlanta's central highway, and adjacent to Hartsfield International airport (the nation's third busiest airport). After acquiring the hotel, the Company began the process of converting the franchise affiliation from Renaissance to Westin. It is expected that this conversion will be completed by July 1996. The hotel's facilities and amenities feature over 15,000 square feet of meeting and banquet space, an indoor/outdoor pool, a health club, a voice mail telephone answering system, a gift shop, a business center, a club lounge, two restaurants, a lounge and a nightclub. The economy of greater Atlanta, host of the 1996 Summer Olympic Games, is among the strongest in the nation. As of March 31, 1996, the Company had spent $1.2 million on renovations at the hotel with an additional $5.9 million planned. Radisson Hotel, Schaumburg, IL. Built in 1979, the 202-room hotel is centrally located on an important arterial road a quarter mile west of interstate 290, approximately 20 minutes from O'Hare International Airport (the nation's busiest airport) and 40 minutes from downtown Chicago. The hotel's facilities and amenities feature over 7,400 square feet of meeting and banquet space (with the addition of new space planned), a complimentary breakfast buffet, complimentary airport and local transportation service, valet parking and dry cleaning, an outdoor pool and whirlpool, a fitness center, a jogging trail, a restaurant and a sports bar/dance club. After Chicago, Schaumburg contains the second highest concentration of commercial, office, retail and residential space in the Midwest. The suburban areas surrounding Schaumburg have experienced strong economic growth in recent years, based on employment figures, office space occupancy rates, air traffic levels and retail sales volume. As of March 31, 1996, the Company had spent $1.3 million on renovations at the hotel with an additional $0.4 million planned. Marriott Hotel, Somerset, NJ. Built in 1978, the 434-room hotel is centrally located on Interstate 287, approximately 25 miles from Newark International Airport, 40 minutes from midtown Manhattan and convenient to all major traffic arteries in Northern New Jersey. The hotel's facilities and amenities feature over 9,000 square feet of meeting and banquet space, tennis courts, an indoor/outdoor pool, a sauna/whirlpool, volleyball courts, an exercise room, a shuffleboard/badminton court, two restaurants and a pool-side bar. The hotel is surrounded by a significant number of corporate headquarters, 49 commercial office buildings, retail centers, an affluent residential community and extensive, well-maintained local highways and road systems. Somerset and its neighboring communities have been experiencing moderate economic growth in recent years. As of March 31, 1996, the Company had spent $0.6 million on renovations at the hotel with an additional $2.7 million planned. Sheraton Airport Plaza, Charlotte, NC. Built in 1985, the 226-room hotel is the only upscale, full-service hotel at Charlotte Douglas International Airport (which is USAir's main operating hub and the nation's 14th busiest airport). The hotel is located north of the airport, approximately five miles from the Charlotte Coliseum and seven miles from downtown Charlotte. The hotel's facilities and amenities feature over 12,500 square feet of meeting and banquet space, airport shuttle service, a fitness center, a pool with sauna and whirlpool, a restaurant and a lounge/nightclub. The Charlotte region has grown in recent years to become the second largest financial center in the U.S. (after New York City) and has experienced a continued influx of foreign companies establishing U.S. operations. Economic growth has been strong over the past fifteen years due to Charlotte's attractive climate, low cost of living, young and well-educated workforce and accessibility by all forms of transportation. As of March 31, 1996, the Company had spent $0.2 million on renovations at the hotel with an additional $1.3 million planned. Holiday Inn, Cleveland, OH. Built in 1978, the 237-room hotel is located on Interstate 71 in Middleburg Heights, approximately three miles from Cleveland's Hopkins International Airport and approximately 15 miles from downtown Cleveland. The hotel's facilities and amenities feature over 14,000 square feet of meeting and banquet space, an indoor pool, a fitness spa, 24-hour airport shuttle service and a restaurant specializing in seafood and regional cuisine. The Cleveland metropolitan area and the cities surrounding the airport have experienced strong economic growth in recent years as the greater Cleveland economy has shifted from an economic base weighted toward heavy manufacturing to one focused on services, technology and manufacturing. As of March 31, 1996, the Company had spent $0.1 million on renovations at the hotel with an additional $2.8 million planned. Hilton Hotel, Arlington, TX. Built in 1983, the 310-room hotel is located at the intersection of Interstate 30 and Route 360, near the center of the Dallas/Fort Worth Metroplex. The hotel is well-positioned to serve both business and leisure segments due to its proximity to (i) a surrounding commercial development, (ii) nearby leisure attractions, including The Ballpark at Arlington and the original Six Flags amusement park, (iii) a regional convention center located one mile away, and (iv) the Dallas/Fort Worth International Airport (the nation's second busiest), approximately eight miles away. The commercial office concentrations of downtown Dallas and Fort Worth are each approximately 15 miles away. The Dallas-Forth Worth Metroplex is the sixth most populous metropolitan area in the U.S. and, notwithstanding a state recession in the 1980s caused by the collapse of oil prices and a nationwide recession during the early 1990s, has been experiencing strong economic growth in recent years, as measured by airport activity, office space occupancy rates, employment rates and population figures. As of March 31, 1996, the Company had allocated $2.7 million for renovations at the hotel. Salt Lake Airport Hilton. Built in 1980, the 287-room hotel is centrally located within a commercial office park, approximately five minutes from the Salt Lake City International Airport and 15 minutes from downtown Salt Lake City. The hotel's facilities and amenities feature 10,000 square feet of meeting and banquet facilities, indoor and outdoor pools, a basketball court, lake and dock facilities, a putting green, a health club, a video room and a restaurant and lounge with 150 seats. The hotel is well-positioned to serve strong business segment demand generated by the commercial office park, as well as leisure segment demand from visitors to nearby attractions like the Mormon Temple, the Great Salt Lake and seven world-class ski resorts in the Wasatch Range of the Rocky Mountains. Salt Lake City has experienced strong economic growth in recent years as a result of a growing high-tech business community, the renovation and expansion of the Salt Palace Convention Center and the selection of the city as the site of the 2002 Winter Olympic Games. As of March 31, 1996, the Company had spent $1.6 million on renovations at the hotel with an additional $0.2 million planned. 50 Renaissance Hotel, Arlington, VA. Built in 1990, the 209-room hotel is part of Ballston Metro Center, a mixed use development consisting of hotel, residential condominium, office, retail and parking uses, which is located approximately four miles outside of downtown Washington, D.C. in the Interstate 66 corridor. Ballston Metro Center incorporates the Ballston station of Washington's 100 mile regional subway system. The hotel's facilities and amenities feature more than 7,500 square feet of banquet and meeting space, garage parking, a restaurant and lounge, a club floor with deluxe guest rooms and special services available, an indoor pool with exercise and health facilities, an atrium walkway leading to the integrated office building and retail outlets, and an enclosed connection to the office building across the street and the regional mall one block away. The Company has a commitment from Westin License Company to reflag the hotel as a Westin. In connection with the reflagging, the Company intends to spend an additional $1.5 million on renovations at the hotel. Hilton Hotel, Bellevue, WA. Built in 1979, the 180-room hotel is centrally located approximately 13 miles from Seattle-Tacoma International Airport, nine miles from downtown Seattle and blocks from downtown Bellevue. The hotel's facilities and amenities feature over 7,750 square feet of meeting and banquet space, an indoor pool with a jacuzzi and sauna, a fitness club, laundry/valet services, a business center and a restaurant and lounge. After Seattle, Bellevue contains the highest concentration of commercial, office, retail and residential space in Washington and has been experiencing economic growth above the national average. Economic growth in the Bellevue market area has been strong over the last 15 years as numerous computer, aerospace and communications companies, including Microsoft Corporation, have located there. As of March 31, 1996, the Company had spent $0.7 million on renovations at the hotel with an additional $0.4 million planned. THE ADDITIONAL HOTELS The Company has entered into a binding contract with MBL to acquire the Additional Hotels which contain 1,121 rooms, for a purchase price of $68.4 million. Four of the Additional Hotels are currently managed by the Company. Since assuming management of these four hotels in 1991, the Company has improved the performance of the properties. However, the Company believes that, with appropriate capital spending, the Additional Hotels can achieve further improvements in revenue and cash flow. The Company plans to spend approximately $3.1 million subsequent to the acquisition to renovate and reposition the Additional Hotels. The acquisition is scheduled to close in December 1996. The following is a brief description of each of the Additional Hotels and their respective locations: Hilton Hotel, Sacramento, CA. Built in 1983, the 326-room hotel is located in suburban Sacramento, near the interchange of Interstate 80 and Route 160 in an area which is well developed with commercial office space, upscale retail and residential uses. The hotel's facilities and amenities feature over 17,000 square feet of banquet and meeting space, an indoor-outdoor pool, volleyball courts, a health and fitness center, a business center, valet services, a gift shop and two restaurants. The greater Sacramento market has experienced strong economic growth during the 1990s. The Company plans to spend $0.8 million on renovations. Santa Barbara Inn, Santa Barbara, CA. Built in 1959, the 71-room hotel is located on the Pacific Coast Highway directly across from a wide, publicly maintained beach. The hotel's facilities and amenities feature the well-known CITRONELLE restaurant, two meeting rooms, an outdoor pool and deck, tennis courts and valet services. The Santa Barbara market is a popular residential and resort area. The Company plans to spend $0.4 million on renovations at the hotel. Holiday Inn, Colorado Springs, CO. Built in 1974, the 201-room hotel is located on Interstate 25, approximately five miles north of downtown Colorado Springs and approximately eight miles north of an Owned Hotel, the Sheraton Hotel, Colorado Springs. The hotel's facilities and amenities feature more than 8,700 square feet of banquet and meeting space, a health club and jogging track, an outdoor pool, tennis courts, a restaurant, a gift shop and valet services. Colorado Springs has experienced strong economic growth in recent years which has led to a major airport expansion program completed in 1995. 51 Such growth is attributable to a number of factors, including the region's low average cost of living and a rapidly expanding, young population. The Company plans to spend $0.2 million on renovations at the hotel. The Embassy Row Hotel, Washington, D.C. Built in 1969, the 195-room hotel is located in downtown Washington, D.C. on Massachusetts Avenue, which is known as "Embassy Row" because of the many embassies, chanceries and offices of foreign governments located in the area. The hotel's facilities and amenities feature over 7,500 square feet of banquet and meeting space, a rooftop pool and deck, a health and fitness center, a business center, valet services and a restaurant. A major new convention center is expected to open in downtown within four years. The Company will assume management of the hotel in July 1996 and plans to spend $1.5 million on renovations after acquiring the hotel. In conjunction with the renovation, the Company plans to obtain a franchise for the hotel. Hilton Hotel & Towers, Lafayette, LA. Built in 1981, the 328-room hotel is centrally located on Pinhook Road, a major business artery linking downtown Lafayette with the local airport. The hotel's facilities and amenities feature over 17,000 square feet of banquet and meeting space, an outdoor pool, an exercise room, a business center, valet services, a gift shop and a restaurant. Lafayette serves as a major center for offshore oil drilling and production, and has experienced strong job growth during the 1990s. The Company plans to spend $0.2 million on renovations at the hotel. THE MANAGED HOTELS The Company operates 36 Managed Hotels containing approximately 5,300 rooms. Of the Managed Hotels, 24 are full-service properties, nine are limited-service properties and three are extended stay properties. 29 of the Managed Hotels are operated under nationally-recognized brand names and seven are independent properties. The brand names of the Managed Hotels include Hilton, Sheraton, Clarion and Holiday Inn. See "Certain Relationships and Related Transactions" and "Risk Factors--Potential Conflicts of Interest." The Management Agreements have remaining terms ranging from one month to nine years. Substantially all of the Management Agreements permit the owners of the Managed Hotels to terminate such agreements prior to the stated expiration dates if the applicable hotel is sold and several of the Management Agreements permit the owners of the Managed Hotels to terminate such agreements prior to the stated expiration date without cause or by reason of the failure of the applicable hotel to obtain specified levels of performance. During 1995, the Company's revenue from Management Agreements was $3.3 million constituting 2.3% of the Company's total revenue for such period on a pro forma basis. No single Management Agreement currently accounts for more than 5% of the total revenue from the Management Agreements on a pro forma basis. Additionally, no group of Management Agreements for hotels under common ownership or control currently accounts for more than 13% of the total revenue from the Management Agreements on a pro forma basis. See "Risk Factors-- Termination of Management Agreements." The Company intends to continue its efforts to add to its portfolio of Managed Hotels by aggressively pursuing new management agreements. The Company believes that, in addition to adding to the Company's revenues and profits, the business of operating hotels for third parties benefits the Company by (i) increasing the Company's operating experience in, and knowledge of, hotel markets throughout the United States, (ii) broadening the Company's relationships with hotel owners and thus enhancing the Company's opportunities to identify, evaluate and negotiate hotel acquisitions prior to the active marketing of a hotel for sale, and (iii) improving the Company's ability to attract, train and retain highly-qualified operating employees by offering them the opportunity to work in a broader variety of hotels and markets. 52 THE HOTEL INDUSTRY The hotel industry is currently recovering from a period of low demand and high supply that led to industry-wide decreases in ADRs, numerous hotel failures and decreased levels of profit. It was the rapid increase in room supply during the 1980s that drove ADRs and industry profitability down, but 1993 marked a reversal of this trend. The following chart demonstrates the rise that has occurred in hotel industry average ADRs since 1993: [GRAPH] The hotel industry is one of the most management intensive sectors of the real estate industry. The last 15 years have been characterized by increased product segmentation and greater marketing and cost control sophistication. Even as the importance of sophisticated management has increased, however, hotel owners have continued to rely upon fee-based third parties to manage their hotels. As an integrated owner and operator focused on maximizing long-term asset value and increasing profit, the Company believes that it distinguishes itself from those owners who do not possess in-house management capabilities. The lodging industry as a whole has shown significant improvement in recent years. Industry reports indicate that the lodging industry marked its third consecutive year of profitability in 1995, earning pre-tax profits of $5.5 billion. The improved profitability resulted from a favorable industry supply/demand relationship, with increases in room demand exceeding supply growth in 1992, 1993, 1994 and 1995. This excess of demand growth over supply growth has given the lodging industry a significant and increasing degree of pricing power. This pricing power has resulted in significant industry-wide growth in average room rate from 1992 through 1995. Industry reports indicate that these trends are expected to continue, with demand projected to increase at 2.4% annually through 1998 compared to only a 1.8% growth in supply. This favorable supply/demand position is projected to lead to growth of 4 to 5% in average room rate annually through 1998 (a rate that is projected to exceed the inflation rate), coupled with an increase in average occupancy rate from 65.4% in 1995 to 70% by 1998. However, demand historically has been sensitive to shifts in economic activity which has resulted in cyclical room and occupancy rates and there is no assurance that industry projections will be met. The Company believes that the lodging industry pricing power described above is likely to be strongest and most sustained in the full-service segment in which the Company operates. Two primary factors underlying this projected strength are the lower consumer price elasticity in the full-service segment as a result of customer emphasis on service and brand loyalty and an expectation by industry experts that there will be no significant additions to the full-service room base over the next few years. No significant increase in the full-service sector's room base is projected because, (i) the cost of constructing hotels in the full-service segment is substantially higher than other industry segments, (ii) financing available for full-service hotel construction projects is generally higher in cost and more limited in nature, (iii) construction of full-service hotels involves longer lead times, and (iv) construction cost for new hotels, in most cases, remain substantially higher than the costs of acquiring existing full-service hotels. 53 COMPETITION The Company competes primarily in the upscale and mid-priced sectors of the full-service segment of the lodging industry. In each geographic market in which the Hotels are located, there are other full-and limited-service hotels that compete with the Hotels. In addition, the Company's food and beverage operations compete with local free-standing restaurants and bars. Competition in the U.S. lodging industry is based generally on convenience of location, price, range of services and guest amenities offered and quality of customer service and overall product. EMPLOYEES As of March 31, 1996, the Company employed approximately 5,325 persons, of whom approximately 4,431 were compensated on an hourly basis. Approximately 58 employees work at the corporate headquarters. Employees at five of the Hotels are represented by labor unions. Management believes that labor relations with its employees are good. TRADEMARKS The Company employs a flexible branding strategy based on a particular Hotel's market environment and the Hotel's unique characteristics. Accordingly, the Company uses various national trade names pursuant to licensing arrangements with national franchisors. HILTON(R) AND THE STYLIZED H(R) ARE REGISTERED TRADEMARKS OF HILTON HOTELS CORPORATION ("HILTON HOTELS"). NEITHER HILTON HOTELS NOR ANY OF ITS OFFICERS, DIRECTORS, AGENTS OR EMPLOYEES SHALL IN ANY WAY BE DEEMED AN ISSUER OR UNDERWRITER OF THE SHARES OF COMMON STOCK OFFERED HEREBY NOR HAS HILTON HOTELS ENDORSED OR APPROVED THE OFFERING. THE HILTON HOTELS HAVE NOT ASSUMED AND SHALL NOT HAVE ANY LIABILITY OR RESPONSIBILITY FOR ANY FINANCIAL STATEMENTS OR OTHER FINANCIAL INFORMATION CONTAINED HEREIN OR ANY PROSPECTUS OR ANY WRITTEN OR ORAL COMMUNICATIONS REGARDING THE SUBJECT MATTER HEREBY. A GRANT OF A HILTON FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY HILTON HOTELS (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK OFFERED HEREBY. HOLIDAY INN(R) IS A REGISTERED TRADEMARK OF HOLIDAY INNS FRANCHISING, INC. ("HOLIDAY INNS"). HOLIDAY INNS HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS NOR DOES HOLIDAY INNS HAVE ANY INTEREST IN THE COMPANY OR THE COMMON STOCK OFFERED HEREBY, EXCEPT AS A FRANCHISOR. A GRANT OF A HOLIDAY INN FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY HOLIDAY INNS (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK OFFERED HEREBY. RADISSON(R) IS A REGISTERED TRADEMARK OF RADISSON HOTELS INTERNATIONAL, INC. ("RADISSON HOTELS"), WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A RADISSON FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY RADISSON HOTELS (OR 54 ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK OFFERED HEREBY. MARRIOTT(R) IS A REGISTERED TRADEMARK OF MARRIOTT INTERNATIONAL, INC., WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A MARRIOTT FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY MARRIOTT INTERNATIONAL, INC. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK OFFERED HEREBY. SHERATON(R) IS A REGISTERED TRADEMARK OF SHERATON INNS, INC., WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A SHERATON FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY SHERATON INNS, INC. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK OFFERED HEREBY. WESTIN(R) IS A REGISTERED TRADEMARK OF WESTIN LICENSE COMPANY, WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A WESTIN FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY WESTIN LICENSE COMPANY (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK OFFERED HEREBY. LEGAL PROCEEDINGS The Company is involved in various lawsuits arising in the normal course of business. The Company believes that the ultimate outcome of these lawsuits will not have a material adverse effect on the Company. GOVERNMENTAL REGULATION A number of states regulate the licensing of hotels and restaurants, including liquor license grants, by requiring registration, disclosure statements and compliance with specific standards of conduct. The Company believes that it is substantially in compliance with these requirements. Managers of hotels are also subject to laws governing their relationship with hotel employees, including minimum wage requirements, overtime, working conditions and work permit requirements. Compliance with, or changes in, these laws could reduce the revenue and profitability of the Owned Hotels and could otherwise adversely affect the Company's operations. Under the ADA, all public accommodations are required to meet certain requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts have been and continue to be invested in ADA required upgrades to the Owned Hotels, a determination that the Company is not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. The Company is likely to incur additional costs of complying with the ADA; however, such costs are not expected to have a material adverse effect on the Company's results of operations or financial condition. See "Risk Factors--Governmental Regulation." For a description of certain environmental regulations to which the Company is subject, see "Risk Factors--Environmental Risks." 55 MANAGEMENT The following table sets forth certain information with respect to the Company's directors and executive officers as of the date of this Prospectus.
NAME AGE POSITION - ------------------------------------------ --- ------------------------------------------ Paul W. Whetsell.......................... 45 President, Chief Executive Officer and Chairman of the Board David E. McCaslin......................... 39 Chief Operating Officer and Director William M. Karnes......................... 50 Senior Executive Vice President, Finance and Chief Financial Officer John E. Plunket........................... 40 Executive Vice President, Finance and Development Michael T. George......................... 37 Senior Vice President, Operations D. Scott Livchak.......................... 41 Senior Vice President, Operations Robert Gauthier........................... 42 Senior Vice President, Operations Daniel L. Doctoroff....................... 37 Director Bradford E. Bernstein..................... 29 Director Joseph McCarthy........................... 64 Director William S. Janes.......................... 43 Director Independent Director (to be named)........ Director Independent Director (to be named)........ Director Independent Director (to be named)........ Director
Paul W. Whetsell has served as President and Chief Executive Officer of the Company since its founding in 1987. From 1981 to 1986, Mr. Whetsell served as Vice President of Development for Lincoln Hotels in Dallas, Texas. Prior to that, from 1973 to 1981, Mr. Whetsell worked for Quality Inns in various capacities in its franchise division, culminating in Vice President of Franchise. David E. McCaslin has served as Chief Operating Officer of the Company since 1994. Mr. McCaslin joined the Company in 1987 as a General Manager and was named Vice President of Operations in 1988. From 1985 to 1987, Mr. McCaslin served as General Manager for Lincoln Hotels. Prior to that, from 1979 to 1985, he worked for Westin Hotels in various capacities, including Assistant General Manager, Rooms Division Manager and Food & Beverage Manager. William M. Karnes has served as Senior Executive Vice President, Finance and Chief Financial Officer of the Company since April 1996. From 1994 to April 1996, Mr. Karnes served as Senior Vice President and Chief Financial Officer of Tucker Properties Corporation, a publicly traded real estate investment trust. From 1991 to 1994, Mr. Karnes served as Senior Vice President Finance and Administration for Banyan Management Corp., a company that provides management services for five public real estate investment trusts and three master limited partnerships. Prior to that, from 1989 to 1991, Mr. Karnes served as Chief Operating Officer of Miglin-Beitler, Inc., a private real estate development, management and leasing firm. John E. Plunket has served as Executive Vice President, Finance and Development since November 1993. From September 1991 to October 1993, Mr. Plunket served as Vice President and Principal Broker for CIG International, an investment and hotel asset management company. From February 1988 to August 1991, Mr. Plunket served as Managing Director of Cassidy & Pinkard Inc., a commercial real estate services company. From 1985 to 1987, Mr. Plunket served as Senior Vice President for Oxford 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. D. Scott Livchak has served as Senior Vice President, Operations since 1990. From 1985 to 1989 Mr. Livchak served as a General Manager for The Adam's Mark Hotel in Washington, DC, owned by 56 HBE Corporation. From 1983 to 1985, Mr. Livchak worked for the Sheraton Atlanta Hotel in the capacity of Resident Manager. From 1977 to 1983, Mr. Livchak held various management positions with Sheraton Corporation. Michael T. George has served as Senior Vice President, Operations since 1995. From 1992 to 1995, Mr. George served as Chief Operating Officer for Devon Hotels in Montreal. From 1989 to 1992, Mr. George served as Vice President for Radisson Hotels International. Prior to that, from 1986 to 1989, Mr. George served as Vice President for Sheraton Hotels in Toronto. Robert Gauthier has served as Senior Vice President, Operations and General Manager of the Sheraton, Colorado Springs since 1996. From 1993 to 1996, he served as Vice President, Operations for CapStar Management. Prior to that, from 1987 to 1993, Mr. Gauthier served as Area Manager and General Manager for Drexel Burnham Lambert Realty, Inc. Daniel L. Doctoroff has been Managing Director of Oak Hill Partners, Inc. (Acadia Partners' investment advisor) and its predecessor since August 1987; Vice President and Director of Acadia Partners MGP, Inc. since March 1992; Vice President of Keystone, Inc. since March, 1992; and a Managing Partner of Insurance Partners Advisors, L.P. since February 1994. All of such entities are affiliates of Acadia Partners. Mr. Doctoroff is also a Director of Bell & Howell Holdings Company, National Re Corporation, Transport Holdings, Inc., Kemper Corporation and Specialty Foods Corporation. Bradford E. Bernstein has served as a Vice President and an Associate of Oak Hill Partners, Inc. (Acadia Partners' investment advisor) since 1992. From 1991 until 1992, Mr. Bernstein worked at Patricof & Co. Ventures. Prior to that, from 1989 to 1991, he worked at Merrill, Lynch & Co. Mr. Bernstein serves as a director of Pinnacle Brands, Inc. and Payroll Transfers, Inc. William S. Janes serves as a Principal and Director of RMB Realty, Inc., an affiliate of Keystone, Inc. of Fort Worth, Texas and an affiliate of Acadia Partners. Mr. Janes serves as a Director of Paragon Group, Inc., a publicly-traded real estate investment trust, as well as Brazos Asset Management, Brazos Fund, Paragon Property Services, Inc. and Carr Real Estate Services. Prior to joining RMB Realty, Inc., Mr. Janes served as Regional General Partner of Lincoln Property Company from 1984 to 1989. Mr. Janes maintains professional affiliations as a member of NAREIT, SIOR and the Urban Land Institute. Joseph McCarthy has been retired since 1994. From 1993 to 1994 he has served as Chairman of the Board for Motel 6. From 1985 to 1993, he served as President and Chief Executive Officer for Motel 6. From 1980 to 1985, he served as President and Chief Executive Officer of Lincoln Hotels. From 1976 to 1980, he served as President and Chief Executive Officer of Quality Inns International. Prior to that, from 1971 to 1976, he served as Senior Vice President of the Sheraton Corporation. EXECUTIVE COMPENSATION The following table sets forth the annual base salaries that the Company intends to pay in 1996 to its Chief Executive Officer and the four most highly compensated executive officers during such year:
NAME POSITION BASE SALARY(1) - -------------------------------------- -------------------------------------- -------------- Paul W. Whetsell...................... President, Chief Executive Officer and Chairman of the Board $225,000 David E. McCaslin..................... Chief Operating Officer and Director $215,000 William M. Karnes..................... Senior Executive Vice President, Finance and Chief Financial Officer $215,000(2) John E. Plunket....................... Executive Vice President, Finance and Development $150,000 Michael T. George..................... Senior Vice President, Operations $132,000
(Footnotes on following page) 57 (Footnotes for preceding page) - ------------ (1) Pursuant to the Management Bonus Plan (as defined below), such executive officers are also eligible to earn bonuses of up to 100% of their annual base salary. Under the terms of the Management Bonus Plan, the total of such bonuses may not exceed $300,000 during 1996. See "--Compensation Plans--Management Bonus Plan." (2) Under the terms of his employment agreement, Mr. Karnes will also be paid a minimum bonus of $30,000 in 1996 and will be reimbursed by the Company for certain moving expenses. At the time of the Offering, Messrs. Whetsell, McCaslin, Plunket, Karnes and George also will receive options to purchase 150,000, 87,500, 73,129, 50,000 and 18,282 shares of Common Stock, respectively. The terms of such options are described under "--Compensation Plans--Equity Incentive Plan." COMPENSATION OF DIRECTORS Any director who is not an employee of the Company will be paid an annual fee of $12,000. In addition, each such director will be paid $750 for attendance at each meeting of the Board and $500 for attendance at each meeting of a committee of the Board of which such director is a member. Directors who are employees of the Company will not receive any fees for their service on the Board or a committee thereof. In addition, the Company will reimburse directors for their out-of-pocket expenses in connection with their service on the Board. Upon the effectiveness of the Registration Statement, each director who is not an employee of the Company (an "Independent Director") will be granted options to purchase 5,000 shares of Common Stock at the initial public offering price. Thereafter, on the date of the annual meeting of the Company's shareholders beginning with the annual meeting held in 1997, each Independent Director will be granted options to purchase 5,000 shares of Common Stock at the then current market price. All options granted to directors will vest over three years. Any non-employee director who ceases to be a director will forfeit the right to receive any options not previously vested or granted. COMMITTEES The Board will initially have an Audit Committee, a Compensation Committee and an Investment Committee, the members of which will be determined at the first meeting of the Board following completion of the Offering. The Audit Committee will consist of three Independent Directors. The Audit Committee will make recommendations concerning the engagement of independent public accountants, review with the independent public accountants the plans and results of the audit engagement, approve professional services provided by the independent public accountants, review the independence of the independent public accountants, consider the range of audit and non-audit fees and review the adequacy of the Company's internal accounting controls. The Compensation Committee will consist of three Independent Directors and will determine compensation of the Company's executive officers and administer the Company's Equity Incentive Plan (as defined below). The Investment Committee will consist of the Chairman of the Board and three Independent Directors, and will review and approve investments proposed to be made by the Company. COMPENSATION PLANS Management Bonus Plan. The Company has established a bonus plan (the "Management Bonus Plan") under which key management employees of the Company are eligible to receive bonuses based upon achievement of specified targets and goals for the Company and the individual employee. Bonus awards may not exceed 100% of the executive's annual base salary, which will be subject to certain 58 restrictions and forfeiture provisions. Total bonus awards for 1996 may not exceed 10% of the aggregate base salary of the executives that are eligible in 1996 for bonuses under the Management Bonus Plan. Stock Purchase Plan. Each full-time employee of the Company (other than an employee who owns beneficially 5% or more of the outstanding Common Stock) is eligible to participate in the Company's stock purchase plan (the "Stock Purchase Plan"). Under the Stock Purchase Plan, subject to certain limitations arising under the Internal Revenue Code of 1986 (the "Code"), participating employees may elect to authorize the Company to withhold a minimum of $200 per quarter and a maximum of 8% or $25,000 (whichever is less) of the participating employee's salary, which amounts will be held in the participating employee's account and used to purchase Common Stock from the Company on a monthly basis at a price equal to a designated percentage from 85% to 100% of the average closing sales price for Common Stock as reported on the Composite Transactions Tape of the New York Stock Exchange (except as described below). The designated percentage will be established annually by the Compensation Committee which is responsible for the administration of the Stock Purchase Plan, except that for the period ending December 31, 1996 the price will be the greater of (i) the initial offering price or (ii) 85% of the average market price of the Common Stock for such period. The Stock Purchase Plan reserves 500,000 shares of authorized but unissued or reacquired Common Stock for purchase thereunder. The Stock Purchase Plan will remain in effect until terminated at any time by the Board, except that such termination will be subject to employees' rights to purchase shares in any outstanding monthly offering period. The Stock Purchase Plan may be amended from time to time by the Board. No amendment will increase the aggregate number of shares of Common Stock that may be issued and sold under the Stock Purchase Plan (except for authorizations pursuant to the anti-dilution provisions of the Stock Purchase Plan) without further approval by the Company's shareholders. Furthermore, no amendment that would cause the Stock Purchase Plan to fail to meet the requirements of Section 423 of the Code will be adopted without shareholder approval. Equity Incentive Plan. The Company's 1996 Equity Incentive Plan (the "Equity Incentive Plan") is designed to attract and retain qualified officers and other key employees of the Company. The Equity Incentive Plan authorizes the grant of options to purchase shares of Common Stock ("Option Rights"), stock appreciation rights ("Appreciation Rights"), restricted shares ("Restricted Shares"), deferred shares ("Deferred Shares"), performance shares ("Performance Shares") and performance units ("Performance Units"). The Compensation Committee administers the Equity Incentive Plan and determines to whom Option Rights, Appreciation Rights, Restricted Shares, Deferred Shares, Performance Shares and Performance Units are to be granted and the terms and conditions thereof, including the number of shares and the period of exerciseability. Subject to adjustment as provided in the Equity Incentive Plan, the number of shares of Common Stock that may be issued or transferred and covered by outstanding awards granted under the Equity Incentive Plan may not in the aggregate exceed 1,740,000 shares, which may be shares of original issuance or treasury shares or a combination thereof. Officers, including officers who are members of the Board, and other key employees of and consultants to the Company and its subsidiaries may be selected by the Compensation Committee to receive benefits under the Equity Incentive Plan. At the time of the Offering, the Company intends to grant to certain executive officers and other members of management options to purchase up to 745,254 shares of Common Stock at the initial public offering price. Certain of these options will vest immediately upon their grant, while the remaining options will vest in three equal annual installments. The Compensation Committee may grant Option Rights that entitle the optionee to purchase shares of Common Stock at a price equal to or greater or less than market value on the date of grant, and the Option Rights may be conditioned on the achievement of specified performance objectives 59 ("Management Objectives"). Subject to adjustment as provided in the Equity Incentive Plan, no participant shall be granted Option Rights and Appreciation Rights, in the aggregate, for more than 100,000 shares during any calendar year. The Compensation Committee may provide that the option price is payable at the time of exercise (i) in cash, (ii) by the transfer to the Company of nonforfeitable, nonrestricted shares of Common Stock that are already owned by the optionee, (iii) with any other legal consideration the Compensation Committee may deem appropriate, or (iv) by any combination of the foregoing methods of payment. Any grant may provide for deferred payment of the option price from the proceeds of sale through a broker on the date of exercise of some or all of the shares of Common Stock to which the exercise relates. Any grant may provide for automatic grant of reload option rights upon the exercise of Option Rights, including reload option rights, for shares of Common Stock or any other non-cash consideration authorized under the Equity Incentive Plan, except that the term of any reload option right shall not extend beyond the term of the Option Right originally exercised. The Compensation Committee has the authority to specify at the time Option Rights are granted that shares of Common stock will not be accepted in payment of the option price until they have been owned by the optionee for a specified period; however, the Equity Incentive Plan does not require any such holding period and would permit immediate sequential exchanges of shares of Common Stock at the time of exercise of Option Rights. Option Rights granted under the Equity Incentive Plan may be Option Rights that are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Code, or option Rights that are not intended to so qualify. Any grant may provide for the payment of dividend equivalents to the optionee on a current, deferred or contingent basis or may provide that dividend equivalents be credited against the option price. No Option Right may be exercised more than ten years from the date of grant. Each grant must specify the period of continuous employment with, or continuous engagement of consulting services by, the Company or any subsidiary that is necessary before the Option Rights will become exercisable and may provide for the earlier exercise of the Option Rights in the event of a change of control of the Company or other similar transaction or event. Successive grants may be made to the same optionee regardless of whether Option Rights previously granted to him or her remain unexercised. Appreciation Rights granted under the Equity Incentive Plan may be either free-standing Appreciation Rights or Appreciation Rights that are granted in tandem with Option rights. An Appreciation Right represents the right to receive from the Company the difference (the "Spread"), or a percentage thereof not in excess of 100%, between the base price per share of Common Stock in the case of a free-standing Appreciate Right, or the option price of the related Option Right in the case of a tandem Appreciation Right, and the market value of the Common Stock on the date of exercise of the Appreciation Right. Tandem Appreciation Rights may only be exercised at a time when the related Option Right is exercisable and the Spread is positive, and the exercise of a tandem Appreciation right requires the surrender of the related Option Right for cancellation. A free-standing Appreciation Right must specify a base price, which may be equal to or greater or less than the fair market value of a share of Common Stock on the date of grant, must specify the period of continuous employment, or continuous engagement on consulting services, that is necessary before the Appreciation Right becomes exercisable (except that it may provide for its earlier exercise in the event of a change in control of the Company or other similar transaction or event) and may not be exercised more than ten years from the date of grant. Any grant of Appreciation Rights may specify that the amount payable by the Company upon exercise may be paid in cash, Common Stock or a combination thereof and may either (i) grant to the recipient or retain in the Compensation Committee the right to elect among those alternatives or (ii) preclude the right of the participant to receive, and the Company to issue, Common Stock or other equity securities in lieu of cash. In addition, any grant may specify that the Appreciation Right may be exercised only in the event of a change in control of the company. Subject to adjustment as provided in the Equity Incentive Plan, no participant shall be granted Option Rights and Appreciation Rights, in the aggregate, for more than 100,000 shares during any calendar year. The Compensation Committee may condition the award of Appreciation Rights on the achievement of one or more Management 60 Objectives and may provide with respect to any grant of Appreciation Rights for the payment of dividend equivalents thereon in cash or Common Stock on a current, deferred or contingent basis. An award of Restricted Shares involves the immediate transfer by the Company to a participant of ownership of a specific number of shares of Common Stock in consideration of the performance of services. The participant is entitled immediately to voting, dividend and other ownership rights in the shares. The transfer may be made without additional consideration or for consideration in an amount that is less than the market value of the shares on the date of grant, as the Compensation Committee may determine. The Compensation Committee may condition the award on the achievement of specified Management Objectives. Restricted Shares must be subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Code for a period to be determined by the Compensation Committee. An example would be a provision that the Restricted Shares would be forfeited if the participant ceased to serve the Company as an officer or other salaried employee during a specified period of years. In order to enforce these forfeiture provisions, the transferability of Restricted Shares will be prohibited or restricted in a manner and to the extend prescribed by the Compensation Committee for the period during which the forfeiture provisions are to continue. The Compensation Committee may provide for a shorter period during which the forfeiture provisions are to apply in the event of a change in control of the Company or other similar transaction or event. An award of Deferred Shares constitutes an agreement by the Company to deliver shares of Common Stock to the participant in the future in consideration of the performance of service, subject to the fulfillment of such conditions during the Deferral Period (as defined in the Equity Incentive Plan) as the Compensation Committee may specify. During the Deferral Period, the participant has no right to transfer any rights covered by the award and no right to vote the shares covered by the award. On or after the date of any grant of Deferred Shares, the Compensation Committee may authorize the payment of dividend equivalents thereon on a current, deferred or contingent basis in either cash or additional shares of Common Stock. Grants of Deferred Shares may be made without additional consideration or for consideration in an amount that is less than the market value of the shares on the date of grant. Deferred Shares must be subject to a Deferral Period, as determined by the Compensation Committee on the date of grant, except that the Compensation Committee may provide for a shorter Deferral Period in the event of a change in control of the Company or other similar transaction or event. The Compensation Committee may condition the award of Deferred Shares on the achievement of one or more Management Objectives. A Performance Share is the equivalent of one share of Common Stock, and a Performance Unit is the equivalent of $1.00. A participant may be granted any number of Performance Shares or Performance Units, which shall be specified in any such grant. The participant will be given one or more Management Objectives to meet within a specified period (the "Performance Period"). The specified Performance Period may be subject to earlier termination in the event of a change in control of the Company or other similar transaction or event. A minimum level of acceptable achievement will also be established by the Compensation Committee. If by the end of the Performance Period the participant has achieved the specified Management Objectives, the participant will be deemed to have fully earned the Performance Shares or Performance Units. If the participant has not achieved the Management Objectives but has attained or exceeded the predetermined minimum level of acceptable achievement, the participant will be deemed to have partly earned the Performance Shares or Performance Units in accordance with a predetermined formula. To the extent earned, the Performance Shares or Performance Units will be paid to the participant at the time and in the manner determined by the Compensation Committee in cash, shares of Common Stock or any combination thereof. Management Objectives may be described in terms of either Company-wide objectives or objectives that are related to the performance of the division, subsidiary, department or function within the Company or a subsidiary in which the participant is employed or with respect to which the participant provides consulting services. The Compensation Committee may adjust any Management Objectives and the related minimum level of acceptable achievement if, in its judgment, transactions or events have occurred after the date of 61 grant that are unrelated to the participant's performance and result in distortion of the Management Objectives or the related minimum level of acceptable achievement. No Option Right, Appreciation Right or other "derivative security" within the meaning of Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is transferable by a participant except by will or the laws of descent and distribution. Option Rights and Appreciation Rights may not be exercised during a participant's lifetime except by the participant or, in the event of the participant's incapacity, by the participant's guardian or legal representative acting in a fiduciary capacity on behalf of the participant under state law and court supervision. Notwithstanding the foregoing, the Compensation Committee, in its sole discretion, may provide for the transferability of the particular awards under the Equity Incentive Plan so long as such provisions will not disqualify the exemption for other awards under Rule 16b-3, if such rule is then applicable to awards under the plan. The Compensation Committee may specify at the date of grant that all or any part of the shares of Common Stock that are to be issued or transferred by the Company upon the exercise of Option Rights or Appreciation Rights, upon the termination of the Deferral Period applicable to Deferred Shares or upon payment under any grant of Performance Shares or Performance Units, or are to be no longer subject to the substantial risk of forfeiture and restrictions on transfer referred to in the Equity Incentive Plan with respect to Restricted Shares, are subject to further restrictions on transfer. The maximum number of shares that may be issued or transferred under the Equity Incentive Plan, the number of shares covered by outstanding Option Rights or Appreciation Rights and the option prices or base prices per share applicable thereto, and the number of shares covered by outstanding grants of Deferred Shares and Performance Shares, are subject to adjustment in the event of stock dividends, stock splits, combinations of shares, recapitalizations, mergers, consolidations, spin-offs, reorganizations, liquidations, issuances of rights or warrants, and similar transactions or events. In the event of any such transaction or event, the Compensation Committee may in its discretion provide in substitution for any or all outstanding awards under the Equity Incentive Plan such alternative consideration as it may in good faith determine to be equitable in the circumstances and may require the surrender of all awards so replaced. The Compensation Committee may also, as it determines to be appropriate in order to reflect any such transaction or event, make or provide for such adjustments in the number of shares that may be issued or transferred and covered by outstanding awards granted under the Equity Incentive Plan and the number of shares permitted to be covered by Option Rights and Appreciation Rights granted to any one participant during any calendar year. The Compensation Committee must consist of not less than three Independent Directors who are "disinterested persons" within the meaning of Rule 16b-3. In connection with its administration of the Equity Incentive Plan, the Compensation Committee is authorized to interpret the Equity Incentive Plan and related agreements and other documents. The Compensation Committee may make grants to participants under any or a combination of all of the various categories of awards that are authorized under the Equity Incentive Plan and may condition the grant of awards on the surrender or deferral by the participant of the participant's right to receive a cash bonus or other compensation otherwise payable by the Company or a subsidiary to the participant. The Equity Incentive Plan may be amended from time to time by the Compensation Committee but, without further approval by the shareholders of the Company, no such amendment may (i) increase the aggregate number of shares of Common Stock that may be issued or transferred and covered by outstanding awards or increase the number of shares which may be granted to any participant in any calendar year or (ii) otherwise cause Rule 16b-3 to cease to be applicable to the Equity Incentive Plan. EMPLOYMENT AGREEMENTS Each of Paul Whetsell, David McCaslin, William Karnes and John Plunket are parties to employment agreements with the Company. 62 Under the employment agreements of Messrs. Whetsell and McCaslin, each is entitled to receive (i) a lump sum payment equal to three times his total cash compensation for the previous fiscal year if his employment is terminated by the Company without cause or is terminated by the executive for Good Reason (as defined below), or (ii) a lump sum payment equal to two times his total cash compensation for the previous fiscal year if the Company elects not to extend his contract for an additional year at the end of its initial term (which ends December 31, 1999) or any subsequent term. The events constituting "Good Reason" include the assignment to the executive of duties materially inconsistent with his position and a material breach of the employment agreement by the Company. These employment agreements also provide that if (i) the executive elects to terminate his employment within six months of certain changes in control of the Company and (ii) within two years of any such change in control, the executive is terminated without cause or the executive terminates his employment for Good Reason, the executive is entitled to receive a lump sum payment equal to five times his total cash compensation for the previous fiscal year. Amounts received by the executive upon termination of employment will increase to compensate the executive for any excise tax payable by him under the Code. These employment agreements prohibit the executives from using or disclosing any confidential information about the Company and its operations for a period of three years after the term of employment and from engaging in any competitive hotel business for a period of one year after the term of employment. Under the employment agreements of Messrs. Karnes and Plunket, each is entitled to continue to receive his annual base salary plus, in the case of Mr. Karnes, $30,000 per year, for the remaining unexpired term of employment, if his employment is terminated by the Company without cause, or by the executive for Good Reason. These employment agreements also provide that if the executive elects to terminate his employment within thirty days of certain changes in control of the Company, the executive is entitled to continue to receive his annual base salary plus, in the case of Mr. Karnes, $30,000 per year, for a period of two years. These employment agreements restrict the executives' use and disclosure of confidential information about the Company. 63 PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDER The following table sets forth certain information regarding the beneficial ownership of Common Stock as of the Offering and as adjusted to reflect the sale of 9,250,000 shares of Common Stock by the Company, and Acadia Partners (the "Selling Stockholder") in the Offering by (i) all persons known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each director who is a stockholder, (iii) each of the named executive officers, (iv) all directors and executive officers as a group, and (v) the Selling Stockholder.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED BEFORE OFFERING OWNED AFTER OFFERING ----------------------- SHARES BEING ----------------------- NAME & ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE SOLD NUMBER PERCENTAGE - ------------------------------------- --------- ---------- ------------ --------- ---------- Acadia Partners, L.P.(1) 201 Main Street Suite 3100 Fort Worth, TX 76102............. 3,824,201 63.7% 2,500,000 1,324,201 10.4% Paul W. Whetsell(2)................ 989,517 16.5% -- 989,517 7.8% David E. McCaslin(3)............... 462,729 7.7% -- 462,729 3.6% John E. Plunket(3)................. 462,729 7.7% -- 462,729 3.6% William M. Karnes(4)............... 0 -- -- 0 -- Michael T. George(4)............... 0 -- -- 0 -- D. Scott Livchak(4)................ 0 -- -- 0 -- Robert Gauthier(4)................. 0 -- -- 0 -- Daniel L. Doctoroff(4)............. 0 -- -- 0 -- Bradford E. Bernstein(4)........... 0 -- -- 0 -- William S. Janes(4)................ 0 -- -- 0 -- Joseph McCarthy(4)................. 0 -- -- 0 -- All directors and executive officers as a group (12 persons)..................... - - - - -
- ------------ (1) Includes 3,771,133 shares owned prior to the offering by Acadia Partners, L.P. and 53,068 shares owned by Cherwell Investors, Inc., a wholly owned subsidiary of Acadia Partners, L.P. ("Cherwell"). The general partner of Acadia Partners, L.P. is Acadia FW Partners, L.P., the managing general partner of which is Acadia MGP, Inc. ("Acadia MGP"). J. Taylor Crandall is the sole stockholder of Acadia MGP and may be deemed to beneficially own the shares owned by Acadia Partners, L.P. and Cherwell. In addition, Mr. Crandall is the sole stockholder of each of PTJ, Inc. ("PTJ") and Group 31, Inc. ("Group 31"). PTJ is the managing general partner of PTJ Merchant Banking Partners, L.P., which is the general partner of Penobscot Partners, L.P. ("Penobscot"), which together with MC Investment Corporation ("MC Investment"), Penobscot's wholly owned subsidiary, owns 275,299 shares. Group 31 is the general partner of FWHY Coinvestments VIII Partners, L.P. ("FWHY"), which owns 457,652 shares. As a result of his ownership of PTJ and Group 31, Mr. Crandall may also be deemed to beneficially own the 732,951 shares owned by Penobscot, MC Investment and FWHY, which shares are not included in the number of shares set forth as being owned by Acadia Partners, L.P. in the Principal Stockholders and Selling Stockholder chart, above. Mr. Crandall's address is 201 Main Street, Suite 3100 Fort Worth, TX 76102. The number of shares set forth as being owned by Acadia Partners, L.P. in the Principal Stockholders and Selling Stockholder chart above also excludes 457,652 shares held by OHP EquiStar Partners, L.P. ("OHP") and OHP EquiStar Partners II, L.P. ("OHP II"). Oak Hill Partners, Inc., which is the investment advisor to Acadia Partners, L.P., is the general partner of each of OHP and OHP II. (2) Includes shares held by entities over which Mr. Whetsell has beneficial ownership within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended ("Rule 13d-3"). (3) Includes shares held by entities over which Messrs. McCaslin and Plunket have beneficial ownership within the meaning of Rule 13d-3. (4) Does not include shares indirectly owned through interests in entities which own shares of Common Stock. 64 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ACQUISITIONS In March 1996, the Company acquired the Georgetown Latham Hotel in Washington, D.C. for a purchase price of $12,000,000 from LCP Hotel Ventures, L.P. ("LCP"). At the time of the acquisition, the general partner of LCP was Latham Hotels, Inc. ("LHI"), a corporation owned 80% by Paul W. Whetsell, President and Chief Executive Officer of the Company, and 10% by David E. McCaslin, Chief Operating Officer of the Company. Including their interests in LHI, Mr. Whetsell and Mr. McCaslin owned, directly or indirectly, 9.18% and 0.52%, respectively, of the beneficial interest in LCP and received $763,000 and $42,000, respectively, of the net proceeds of the purchase price paid to LCP. The purchase price for the Latham Georgetown was determined through arm's-length negotiations between the Company, on the one hand, and representatives of the holders of the majority of the beneficial interests in LCP, on the other hand; such representatives are not affiliated with the Company. Since November 1995, the Company has acquired 84.6% of the limited partnership interests in the partnership that owns the Atlanta Airport Westin ("Atlanta Partners"). In November 1995, the Company acquired, for a purchase price of $56,000, the 1% general partnership interest in Atlanta Partners previously held by a corporation in which E. Robert Roskind owned an equity interest ("LHP"). At the time of such acquisition Mr. Roskind was a principal of both CapStar Management and EquiStar. LHP was also paid a fee of $893,000 in connection with the acquisition of the partnership interests in Atlanta Partners, and is entitled to an additional $161,000 upon the ultimate disposition of Atlanta Partners. The LCP Group, L.P., in which Mr. Roskind owns an equity interest is entitled to an annual fee of $30,000 for providing certain administrative services relating to the outside limited partners of the Atlanta Airport Westin. All of the compensation paid or payable to affiliates of Mr. Roskind in connection with the Atlanta Airport Westin transaction was negotiated at arms-length between Mr. Roskind, on the one hand, and other principals of EquiStar, on the other hand. Mr. Roskind is no longer associated with the Company. OWNERSHIP INTERESTS IN CERTAIN MANAGED HOTELS Mr. Whetsell and Mr. McCaslin and corporations owned by them own, directly or indirectly, (i) a leasehold interest, expiring on December 31, 2001, in one of the Managed Hotels and (ii) minority equity interests in eight of the Managed Hotels. Mr. Whetsell and Mr. McCaslin exercise management control over the Affiliated Owners of five of these Managed Hotels through their ownership of certain entities which serve as general partners of such owners. Such interests were acquired prior to the formation of EquiStar and CapStar Management. During 1995, the Company received approximately $826,000 in management fees from those Managed Hotels in which Messrs. Whetsell and McCaslin own an equity interest, including approximately $630,000 in management fees from the Affiliated Owners. Under the terms of their employment agreements, Messrs. Whetsell and McCaslin are prohibited from hereafter acquiring any interests in hotels or hotel management companies while they serve as officers of the Company. See "Management--Employment Agreements." INDEBTEDNESS OF CERTAIN MEMBERS OF MANAGEMENT In connection with the initial formation and capitalization of EquiStar, CapStar Management made loans to certain directors and executive officers of the Company, which loans were used by such individuals to make capital contributions to EquiStar. Such loans were made from August 1995 through April 1996 and bore interest at the prime rate through December 31, 1995 and at a rate of 1.5% above the prime rate thereafter. The largest aggregate amounts of the loans to such directors and executive officers outstanding at any time (where such aggregate amount exceeded $60,000) were $300,000 to Mr. Whetsell and $147,500 to Mr. McCaslin. All such loans will be repaid immediately prior to the Offering. 65 SHARES AVAILABLE FOR FUTURE SALE Upon consummation of the Offering (assuming the over-allotment option is not exercised), the Company will have 12,754,321 shares of Common Stock outstanding. Of these shares, all of the shares of Common Stock sold in the Offering will be freely transferable by persons other than "affiliates" of the Company without restriction or limitation under the Securities Act. The remaining 3,504,321 shares are "restricted securities" within the meaning of Rule 144 under the Securities Act (the "Restricted Shares") and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemption contained in Rule 144. The Company has granted certain registration rights to the recipients of restricted securities issued in connection with the Formation Transactions, which registration rights cover all of the securities issued in connection with the Formation Transactions. In general, under Rule 144, if two years have elapsed since the later of the date of acquisition of Restricted Shares from the Company or any "affiliate" of the Company, as that term is defined under the Securities Act, the acquiror or subsequent holder thereof is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the Common Stock then outstanding or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If three years have elapsed since the date of acquisition of Restricted Shares from the Company or from any "affiliate" of the Company, and the acquiror or subsequent holder thereof is deemed not to have been an affiliate of the Company at any time during the 90 days preceding a sale, such person would be entitled to sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. The Securities and Exchange Commission has proposed amendments to Rule 144 to reduce the two and three year holding periods to one and two years, respectively. The Company and Acadia Partners (who beneficially owns 2,514,804 shares of Common Stock) have agreed that, for a period of 180 days from the date of this Prospectus, they will not, without the prior written consent of Lehman, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for Common Stock. Certain entities controlled by members of management (who beneficially own an aggregate of 989,517 shares of Common Stock) have agreed that, for a period of 360 days from the date of this Prospectus, they will not, without the prior written consent of Lehman, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for Common Stock. There can be no assurance that Lehman will not grant any such consent. Prior to the Offering, there has been no public market for the Common Stock. The Company can make no predictions as to the effect, if any, that future sales of Restricted Shares, or the availability of such Restricted Shares for sale, or the issuance of shares of Common Stock upon the exercise of options or otherwise, or the perception that such sales or exercises could occur, will have on the market price prevailing from time to time. Sales of substantial amounts of Restricted Shares in the public market could have an adverse effect on the market price of the Common Stock. The Company has adopted an Equity Incentive Plan and Stock Purchase Plan for the purpose of attracting, retaining and motivating executive officers of the Company, other key employees and directors. The Company has reserved 1,740,000 shares of Common Stock for issuance under such plans. The Board expects to grant options to purchase an aggregate of 745,254 shares of Common Stock at the initial public offering price under the Equity Incentive Plan to certain key personnel prior to the date of this Prospectus. The Company intends to file a registration statement under the Securities Act to register shares of Common Stock issuable upon the exercise of stock options granted under the Equity Incentive Plan or the Stock Purchase Plan. Shares issued upon exercise of stock options after the effective date of such registration statement generally will be available for sale in the open market. 66 DESCRIPTION OF CAPITAL STOCK The following summary information is qualified in its entirety by the provisions of the Company's Certificate of Incorporation and By-laws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. See "Additional Information." The authorized capital stock of the Company consists of 49,000,000 shares of Common Stock, par value $.01 per share, and 25,000,000 shares of preferred stock, par value $.01 per share ("Preferred Stock"), of which 6,004,321 shares of Common Stock and no shares of Preferred Stock are outstanding. Upon completion of the Offering, 12,754,321 shares of Common Stock and no shares of Preferred Stock will be outstanding. Prior to the Offering, there has been no public market for the Common Stock. See "Risk Factors-- Absence of Prior Public Market." COMMON STOCK Voting Rights. The Company's Certificate of Incorporation provides that holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders. The stockholders are not entitled to vote cumulatively for the election of directors. Dividends. Each share of Common Stock is entitled to receive dividends if, as and when declared by the Board. Under Delaware law, a corporation may declare and pay dividends out of surplus, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding year. No dividends may be declared, however, if the capital of the corporation has been diminished by depreciation in the value of its property, losses or otherwise to an amount less than the aggregate amount of capital represented by any issued and outstanding stock having a preference on the distribution of assets. See "Dividend Policy." Other Rights. Stockholders of the Company have no preemptive or other rights to subscribe for additional shares. Subject to any rights of the holders of any Preferred Stock that may be issued subsequent to the Offering, all holders of Common Stock are entitled to share equally on a share-for-share basis in any assets available for distribution to stockholders on liquidation, dissolution or winding up of the Company. No shares of Common Stock are subject to redemption or a sinking fund. All outstanding shares of Common Stock are, and the Common Stock to be outstanding upon completion of the Offering will be, fully paid and nonassessable. PREFERRED STOCK The Company's Board is authorized to issue, without further authorization from stockholders, up to 25,000,000 shares of Preferred Stock in one or more series and to determine, at the time of creating each series, the distinctive designation of, and the number of shares in, the series, its dividend rate, the number of votes, if any, for each share of such series, the price and terms on which such shares may be redeemed, the terms of any applicable sinking fund, the amount payable upon liquidation, dissolution or winding up, the conversion rights, if any, and such other rights, preferences and priorities of such series as the Board may be permitted to fix under the laws of the State of Delaware as in effect at the time such series is created. The issuance of Preferred Stock could adversely affect the voting power of the holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no current plan to issue any shares of Preferred Stock. 67 SECTION 203 OF THE DELAWARE LAW Section 203 of the Delaware General Corporation Law (the "Delaware Law") prohibits publicly held Delaware corporations from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date of the transaction in which the person or entity became an interested stockholder, unless (i) prior to such date, either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder is approved by the Board, (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the outstanding voting stock of the corporation (excluding for this purpose certain shares owned by persons who are directors and also officers of the corporation and by certain employee benefit plans) or (iii) on or after such date the business combination is approved by the Board and by the affirmative vote (and not by written consent) of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. For the purposes of Section 203, a "business combination" is broadly defined to include mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within the immediately preceding three years did own) 15% or more of the corporation's voting stock. REGISTRATION RIGHTS Contemporaneously with the Formation Transactions, the Company will enter into a registration rights agreement with persons receiving shares of Common Stock in connection with the Formation Transactions (the "Registration Rights Agreement"), pursuant to which the Company will agree (subject to certain limitations and under certain circumstances) to register for sale any shares of Common Stock that are held by the parties thereto (collectively, the "Registrable Securities"). See the "Formation Transactions." All of the shares of Common Stock issued in the Formation Transactions will be Registrable Securities. The Registration Rights Agreement provides that any holder of Registrable Securities may require the Company to register such Registrable Securities for sale (a "Demand Registration"), provided that the total amount of Registrable Securities to be included in the Demand Registration has a market value of at least $10 million and provided that notice is not given prior to six months after the effective date of a previous Demand Registration. If Registrable Securities are going to be registered by the Company pursuant to a Demand Registration, the Company must provide written notice to the other holders of Registrable Securities and permit them to include any or all Registrable Securities that they hold in the Demand Registration, provided that the amount of Registrable Securities requested to be registered may be limited by the underwriters in an underwritten offering based on such underwriters' determination that inclusion of the total amount of Registrable Securities requested for registration would materially and adversely affect the success of the offering. Upon notice of a Demand Registration, the Company is required to file a registration statement within 60 days of the date on which notice is given, although the Company may postpone the filing for up to 90 days under certain circumstances. Subject to the conditions stated or referred to above, the holders of Registrable Securities may request an unlimited number of Demand Registrations. Acadia Partners and its affiliates that will receive shares in the Formation Transactions have agreed not to exercise any Demand Registration rights for a period of six months from the date of execution of the Registration Rights Agreement. Certain management-controlled entities that will receive shares in the Formation Transactions have a one-time right, exercisable after one year from the Closing, to require the Company to register the Registrable Securities that they hold in connection with the distribution of the Registrable Securities to their members or in connection with a resale of such shares. In order to demand any such registration the market value of the securities to be sold by such entities must be at least $5 million. The management-controlled entities will not be entitled to request or participate in any such registration prior to one year from the Closing. 68 The Registration Rights Agreement also provides that, subject to certain exceptions, in the event the Company proposes to file a registration statement with respect to an offering of any class of equity securities, other than a LLC Registration and certain other types of registrations, the Company will offer the holders of Registrable Securities the opportunity to register the number of Registrable Securities they request to include (the "Piggyback Registration"), provided that the amount of Registrable Securities requested to be registered may be limited by the underwriters in an underwritten offering based on such underwriters' determination that inclusion of the total amount of Registrable Securities requested for registration would materially and adversely affect the success of the offering. The Company is generally required to pay all of the expenses of Demand Registrations, the LLC Registration and Piggyback Registrations, other than underwriting discounts and commissions. TRANSFER AGENT AND REGISTRAR The Company has appointed - as the transfer agent and registrar for the Common Stock. 69 UNDERWRITING The underwriters of the Offering (the "Underwriters"), for whom Lehman, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Smith Barney Inc. are acting as representatives (the "Representatives"), have severally agreed, subject to the conditions contained in the Underwriting Agreement (the form of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part), to purchase from the Company and the Company has agreed to sell to each Underwriter, the aggregate number of shares of Common Stock set forth opposite the name of each such Underwriter. NUMBER OF UNDERWRITER SHARES - ----------------------------------------------------------------- --------- Lehman Brothers Inc.............................................. - Goldman, Sachs & Co.............................................. - Merrill Lynch, Pierce, Fenner & Smith Incorporated.......................................... - Smith Barney Inc................................................. - --- Total................................................. --- --- The Underwriting Agreement provides that the obligations of the several Underwriters to purchase shares of Common Stock are subject to certain conditions, and that if any of the shares of Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, all of the shares agreed to be purchased by the Underwriters under the Underwriting Agreement must be so purchased. The Company has been advised that the Underwriters propose to offer shares of Common Stock directly to the public initially at the initial public offering price set forth on the cover page of this Prospectus, and to certain selected dealers who may include the Underwriters at such initial public offering price less a selling concession not in excess of $ - per share. The selected dealers may reallow a concession not in excess of $ - per share to certain brokers or dealers. After the Offering, the initial public offering price, the concession to selected dealers, and the reallowance may be changed by the Representatives. The Company has agreed to indemnify the Underwriters against certain labilities, including liabilities under the Securities Act, or to contribute to the payments they may be required to make in respect thereto. The Company has granted to the Underwriters an option to purchase up to an additional 1,387,500 shares of Common Stock, at the initial public offering price, less the aggregate underwriting discounts and commissions, shown on the cover page of this Prospectus, solely to cover over-allotments, if any. Such option may be exercised at any time within 30 days after the date of the Underwriting Agreement. To the extent that such option is exercised, each Underwriter will be committed, subject to certain conditions, to purchase a number of the additional shares of Common Stock proportionate to such Underwriter's initial commitment as indicated in the preceding table. In connection with the Offering, the Company and Acadia Partners have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Lehman. In addition, certain entities controlled by members of management have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for Common Stock for a period of 360 days after the date of this Prospectus without the prior written consent of Lehman. Such restriction will not apply to any shares purchased in the Offering or otherwise on the open market. See "Risk Factors--Shares Available for Future Sale." 70 The Common Stock has been approved for listing on the NYSE subject to official notice of issuance. To meet one of the requirements for listing on the NYSE, the Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners. The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Prior to the Offering, there has been no active market for the Common Stock. The initial public offering price was determined by negotiations among the Company and the Underwriters. Among the factors considered in such negotiations are the Company's recent results of operations, the future prospects of the Company and its industry in general, the price-earnings ratios and market prices of securities of companies engaged in activities similar to those of the Company and prevailing conditions in the securities markets. On December 21, 1995, Lehman Holdings, an affiliate of Lehman, provided to the Company a $202,500,000 credit facility ($127,221,001 was outstanding thereunder as of March 31, 1996), which facility is expected to be retired with the net proceeds of the Offering. See "Use of Proceeds." Because an affiliate of Lehman will receive more than 10% of the net proceeds of the Offering in repayment of currently outstanding indebtedness, the Offering is being conducted in accordance with Section 44(c)(8) of the Rules of Fair Practice and the applicable provisions of Schedule E to the By-Laws of the National Association of Securities Dealers, Inc. In accordance with these requirements, Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Independent Underwriter") is assuming the responsibilities of acting as "qualified independent underwriter" and will recommend the maximum initial public offering price for the shares of Common Stock in compliance with the requirements of Schedule E. In connection with the Offering, the Independent Underwriter is performing due diligence investigations and is reviewing and participating in the preparation of this Prospectus and the Registration Statement of which this Prospectus forms a part. The initial public offering price of the Common Stock will be no higher than the price recommended by the Independent Underwriter. LEGAL MATTERS The validity of the Common Stock will be passed upon for the Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York. Certain legal matters will be passed upon for the Underwriters by Hogan & Hartson L.L.P., Washington, D.C. EXPERTS The financial statements and schedule included herein and in the Registration Statement, to the extent and for the periods indicated therein, have been included in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and upon the authority of said firm as experts in accounting and auditing. The combined financial statements of the Holiday Inn, Cleveland, Ohio for the period from January 1, 1996 to February 16, 1996 and the years ended December 31, 1995, 1994 and 1993 included herein and in the Registration Statement have been audited by Bober, Markey & Company, independent certified public accountants, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing. 71 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus, which is a part of the Registration Statement, omits certain information contained in the Registration Statement, and reference is made to the Registration Statement and the exhibits and schedules thereto for further information with respect to the Company and the Common Stock offered hereby. Statements contained herein concerning the provisions of any documents are not necessarily complete, and in each instance reference is made to the copy of such document filed as an exhibit to the Registration Statement. Each such statement is qualified in its entirety by such reference. The Registration Statement, including exhibits and schedules filed therewith, may be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and will also be available for inspection and copying at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the fees prescribed by the Commission. The Commission maintains a 'web site' that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of such site is "http://www.sec.gov". Statements contained in this Prospectus as to the contents of any contract or other document which is filed as an exhibit to the Registration Statement are not necessarily complete, and each such statement is qualified in its entirety by reference to the full text of such contract or document. The Company will be required to file reports and other information with the Commission pursuant to the Exchange Act. The Company intends to furnish to its stockholders annual reports containing consolidated financial statements certified by its independent accountants and quarterly reports containing unaudited condensed consolidated financial statements for each of the first three quarters of each fiscal year. 72 INDEX TO FINANCIAL STATEMENTS
EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P. Independent Auditors' Report......................................................... F-4 Combined Balance Sheets as of March 31, 1996 and December 31, 1995................... F-5 Combined Statements of Operations for the three months ended March 31, 1996 and for the period from January 12, 1995 (date of inception) to December 31, 1995........... F-6 Combined Statements of Partners' Capital for the three months ended March 31, 1996 and for the period from January 12, 1995 (date of inception) to December 31, 1995............................................................................... F-7 Combined Statements of Cash Flows for the three months ended March 31, 1996 and for the period from January 12, 1995 (date of inception) to December 31, 1995........... F-8 Notes to the Combined Financial Statements........................................... F-9 CAPSTAR MANAGEMENT COMPANY, L.P. Independent Auditors' Report......................................................... F-17 Balance Sheet as of December 31, 1994................................................ F-18 Statements of Operations and Changes in Management Operations' Equity for the years ended December 31, 1994 and 1993.................................................... F-19 Statements of Cash Flows for the years ended December 31, 1994 and 1993.............. F-20 Notes to Financial Statements........................................................ F-21 RADISSON PLAZA HOTEL Independent Auditors' Report......................................................... F-23 Statements of Operations for the period from January 1, 1996 to February 22, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993................................................... F-24 Statements of Cash Flows for the period from January 1, 1996 to February 22, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993................................................... F-25 Notes to Financial Statements........................................................ F-26 COLORADO SPRINGS SHERATON HOTEL Independent Auditors' Report......................................................... F-28 Statements of Operations for the period from January 1, 1995 to June 30, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1994 and 1993...................................................................... F-29 Statements of Cash Flows for the period from January 1, 1995 to June 30, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1994 and 1993...................................................................... F-30 Notes to Financial Statements........................................................ F-31 GEORGETOWN LATHAM HOTEL Independent Auditors' Report......................................................... F-32 Statements of Operations for the period from January 1, 1996 to March 8, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993................................................................ F-33 Statements of Cash Flows for the period from January 1, 1996 to March 8, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993................................................................ F-34 Notes to Financial Statements........................................................ F-35
F-1 ATLANTA RENAISSANCE HOTEL (ATLANTA AIRPORT WESTIN) Independent Auditors' Report......................................................... F-37 Statements of Operations for the period from January 1, 1995 to November 15, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1994 and 1993......................................................... F-38 Statements of Cash Flows for the period from January 1, 1995 to November 15, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1994 and 1993........................................................... F-39 Notes to Financial Statements........................................................ F-40 SOMERSET MARRIOTT HOTEL Independent Auditors' Report......................................................... F-42 Statements of Operations for the fiscal years ended September 30, 1995, 1994 and 1993................................................................................ F-43 Statements of Cash Flows for the fiscal years ended September 30, 1995, 1994 and 1993................................................................................ F-44 Notes to Financial Statements........................................................ F-45 CHARLOTTE SHERATON AIRPORT PLAZA Independent Auditors' Report......................................................... F-47 Statements of Operations for the period from January 1, 1996 to February 2, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993................................................... F-48 Statements of Cash Flows for the period from January 1, 1996 to February 2, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993................................................... F-49 Notes to Financial Statements........................................................ F-50 CLEVELAND HOLIDAY INN AND AFFILIATE Independent Auditors' Report......................................................... F-52 Combined Statements of Income for the period from January 1, 1996 to February 16, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993................................................... F-53 Combined Statements of Cash Flows for the period from January 1, 1996 to February 16, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993..................................................... F-54 Notes to Combined Financial Statements............................................... F-55 ARLINGTON HILTON HOTEL Independent Auditors' Report......................................................... F-57 Balance Sheets as of March 31, 1996, December 31, 1995 and 1994...................... F-58 Statements of Operations for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993............................................. F-59 Statements of Partners' Capital (Deficit) for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993............................... F-60 Statements of Cash Flows for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993............................................. F-61 Notes to Financial Statements........................................................ F-62
F-2 SALT LAKE AIRPORT HILTON Independent Auditors' Report......................................................... F-64 Statements of Operations for the period from January 1, 1995 to March 3, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1994 and 1993...................................................................... F-65 Statements of Cash Flows for the period from January 1, 1995 to March 3, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1994 and 1993...................................................................... F-66 Notes to Financial Statements........................................................ F-67 BALLSTON HOTEL LIMITED PARTNERSHIP (RENAISSANCE HOTEL, ARLINGTON, VA) Independent Auditors' Report......................................................... F-69 Balance Sheets as of March 31, 1996 and December 31, 1995 and 1994................... F-70 Statements of Operations for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993............................................. F-71 Statements of Partners' Deficit for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993....................................... F-72 Statements of Cash Flows for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993............................................. F-73 Notes to Financial Statements........................................................ F-74 BELLEVUE HILTON HOTEL Independent Auditors' Report......................................................... F-79 Statements of Operations for the period from January 1, 1995 to August 4, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1994 and 1993...................................................................... F-80 Statements of Cash Flows for the period from January 1, 1995 to August 4, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1994 and 1993...................................................................... F-81 Notes to Financial Statements........................................................ F-82 ADDITIONAL HOTELS Independent Auditors' Report......................................................... F-84 Combined Balance Sheets as of March 31, 1996, December 31, 1995 and 1994............. F-85 Combined Statements of Operations for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993........................................ F-86 Combined Statements of Owners' Capital for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993.................................... F-87 Combined Statements of Cash Flows for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993........................................ F-88 Notes to Combined Financial Statements............................................... F-89
F-3 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P. and CapStar Management Company, L.P.: We have audited the accompanying combined balance sheets of EquiStar Hotel Investors, L.P. and subsidiaries and CapStar Management Company, L.P. (collectively, the "Partnerships") as of March 31, 1996 and December 31, 1995 and the related combined statements of operations, partners' capital, and cash flows for the three months ended March 31, 1996 and for the period from January 12, 1995 (date of inception) to December 31, 1995, and the supplementary schedule. These combined financial statements and schedule are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these combined financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement and schedule presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of EquiStar Hotel Investors, L.P. and subsidiaries and CapStar Management Company, L.P. as of March 31, 1996 and December 31, 1995, and the results of their combined operations and their combined cash flows for the three months ended March 31, 1996 and for the period from January 12, 1995 (date of inception) to December 31, 1995, in conformity with generally accepted accounting principles, and the supplementary schedule, in our opinion, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Washington, D.C. May 10, 1996 F-4 EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P. COMBINED BALANCE SHEETS MARCH 31, 1996 AND DECEMBER 31, 1995
1996 1995 ------------ ----------- ASSETS Cash and cash equivalents....................................... $ 7,920,761 6,831,983 Accounts receivable, net of allowance for doubtful accounts of $125,000 in 1996 and $91,000 in 1995........................... 5,245,651 2,748,909 Deposits, including restricted deposits of $1,000,000 in 1996 and $2,023,307 in 1995........................................ 2,608,720 3,515,332 Prepaid expenses and other...................................... 1,031,753 265,260 Inventory....................................................... 437,635 173,514 ------------ ----------- Total current assets............................................ 17,244,520 13,534,998 Property and equipment: Land.......................................................... 35,287,661 12,767,661 Buildings and improvements.................................... 109,490,282 84,545,420 Furniture, fixtures and equipment............................. 21,561,810 11,353,507 Construction-in-progress...................................... 2,162,197 2,216,174 ------------ ----------- 168,501,950 110,882,762 Accumulated depreciation...................................... (3,144,894) (1,756,412) ------------ ----------- Total property and equipment, net............................... 165,357,056 109,126,350 Deferred costs, net of accumulated amortization of $553,998 in 1996 and $271,496 in 1995..................................... 4,343,274 2,637,754 Restricted cash................................................. 18,639,903 7,351,128 ------------ ----------- $205,584,753 132,650,230 ------------ ----------- ------------ ----------- LIABILITIES, MINORITY INTEREST AND PARTNERS' CAPITAL Accounts payable................................................ $ 4,170,708 2,329,034 Accrued expenses and other liabilities.......................... 7,395,746 4,320,320 Due to CapStar Equity Associates, G.P........................... 383,019 305,077 Long-term debt, current portion................................. 4,416,733 2,668,121 ------------ ----------- Total current liabilities....................................... 16,366,206 9,622,552 Long-term debt.................................................. 140,709,685 73,574,038 ------------ ----------- Total liabilities............................................... 157,075,891 83,196,590 Minority interest............................................... 684,823 815,918 Partners' capital--General Partners............................. 2,413,875 2,431,589 Partners' capital--Limited Partners............................. 45,410,164 46,206,133 ------------ ----------- 205,584,753 132,650,230 ------------ ----------- ------------ -----------
See accompanying notes to combined financial statements. F-5 EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P. COMBINED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND FOR THE PERIOD FROM JANUARY 12, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995
1996 1995 ----------- ---------- Revenue from hotel operations: Rooms........................................................... $10,714,167 14,456,387 Food and beverage............................................... 4,755,339 5,900,238 Other operating departments..................................... 889,818 1,122,361 Lease revenue................................................... 637,548 447,934 Hotel management and other fees from third parties................ 791,223 3,331,846 Hotel management and other fees from affiliates................... 245,843 1,104,582 ----------- ---------- Total revenue..................................................... 18,033,938 26,363,348 ----------- ---------- Hotel operating expenses by department: Rooms........................................................... 2,907,133 4,190,299 Food and beverage............................................... 3,781,670 4,923,790 Other operating departments..................................... 432,562 512,791 Undistributed operating expenses: Administrative and general...................................... 4,768,757 8,078,304 Property operating costs........................................ 1,532,558 2,623,626 Property taxes, insurance and other............................. 792,275 1,310,517 Depreciation and amortization................................... 1,671,612 2,097,512 ----------- ---------- Total operating expenses.......................................... 15,886,567 23,736,839 ----------- ---------- Interest expense.................................................. 2,850,844 2,673,365 Interest income................................................... (67,749) (260,017) ----------- ---------- Total expenses.................................................... 18,669,662 26,150,187 ----------- ---------- Income (loss) before minority interest and extraordinary item..... (635,724) 213,161 Minority interest in subsidiary................................... 6,405 (17,415) ----------- ---------- Income (loss) before extraordinary item........................... (642,129) 230,576 Extraordinary item--loss on early extinguishment of debt.......... -- (887,631) ----------- ---------- Net loss.......................................................... $ (642,129) (657,055) ----------- ---------- ----------- ---------- Net loss attributable to General Partners......................... $ (15,469) (87,254) ----------- ---------- ----------- ---------- Net loss attributable to Limited Partners......................... $ (626,660) (569,801) ----------- ---------- ----------- ----------
See accompanying notes to combined financial statements. F-6 EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P. COMBINED STATEMENTS OF PARTNERS' CAPITAL FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND FOR THE PERIOD FROM JANUARY 12, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995
GENERAL LIMITED TOTAL PARTNERS PARTNERS ----------- ---------- ---------- Initial capital contributions on January 12, 1995..... $ 1,773,304 88,765 1,684,539 Capital contributions................................. 48,624,696 2,431,235 46,193,461 Capital distributions................................. (115,723) (1,157) (114,566) Net loss for the period from inception to December 31, 1995................................................. (657,055) (87,254) (569,801) ----------- ---------- ---------- 49,625,222 2,431,589 47,193,633 Less--notes receivable from management for capital contributions........................................ (987,500) -- (987,500) ----------- ---------- ---------- Partners' capital at December 31, 1995................ 48,637,722 2,431,589 46,206,133 ----------- ---------- ---------- ----------- ---------- ---------- Capital distributions................................. (171,554) (2,245) (169,309) Net loss for the three months ended March 31, 1996.... (642,129) (15,469) (626,660) ----------- ---------- ---------- ----------- ---------- ---------- Partners' capital at March 31, 1996................... $47,824,039 2,413,875 45,410,164 ----------- ---------- ---------- ----------- ---------- ----------
See accompanying notes to combined financial statements. F-7 EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P. COMBINED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND FOR THE PERIOD FROM JANUARY 12, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995
1996 1995 ------------ ------------ Cash flows from operating activities: Net loss..................................................... $ (642,129) (657,055) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............................ 1,671,612 2,097,512 Loss on early extinguishment of debt..................... -- 617,730 Minority interest in consolidated subsidiary............. 6,405 (17,415) Changes in working capital: Accounts receivable, net............................... (2,496,742) (2,748,909) Deposits............................................... (116,695) (1,492,025) Prepaid expenses and other............................. (766,493) (223,260) Inventory.............................................. (264,121) (173,514) Accounts payable....................................... 1,841,674 2,329,034 Accrued expenses and other liabilities................. 3,075,426 4,320,320 Due to CapStar Equity Associates, G.P.................. 77,942 305,077 ------------ ------------ Net cash provided by operating activities...................... 2,386,879 4,357,495 ------------ ------------ Cash flows from investing activities: Purchases of property and equipment.......................... (56,894,884) (109,221,935) Purchase of minority interest................................ (33,333) -- Additions to restricted cash for capital improvements and other, net................................................. (11,288,775) (7,351,128) ------------ ------------ Net cash used by investing activities.......................... (68,216,992) (116,573,063) ------------ ------------ Cash flows from financing activities: Proceeds from long-term debt................................. 67,870,152 98,057,709 Payments on long-term debt................................... (24,469) (23,095,559) Principal repayments on capital leases....................... (24,708) (37,888) Release of (additions to) restricted deposits for hedge agreement.................................................. 1,023,307 (2,023,307) Deferred costs............................................... (1,649,670) (3,000,181) Capital contributions........................................ -- 50,250,000 Loans to management.......................................... -- (987,500) Capital distributions........................................ (171,554) (115,723) Distributions to minority interest........................... (104,167) -- ------------ ------------ Net cash provided by financing activities...................... 66,918,891 119,047,551 ------------ ------------ Net increase in cash and cash equivalents...................... 1,088,778 6,831,983 Cash and cash equivalents at beginning of period............... 6,831,983 -- ------------ ------------ Cash and cash equivalents at end of period..................... $ 7,920,761 6,831,983 ------------ ------------ ------------ ------------ Supplemental disclosure of cash flow information: Interest paid................................................ $ 2,008,689 2,383,299 Capitalized interest costs................................... 76,000 67,000 Capital lease additions...................................... 724,932 721,494 Deferred financing fees not yet paid......................... 338,352 596,403 Prepaid expenses contributed by limited partner.............. -- 42,000 Furniture and equipment contributed by limited partner....... -- 106,000 ------------ ------------ ------------ ------------
See accompanying notes to combined financial statements. F-8 EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P. NOTES TO THE COMBINED FINANCIAL STATEMENTS MARCH 31, 1996 AND DECEMBER 31, 1995 (1) ORGANIZATION EquiStar Hotel Investors, L.P. ("EquiStar") was formed on January 12, 1995. The principal activity of EquiStar is to acquire and own upscale, full-service hotels throughout the continental United States. As of March 31, 1996, EquiStar had acquired and owned the following hotels:
ACQUISITION TOTAL DATE NAME ROOMS COST - --------------------------- ------------------------------------------ ----- ----------- March 3, 1995.............. Salt Lake Airport Hilton, UT 287 $14,600,000 June 30, 1995.............. Radisson Hotel, Schaumburg, IL 202 9,000,000 June 30, 1995.............. Sheraton Hotel, Colorado Springs, CO 502 17,600,000 August 4, 1995............. Hilton Hotel, Bellevue, WA 180 12,500,000 October 3, 1995............ Marriott Hotel, Somerset, NJ 434 25,800,000 November 15, 1995.......... Renaissance Hotel, Atlanta, GA 496 21,200,000 February 2, 1996........... Sheraton Hotel, Charlotte, NC 226 18,500,000 February 16, 1996.......... Holiday Inn, Cleveland, OH 237 9,300,000 February 22, 1996.......... Radisson Plaza Hotel, Irvine, CA 290 19,400,000 March 8, 1996.............. Georgetown Latham, Washington, DC 143 12,500,000
Separate wholly-owned limited liability companies ("LLCs") were established to directly own the above hotels. However, for the Atlanta Renaissance Hotel, LLCs were established to purchase and hold EquiStar's 1% general partner interest and the 84.6% limited partner interest in the partnership that owns the hotel. Due to the significance of these LLCs' partnership interests, the partnership's operations are consolidated. CapStar Management Company, L.P. ("CapStar Management") operates 48 hotels throughout the continental United States on behalf of third-party and affiliate owners. The partnership was formed on January 12, 1995. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Combination The accounts of EquiStar and CapStar Management (collectively, the "Partnerships") have been combined in these financial statements as the Partnerships are under common ownership. All material intercompany transactions and balances have been eliminated in combination. Cash and Cash Equivalents The Partnerships consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Deposits Deposits represent refundable amounts escrowed during the negotiation of potential hotel acquisitions, certain amounts held for future hotel renovations and the amounts held in escrow related to a hedge agreement (see note 4). F-9 EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P. NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Inventory Inventories, which consist primarily of hotel food and beverage stock, are recorded at the lower of cost or market using the first-in, first-out ("FIFO") valuation method. Deferred Costs Organizational costs incurred in the formation of the Partnerships are amortized over five years using the straight-line method. Costs associated with the acquisition of debt are amortized over the lives of the related debt instruments using a method that approximates the interest method. Property and Equipment Buildings and building improvements are depreciated over 40 years. Furniture, fixtures and equipment purchases are stated at cost and depreciated over estimated useful lives of five to seven years or, for capital leases, the related lease terms. Furniture and equipment contributed is stated at its fair value at the time it was contributed. All property and equipment balances are depreciated using the straight-line method. Management plans to hold all hotel assets long-term. Management evaluates potential permanent impairment of the net carrying value of its hotel assets on a quarterly basis. For each hotel asset, the expected undiscounted future cash flows for the asset are compared to its net carrying value. If the net carrying value of the hotel exceeds the undiscounted cash flows, management estimates the fair value of the assets based on recent appraisals, if available, or by discounting expected future cash flows using prevailing market discount rates. If the net carrying value of the hotel exceeds its fair value, the excess is charged to operations. No impairment losses were recorded for the three months ended March 31, 1996 or in 1995. Restricted Cash EquiStar is required to maintain certain levels of restricted cash in order to comply with the terms of its debt agreements. Restricted cash reserved primarily for future hotel capital improvements was $18,639,903 and $7,351,128 at March 31, 1996 and December 31, 1995, respectively. Minority Interest Minority interest represents the limited partnership interests in the partnership which owns the Atlanta Renaissance which are not owned by EquiStar. Revenues Revenue is earned primarily through the operations and management of the hotel properties and is recognized when earned. Until February 29, 1996, the Atlanta Renaissance was leased to a third-party operator and revenue related to this hotel was recorded as lease revenue. On February 29, 1996, the Company assumed operations of the hotel upon termination of the lease. F-10 EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P. NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Income Taxes The combined financial statements contain no provision for federal income taxes since both entities are partnerships and, therefore, all federal income tax liabilities are passed through to the individual partners in accordance with the Partnership Agreements and Internal Revenue Code. Partners' Capital Contributions, Distributions and Profit and Loss Allocations The individual partnership agreements of the Partnerships specify the required capital contributions of the partners and the procedures for the allocation of profit and loss and for distributions to partners. Generally, these items are allocated in proportion to the respective ownership percentages of the partners. Use of Estimates Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these combined financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) NOTES RECEIVABLE FROM MANAGEMENT Pursuant to the terms of an agreement dated January 4, 1995, certain members of management borrowed $987,500 from CapStar Management to fund capital contributions to EquiStar. The notes are secured by the borrowers' interest in EquiStar and are personally guaranteed by the individual note holders. During 1995, these notes earned interest at the prime rate. For the three months ended March 31, 1996 and thereafter, these notes will earn interest at prime (as of January 1996) plus 1.5%. Outstanding principal balances are to be repaid within five years of the individual loan dates but may be repaid earlier through certain CapStar Management or EquiStar distributions as defined in the related agreements. Interest is due semi-annually on June 30 and December 31. (4) HEDGE AGREEMENT In August 1995, EquiStar entered into an agreement with Salomon Brothers Holding Company Inc. ("Salomon") to hedge against the impact that interest rate fluctuations may have on EquiStar's various floating rate debt instruments. Gains and losses resulting from this agreement are not recorded in the financial statements until realized. The hedge agreement is a two-year forward swap that is effective June 30, 1997 and that matures on June 30, 2007. The agreement requires EquiStar to pay a fixed rate of 7.095% and receive a floating interest rate based on the three-month London Interbank Offered Rate ("LIBOR"), on a notional amount of $25,000,000. The agreement required EquiStar to make an initial collateral deposit of $1,000,000 and provides for required additions or reductions to the collateral escrow account by EquiStar and Salomon in $500,000 increments based on changes in the market value of this agreement. At March 31, 1996 and December 31, 1995, EquiStar had made required deposits of $1,000,000 and $2,023,307 to the collateral escrow account, respectively, which are recorded as restricted deposits. F-11 EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P. NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) (4) HEDGE AGREEMENT--(CONTINUED) The unrealized loss on this agreement at March 31, 1996 and December 31, 1995 was $102,000 and $1,546,000, respectively. On May 6, 1996, EquiStar sold its interest in the swap agreement. (5) LONG-TERM DEBT Salomon Long-term Debt--Prior to December 21, 1995, EquiStar had a loan facility with Salomon to fund the acquisition of hotels. At December 21, 1995, $22,690,000 was outstanding on this loan facility. Interest-only payments were required under this loan facility at a floating rate based on LIBOR. This debt was refinanced with Lehman Brothers Holding, Inc. ("Lehman Holdings"). Lehman Long-term Debt--On December 21, 1995, EquiStar entered into a $202,500,000 Master Mortgage Loan Facility Agreement (the "Master Agreement") with Lehman Holdings to facilitate the repayment of the existing $22,690,000 in debt and hotel acquisitions. Under the Master Agreement, 50% of total acquisition capital, not to exceed $125,000,000, may be funded through a senior loan facility. An additional 27.5% of acquisition capital, not to exceed $75,000,000, may be borrowed through a mezzanine loan facility. Certain fees incurred by EquiStar related to these borrowings may also be financed through the Master Agreement, up to a maximum of $2,500,000. Separate loans are obtained under the Master Agreement for each hotel acquired. The loans are cross-collateralized and cross-defaulted and are secured by first and second liens on EquiStar's real and personal property. Loans obtained under the senior loan facility bear interest at variable rates that are based on one-month LIBOR. At March 31, 1996 and December 31, 1995, interest rates on the loans under the senior facility were between 9.625% and 10%. Loans obtained under the mezzanine loan facility bear interest at a fixed rate of 16%. Interest payments of 10% are required with the remaining 6% accruing to principal. All loans require interest-only payments monthly. All of the loans mature January 1, 1999. At March 31, 1996 and December 31, 1995, total borrowings under the Master Agreement were $127,221,001 and $59,975,900, of which $90,763,145 and $55,840,900 were made from the senior loan facility and $36,457,856 and $4,135,000 were made from the mezzanine loan facility, respectively. Under the Master Agreement, EquiStar is required to pay financing fees upon the repayment of each loan. These deferred financing fees payable, which are included in long-term debt, totaled $897,570 and $596,403 at March 31, 1996 and December 31, 1995, respectively. Wells Fargo Long-term Debt--On March 2, 1995, EquiStar borrowed $9,960,000 from Wells Fargo Bank, National Association ("Wells Fargo") to finance the purchase of the Salt Lake Airport Hilton (all other hotel loans are under the Master Agreement). The loan matures on March 1, 1999 and provides for a one-year extension at the option of the borrower. Interest, which is payable monthly, is recorded at the one-month LIBOR plus 4.25%, as adjusted for certain provisions in the loan agreement. The debt is secured by certain real and personal property of the hotel. At March 31, 1996 and December 31, 1995, the outstanding balance on this note was $9,865,675 and $9,890,144, respectively. Wells Fargo Line of Credit--EquiStar has an unsecured $5,000,000 revolving credit facility with Wells Fargo to support operations as needed. Amounts outstanding on this line of credit were $3,706,809 and $4,181,809 at March 31, 1996 and December 31, 1995, respectively. Interest accrues at either LIBOR plus 2.25% or the Prime rate plus 1%, depending on the nature of the advance. Prime rate F-12 EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P. NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) (5) LONG-TERM DEBT--(CONTINUED) based interest payments are due quarterly while LIBOR based interest is payable over various periods not to exceed six months. Borrowings expected to be repaid within one year are classified as current liabilities. The full amount outstanding is expected to be repaid upon the termination of the credit facility on July 12, 1997. Notes Payable--During 1995, in order to fund the loans to management (see note 3), CapStar Management borrowed $950,000 from Acadia Partners, L.P. ("Acadia Partners"), an affiliate of the Partnerships. In January 1996, CapStar Management borrowed an additional $150,000 from Acadia Partners under this note agreement to prepay a consulting fee. The note bears fixed interest at the prime rate (as of January 1996) plus 1.5% and is secured by interests in and liens on certain of CapStar Management's real and personal property. Principal payments are scheduled for August 31, 1996 and upon maturity on August 31, 1997. Interest is payable semi-annually beginning February 29, 1996. In March 1996, EquiStar entered into an unsecured note agreement for $1,000,000 with LCP Hotel Ventures, L.P., an affiliate of the Partnerships and the seller of the Georgetown Latham Hotel, to finance the purchase of that hotel (see note 6). The note requires interest only payments quarterly, and bears interest at a rate of 10%. All principal and accrued interest is due in full on January 1, 1999. Capital Leases--The Partnerships have entered into several capital leases for hotel and office equipment that expire between 1997 and 2000. The total capital lease obligations at March 31, 1996 and December 31, 1995, were $1,335,363 and $647,903, respectively, and are included in long-term debt. Interest costs on long-term debt for the Partnerships were $2,926,844 for the three months ended March 31, 1996 and $2,740,365 for 1995. Aggregate maturities of the above obligations are as follows: PERIOD - ------------------------------------------------------------ From April 1 to December 31 1996...................................................... $ 4,497,661 Year ending December 31 1997...................................................... 934,919 1998...................................................... 1,351,982 1999...................................................... 137,901,718 2000 and thereafter....................................... 440,138 ------------- $ 145,126,418 ------------- ------------- Management has determined that the outstanding balance of the Partnerships' long-term debt approximates fair value by discounting the future cash flows under the debt arrangements using rates currently available for debt with similar terms and maturities. (6) RELATED-PARTY TRANSACTIONS CapStar Management manages hotels that are owned in part by affiliates or officers of CapStar Management. Revenue associated with the management of these hotels was $245,843 for the three F-13 EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P. NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) (6) RELATED-PARTY TRANSACTIONS--(CONTINUED) months ended March 31, 1996 and $1,104,582 in 1995. At March 31, 1996 and December 31, 1995, the amount due from these properties was $134,715 and $237,029, respectively. Management believes these contracts are at prevailing market rates. Upon formation of CapStar Management, certain receivables of CapStar Equity Associates, G.P. ("CEA"), a limited partner, were assigned to CapStar Management. Amounts collected under these receivables are to be paid to CEA when CapStar Management achieves a minimum level of liquidity as defined in the Contribution Agreement. Amounts collected under this agreement, which are recorded as due to CapStar Equity Associates, G.P., amounted to $383,019 at March 31, 1996 and $305,077 at December 31, 1995. Management believes that the balance will be repaid to CEA within one year. On March 8, 1996, EquiStar acquired the Georgetown Latham Hotel for a purchase price of $12,000,000 from LCP Hotel Ventures, L.P. ("LCP"). At the time of the acquisition, the general partner of LCP, Latham Hotels, Inc., was wholly-owned by certain members of the Partnerships' management. Directly or indirectly, these members of management owned a 9.7% beneficial interest in LCP and received $806,000 of the net proceeds of the purchase price paid to LCP. Management believes that the purchase price was determined through arm's-length negotiations between EquiStar and representatives of the holders of the majority of the beneficial interests in the LCP. On November 15, 1995, EquiStar acquired its 1% general partner interest in the Atlanta Renaissance Hotel from LHP, a corporation in which an individual who, at the time, was a principal of the Partnerships, owned an equity interest. LHP was paid a fee of $893,000 in connection with EquiStar's acquisition of the general and limited partner interests and is entitled to an additional $161,000 upon the ultimate disposition of the partnership that owns the Atlanta Renaissance. Another affiliate of the former principal, LCP Group, L.P., is entitled to an annual fee of $30,000 to provide certain administrative services related to the outside limited partners. Management believes that these fees were negotiated at arm's-length between the former principal and the other principals of EquiStar. (7) COMMITMENT AND CONTINGENCIES CapStar Management has entered into two operating leases for office space which expire in October 1998. Lease payments will be approximately $250,000 annually through expiration. EquiStar is involved in various litigation through the normal course of business which management believes will not have a material adverse effect on the combined financial statements. (8) PRO FORMA INFORMATION (UNAUDITED) The following unaudited pro forma summary presents information as if hotel acquisitions made from inception of the Partnerships through March 31, 1996, had been made at inception of the Partnerships. The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the Partnerships. F-14 EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P. NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) (8) PRO FORMA INFORMATION (UNAUDITED)--(CONTINUED) PRO FORMA INFORMATION (UNAUDITED)
PERIOD FROM THREE MONTHS ENDED JANUARY 12, 1995 TO MARCH 31, 1996 DECEMBER 31, 1995 ------------------ ------------------- Total revenue............................ $ 22,214,514 94,791,068 ------------------ ------------------- Net loss before extraordinary item....... $ (1,271,256) (2,693,090) ------------------ ------------------- Net loss................................. $ (1,271,256) (3,580,721) ------------------ -------------------
(9) SUBSEQUENT EVENTS On April 16, 1996, EquiStar purchased the Hilton Hotel, Arlington, Texas. The Hilton is a full-service hotel with 289 rooms and was purchased for $18,350,000. On January 18, 1996, EquiStar entered into a letter of intent to acquire a 60% interest in a partnership that owns the Renaissance Hotel, Arlington, Virginia for $4,500,000. F-15 SCHEDULE III EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P. SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION MARCH 31, 1996
GROSS AMOUNT AT WHICH COSTS SUBSEQUENT TO CARRIED AT CLOSE OF PERIOD INITIAL COST TO COMPANY ACQUISITION ------------------------- ------------------------- -------------------- (1) BUILDING AND BUILDING AND (1) BUILDING AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS - -------------------------- ------------ ---------- ------------ ----- ------------ ---------- ------------ Hotel Assets: Salt Lake Airport Hilton, UT...................... $ 9,865,675 770,000 12,827,670 580 138,015 770,580 12,965,685 Radisson Hotel, Schaumburg, IL............ 5,380,000 1,080,000 5,131,399 1,361 3,144 1,081,361 5,134,543 Sheraton Hotel, Colorado Springs, CO.............. 16,270,799 1,071,394 14,591,596 678 112,196 1,072,072 14,703,792 Hilton Hotel, Bellevue, WA...................... 10,788,713 5,210,695 6,766,323 4,590 8,596 5,215,285 6,774,919 Marriott Hotel, Somerset, NJ...................... 18,565,600 1,977,509 23,001,126 854 36,360 1,978,363 23,037,486 Renaissance Hotel, Atlanta, GA............. 23,609,456 2,650,000 15,926,116 -- 80,980 2,650,000 16,007,096 Sheraton Hotel, Charlotte, NC............. 15,659,014 4,700,000 11,056,927 -- 90,024 4,700,000 11,146,951 Holiday Inn, Cleveland, OH...................... 9,809,540 1,330,000 6,353,249 -- 53,716 1,330,000 6,406,965 Radisson Plaza Hotel, Irvine, CA................ 16,674,449 9,990,000 7,993,137 -- -- 9,990,000 7,993,137 Georgetown Latham, Washington, DC........... 11,463,430 6,500,000 5,319,708 -- -- 6,500,000 5,319,708 ------------ ---------- ------------ ----- ------ ---------- ------------ $138,086,676 35,279,598 108,967,251 8,063 523,031 35,287,661 109,490,282 ------------ ---------- ------------ ----- ------ ---------- ------------ ------------ ---------- ------------ ----- ------ ---------- ------------ ACCUMULATED YEAR OF DATE DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED LIFE - -------------------------- ----------- ------------ -------- ---- Hotel Assets: Salt Lake Airport Hilton, UT...................... 351,154 1980 03/03/95 40 Radisson Hotel, Schaumburg, IL.......... 96,309 1974 06/30/95 40 Sheraton Hotel, Colorado Springs, CO.............. 275,696 1979 06/30/95 40 Hilton Hotel, Bellevue, WA...................... 112,915 1979 08/04/95 40 Marriott Hotel, Somerset, NJ...................... 287,968 1978 10/03/95 40 Renaissance Hotel, Atlanta, GA............. 168,563 1982 11/15/95 40 Sheraton Hotel, Charlotte, NC........... 46,446 1985 02/02/96 40 Holiday Inn, Cleveland, OH...................... 20,022 1985 02/16/96 40 Radisson Plaza Hotel, Irvine, CA.............. 20,815 1976 02/22/96 40 Georgetown Latham, Washington, DC........... 11,083 1978 03/08/96 40 ----------- 1,390,971 ----------- -----------
(1) As of March 31, 1996, hotel property and equipment have a cost of $167,954,992 for federal income tax purposes. Land 35,287,661 -- Hotel furniture and equipment.... 21,014,852 1,718,098 Construction in progress......... 2,162,197 -- ------------ ----------- Total hotel property and equipment....................... $167,954,992 $3,109,069 ------------ -----------
(1) As of March 31, 1996 of $167,954,992 for
A reconciliation of the Partnerships' investment in hotel property and equipment and related accumulated depreciation is as follows:
1996 1995 ------------ ----------- Hotel property and equipment: Balance at beginning of period...................................................... $110,454,164 -- Additions during period: Acquisitions...................................................................... 52,668,726 104,238,519 Improvements and construction-in-progress......................................... 4,832,102 6,215,645 ------------ ----------- Balance at end of period............................................................. 167,954,992 110,454,164 ------------ ----------- Accumulated depreciation: Balance at beginning of period...................................................... 1,742,573 -- Additions--depreciation expense..................................................... 1,366,496 1,742,573 ------------ ----------- 3,109,069 1,742,573 ------------ ----------- Net hotel property and equipment at end of period.................................... $164,845,923 108,711,591 ------------ ----------- ------------ -----------
F-16 INDEPENDENT AUDITOR'S REPORT The Partners CapStar Management Company, L.P.: We have audited the accompanying balance sheet of CapStar Management Company, L.P. ("CapStar Management") as of December 31, 1994, and the related statements of operations and changes in management operations' equity and cash flows for the years ended December 31, 1994 and 1993. These financial statements are the responsibility of the management of CapStar Management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform our audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CapStar Management Company, L.P. as of December 31, 1994, and the results of its operations and its cash flows for the years ended December 31, 1994 and 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. May 7, 1996 F-17 CAPSTAR MANAGEMENT BALANCE SHEET DECEMBER 31, 1994
ASSETS Current assets: Cash......................................................................... $ 157,151 Accounts receivable.......................................................... 946,717 Prepaid expenses............................................................. 22,157 ---------- Total current assets........................................................... 1,126,025 Furniture and equipment, net of accumulated depreciation of $69,804............ 105,772 ---------- $1,231,797 ---------- ---------- LIABILITIES AND MANAGEMENT OPERATIONS' EQUITY Accounts payable and accrued expenses.......................................... $ 823,637 Due to affiliates.............................................................. 203,140 Management operations' equity.................................................. 205,020 ---------- $1,231,797 ---------- ----------
See accompanying notes to financial statements. F-18 CAPSTAR MANAGEMENT STATEMENTS OF OPERATIONS AND CHANGES IN MANAGEMENT OPERATIONS' EQUITY YEARS ENDED DECEMBER 31, 1994 AND 1993
1994 1993 ---------- --------- Revenue: Management fees................................................... $3,823,166 3,918,576 Accounting fees and other income.................................. 594,756 315,566 ---------- --------- Total revenue....................................................... 4,417,922 4,234,142 ---------- --------- Expenses: Salaries, wages and benefits...................................... 2,311,569 1,988,282 Other overhead, general and administrative........................ 2,196,251 2,076,385 Depreciation...................................................... 22,639 14,349 ---------- --------- Total expenses...................................................... 4,530,459 4,079,016 ---------- --------- Net income (loss)................................................... (112,537) 155,126 Management operations' equity (deficit), beginning of year.......... 317,557 (81,820) Capital contributions............................................... -- 244,251 ---------- --------- Management operations' equity, end of year.......................... $ 205,020 317,557 ---------- --------- ---------- ---------
See accompanying notes to financial statements. F-19 CAPSTAR MANAGEMENT STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994 AND 1993
1994 1993 --------- -------- Net income (loss)..................................................... $(112,537) 155,126 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation...................................................... 22,639 14,349 Changes in working capital: Accounts receivable............................................. 249,284 (738,337) Prepaid expenses................................................ 20,339 (4,463) Accounts payable................................................ (114,628) 361,377 Accrued expenses................................................ 1,213 110,624 --------- -------- Cash provided (used) by operating activities.......................... 66,310 (101,324) --------- -------- Cash flows from investing activities--purchases of furniture and equipment............................................................. (41,257) (24,475) --------- -------- Cash flows from financing activities--capital contributions........... -- 244,251 --------- -------- Net increase in cash.................................................. 25,053 118,452 Cash at beginning of year............................................. 132,098 13,646 --------- -------- Cash at end of year................................................... $ 157,151 132,098 --------- -------- --------- --------
See accompanying notes to financial statements. F-20 CAPSTAR MANAGEMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994 (1) ORGANIZATION For the period from January 1, 1993 through December 31, 1994, CapStar Hotels, Inc. and subsidiaries ("CHI") provided hotel management services to hotels throughout the continental United States on behalf of third-party and affiliate owners. At December 31, 1994, CHI had contracts to manage 41 hotels. On January 4, 1995, CHI assigned the hotel management contracts and certain assets and liabilities related to its hotel management operations to CapStar Equity Associates, G.P. ("CEA"). On January 12, 1995, CEA, in turn, assigned the same to CapStar Management Company, L.P. For purposes of these financial statements, the hotel management operations accounts are presented as if they were a separate and distinct legal entity (CapStar Management). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These financial statements have been prepared on the accrual basis of accounting and in accordance with generally accepted accounting principles. Revenues and Accounts Receivable CapStar Management receives fees for the performance of management, accounting and other services in accordance with the agreements entered into with individual hotels. All revenues are recognized as the related services are performed. Generally, management fees are equal to 2% to 4% of the gross monthly revenue of each hotel. Additional incentive management fees are earned when a hotel's operating performance exceeds levels specified in the management contract. The collectibility of accounts receivable is evaluated periodically during the year. CapStar Management uses the direct write-off method to record bad debt expense for amounts deemed uncollectible. Furniture and Equipment Furniture and equipment purchases are stated at cost. These assets are depreciated using the straight-line method over an estimated useful life of seven years. Use of Estimates Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements. Actual results could differ from those estimates. Income Taxes No provision has been made for income taxes in the financial statements, as any taxable income or loss of CapStar Management is included in the income tax returns of CHI for the years ended December 31, 1994 and 1993. F-21 CAPSTAR MANAGEMENT NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) RELATED-PARTY TRANSACTIONS Certain of the hotels managed are owned by affiliates of CHI. Revenue earned by CapStar Management from these hotels was approximately $2,830,177 in 1994 and $2,812,653 in 1993. Accounts receivable associated with hotels owned by affiliates was $481,561 at December 31, 1994. Due to affiliates primarily represents amounts collected by CapStar Management on behalf of the hotels it manages which have not yet been disbursed to the hotels. F-22 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Radisson Plaza Hotel (the "Hotel") for the period from January 1, 1996 to February 22, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Radisson Plaza Hotel's operations and its cash flows for the period from January 1, 1996 to February 22, 1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. April 20, 1996 F-23 RADISSON PLAZA HOTEL STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ---------- ----------- ----------- ----------- Revenue: Rooms................................. $ 854,685 4,564,294 3,479,926 3,137,865 Food and beverage..................... 409,200 2,554,156 2,188,612 2,204,286 Other operating departments........... 48,828 314,723 239,755 183,980 ---------- ----------- ----------- ----------- 1,312,713 7,433,173 5,908,293 5,526,131 ---------- ----------- ----------- ----------- Operating costs and expenses: Rooms................................. 254,389 1,302,612 1,009,792 875,825 Food and beverage..................... 346,563 1,882,782 1,617,235 1,543,846 Other operating departments........... 23,005 147,896 116,224 84,197 Undistributed operating expenses: Administrative and general............ 222,566 1,050,388 1,022,104 869,499 Sales and marketing................... 126,979 692,052 452,070 449,615 Management fees....................... 35,000 210,000 197,500 150,000 Property operating costs.............. 96,410 763,258 704,873 691,160 Property taxes, insurance and other... 57,301 342,177 386,464 467,055 Depreciation and amortization......... 112,129 832,958 798,442 854,566 Interest expense...................... 608,294 3,510,997 2,688,580 2,193,590 ---------- ----------- ----------- ----------- Total expenses.......................... 1,882,636 10,735,120 8,993,284 8,179,353 ---------- ----------- ----------- ----------- Net loss................................ $ (569,923) (3,301,947) (3,084,991) (2,653,222) ---------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
See accompanying notes to financial statements. F-24 RADISSON PLAZA HOTEL STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 --------- ---------- ---------- ---------- Cash flows from operating activities: Net loss.................................. $(569,923) (3,301,947) (3,084,991) (2,653,222) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization......... 112,129 832,958 798,442 854,566 Decrease (increase) in accounts receivable........................... (56,580) (198,792) (27,765) 203,192 Decrease (increase) in other assets... 67,637 (42,736) 26,502 38,421 Increase (decrease) in accounts payable and accrued expenses........ 296,914 540,514 11,866 (12,467) Increase in accrued interest.......... 358,294 3,010,996 2,568,580 2,167,618 --------- ---------- ---------- ---------- Total adjustments......................... 778,394 4,142,940 3,377,625 3,251,330 --------- ---------- ---------- ---------- Net cash provided by operating activities... 208,471 840,993 292,634 598,108 --------- ---------- ---------- ---------- Cash flows used by investing activities-- additions to hotel......................... -- (76,435) (54,925) (17,811) --------- ---------- ---------- ---------- Cash flows from financing activities: Repayments of note payable................ -- (30,099) (55,000) -- Capital distributions..................... (43,445) (896,802) (274,594) (397,073) Increase (decrease) in bank overdrafts.... (165,026) 162,343 91,885 (183,224) --------- ---------- ---------- ---------- Net cash used by financing activities....... (208,471) (764,558) (237,709) (580,297) --------- ---------- ---------- ---------- Net increase in cash........................ -- -- -- -- Cash at beginning of period................. -- -- -- -- --------- ---------- ---------- ---------- Cash at end of period....................... $ -- -- -- -- --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest.................... $ 250,000 500,000 120,000 25,972 --------- ---------- ---------- ---------- --------- ---------- ---------- ----------
See accompanying notes to financial statements. F-25 RADISSON PLAZA HOTEL NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (1) ORGANIZATION The Radisson Plaza Hotel (the "Hotel") is located near the Orange County Airport in Irvine, California, approximately 45 miles from Los Angeles. The Hotel opened in 1976. The Hotel has 290 rooms, an outdoor pool and jacuzzi, fitness center and same day valet service. The dining facilities include Mimi's Grill and The Promenade Lounge. The Hotel has approximately 30,000 square feet of meeting space. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accounts of the Hotel were included in the financial records of GMY Investment Company ("GMY"), a limited partnership which owned the Hotel until it was sold to EquiStar on February 22, 1996 for $19,200,000. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared using the accrual basis of accounting. Depreciation Depreciation is computed on the cost of hotel property and equipment using the Modified Accelerated Cost Recovery method over 39 and 31.5 years for the building and building improvements and over 5 to 7 years for furniture, fixtures and equipment. Bad Debt Expense Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. Revenue Revenue is earned primarily through the operations of the Hotel and recognized when earned. Income Taxes The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities were passed through to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. Use of Estimates Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-26 RADISSON PLAZA HOTEL NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) INTEREST EXPENSE GMY entered into a promissory note with an original balance of $19,000,000 in June 1989. Interest accrued at 10% for the first year, and then adjusted to the Bank of America National Trust and Savings Association prime rate as announced from time to time. On December 1, 1991, GMY stopped making scheduled interest and principal payments and the note was in default. From the default date, interest was computed using the prime rate plus four percentage points on the outstanding balance plus any accrued interest. (4) RELATED-PARTY TRANSACTIONS The Hotel incurred management fees of $35,000, $210,000, $197,500 and $150,000 for the period from January 1, 1996 to February 22, 1996 and the years ended December 31, 1995, 1994 and 1993, respectively. The management fees were paid to an affiliate of the Hotel. F-27 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Colorado Springs Sheraton Hotel (the "Hotel") for the period from January 1, 1995 to June 30, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1994 and 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Colorado Springs Sheraton Hotel's operations and its cash flows for the period from January 1, 1995 to June 30, 1995, and the years ended December 31, 1994 and 1993, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. April 26, 1996 F-28 COLORADO SPRINGS SHERATON HOTEL STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1995 TO JUNE 30, 1995 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993
1995 1994 1993 ---------- ---------- --------- Revenue: Rooms................................................. $3,058,060 7,381,231 6,306,143 Food and beverage..................................... 1,450,753 3,476,833 2,930,970 Other operating departments........................... 217,547 534,042 491,097 ---------- ---------- --------- 4,726,360 11,392,106 9,728,210 ---------- ---------- --------- Operating costs and expenses: Rooms................................................. 950,418 1,956,592 1,720,992 Food and beverage..................................... 1,325,154 2,751,933 2,383,324 Other operating departments........................... 140,610 305,426 260,327 Undistributed operating expenses: Administrative and general............................ 612,704 1,606,117 1,163,407 Sales and marketing................................... 483,000 889,803 853,153 Property operating costs.............................. 560,029 1,220,401 1,150,870 Management fees....................................... 137,852 284,803 291,736 Property taxes, insurance and other................... 290,750 498,989 549,725 Depreciation and amortization......................... 545,685 1,123,249 1,076,652 ---------- ---------- --------- 5,046,202 10,637,313 9,450,186 ---------- ---------- --------- Net income (loss)....................................... $ (319,842) 754,793 278,024 ---------- ---------- --------- ---------- ---------- ---------
See accompanying notes to financial statements. F-29 COLORADO SPRINGS SHERATON HOTEL STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1995 TO JUNE 30, 1995 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993
1995 1994 1993 --------- ---------- --------- Cash flows from operating activities: Net income (loss)...................................... $(319,842) 754,793 278,024 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization...................... 545,685 1,123,249 1,076,652 Decrease (increase) in accounts receivable......... (222,962) 216,504 (252,683) Decrease (increase) in inventory and other assets........................................... 132,255 (136,067) 21,999 Increase (decrease) in accounts payable and accrued expenses......................................... (361,807) (60,970) 161,062 --------- ---------- --------- Net cash provided (used) by operating activities......... (226,671) 1,897,509 1,285,054 --------- ---------- --------- Cash flows used by investing activities--purchases of furniture, fixtures and equipment........................ (18,014) (113,743) (324,601) --------- ---------- --------- Cash flows from financing activities: Capital distributions.................................. -- (2,153,816) (777,181) Capital contributions.................................. 425,146 -- -- Increase (decrease) in bank overdrafts................. (180,461) 196,509 (9,731) --------- ---------- --------- Net cash flows provided (used) by financing activities... 244,685 (1,957,307) (786,912) --------- ---------- --------- Net increase in cash..................................... -- (173,541) 173,541 Cash at beginning of year................................ -- 173,541 -- --------- ---------- --------- Cash at end of year...................................... $ -- -- 173,541 --------- ---------- --------- --------- ---------- ---------
See accompanying notes to financial statements. F-30 COLORADO SPRINGS SHERATON HOTEL NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1995 TO JUNE 30, 1995 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993 (1) ORGANIZATION The Colorado Springs Sheraton Hotel (the "Hotel") is a 502 room full-service hotel located in Colorado Springs, Colorado. The Hotel is near Colorado Springs Airport and is about an hour from Denver. The Hotel has a restaurant, a snack bar/coffee shop, a lounge/ lobby bar, an exercise facility and an indoor/outdoor swimming pool. The Hotel is currently undergoing major renovations (budgeted at $2.7 million). For the period ended June 30, 1995 and for the years ended December 31, 1994 and 1993, the Hotel was owned by CIGNA. The Hotel was sold on June 30, 1995 to EquiStar for a purchase price of $17,250,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accounts of the Hotel were included in the financial records of CIGNA. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared using the accrual basis of accounting. Depreciation Depreciation is computed on the cost of the Hotel property and equipment using the straight-line method over 40 years for the building, over 15 years for building improvements and over five years for furniture, fixtures and equipment. Bad Debt Expense Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. Revenue Revenue is earned primarily through the operations of the Hotel and is recognized when earned. Income Taxes The financial statements contain no provision for federal income taxes since the Hotel does not pay any taxes directly. All taxes are the responsibility of the parent company, CIGNA. Use of Estimates Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-31 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Georgetown Latham Hotel (the "Hotel") for the period from January 1, 1996 to March 8, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Georgetown Latham Hotel's operations and its cash flows for the period from January 1, 1996 to March 8, 1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. April 12, 1996 F-32 GEORGETOWN LATHAM HOTEL STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 8, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ---------- ---------- ---------- ---------- Revenue: Rooms.................................... $ 612,857 3,790,580 3,764,567 3,784,884 Food and beverage........................ 628,269 3,699,257 3,448,669 3,192,731 Other operating departments.............. 81,116 360,958 419,968 374,672 ---------- ---------- ---------- ---------- 1,322,242 7,850,795 7,633,204 7,352,287 ---------- ---------- ---------- ---------- Operating costs and expenses: Rooms.................................... 187,244 1,081,472 1,069,864 1,177,839 Food and beverage........................ 553,396 3,268,979 3,095,593 3,032,272 Other operating departments.............. 50,228 313,870 272,476 185,028 Undistributed operating expenses: Administrative and general............... 110,613 996,666 795,642 663,466 Sales and marketing...................... 94,903 511,975 478,520 606,068 Management fees.......................... 39,581 235,523 248,270 288,779 Property operating costs................. 105,258 649,576 672,065 585,158 Property taxes, insurance and other...... 65,278 328,299 244,123 328,451 Depreciation and amortization............ 81,782 674,537 637,614 574,751 Interest expense......................... 87,771 476,901 5,265 -- ---------- ---------- ---------- ---------- 1,376,054 8,537,798 7,519,432 7,441,812 ---------- ---------- ---------- ---------- Net income (loss).......................... $ (53,812) (687,003) 113,772 (89,525) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to financial statements. F-33 GEORGETOWN LATHAM HOTEL STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 8, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 -------- ---------- ---------- -------- Cash flows from operating activities: Net income (loss)............................ $(53,812) (687,003) 113,772 (89,525) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............ 81,782 674,537 637,614 574,751 Decrease (increase) in accounts receivable............................. (26,055) 43,384 83,943 (305,105) Decrease (increase) in other assets...... (29,166) 121,568 (311,111) (184,175) Increase (decrease) in accounts payable and accrued expenses................... 165,028 42,727 (384,682) 450,341 Increase in interest payable............. -- 33,880 5,265 -- -------- ---------- ---------- -------- Net cash provided by operating activities...... 137,777 229,093 144,801 446,287 -------- ---------- ---------- -------- Cash flows from investing activities: Purchase of furniture, fixtures and equipment.................................. (18,907) (262,176) -- (276,520) Proceeds from sale of furniture, fixtures and equipment................................... -- -- 91,933 -- -------- ---------- ---------- -------- Net cash provided (used) by investing activities.................................... (18,907) (262,176) 91,933 (276,520) -------- ---------- ---------- -------- Cash flows from financing activities: Principal repayments on capital leases....... (3,770) (21,857) -- -- Proceeds from note payable................... -- -- 4,500,000 -- Principal payments on note payable........... (6,849) (35,573) -- -- Advances to affiliate........................ -- -- (3,825,000) -- Repayments of advances to affiliate.......... -- 3,825,000 -- -- Capital distributions........................ -- (4,206,759) (593,312) (134,115) -------- ---------- ---------- -------- Net cash provided (used) by financing activities.................................... (10,619) (439,189) 81,688 (134,115) -------- ---------- ---------- -------- Net increase (decrease) in cash................ 108,251 (472,272) 318,422 35,652 Cash at beginning of year...................... 32,193 504,465 186,043 150,391 -------- ---------- ---------- -------- Cash at end of year............................ $140,444 32,193 504,465 186,043 -------- ---------- ---------- -------- -------- ---------- ---------- -------- Supplemental disclosure of cash flow information: Cash paid for interest....................... $118,085 443,021 -- -- Additions to capital lease obligations....... -- -- 71,004 -- -------- ---------- ---------- -------- -------- ---------- ---------- --------
See accompanying notes to financial statements. F-34 GEORGETOWN LATHAM HOTEL NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 8, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (1) ORGANIZATION The Georgetown Latham Hotel (the "Hotel") is located on 3000 M Street in Washington, D.C. It is close to the Smithsonian, embassies, monuments, the Kennedy Center and the downtown business district, and caters mainly to tourists and business travelers. The Hotel has 143 rooms; fine dining in the CITRONELLE restaurant; meeting and banquet facilities; an outdoor pool; business center; limousine rental service; and valet parking. Until 1993, the Hotel was owned by Muben/LCP Hotel Partners, L.P. ("Muben/LCP"), a limited partnership which owned 9 hotels. On October 1, 1993, LCP Hotel Ventures, L.P., a partner in Muben/LCP ("LCP Ventures"), conveyed its 10% interest in Muben/LCP for 100% ownership of the Hotel. The Hotel was sold on March 8, 1996 to EquiStar for a purchase price of $12,000,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accounts of the Hotel were included in the financial records of Muben/LCP and then LCP Ventures, as described above, until the Hotel was sold to EquiStar. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared using the accrual basis of accounting. Depreciation Depreciation is computed on the cost of the Hotel property and equipment using the straight-line method over 31.5 years for the building and building improvements and over five years for furniture, fixtures and equipment. Bad Debt Expense Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. Revenue Revenue is earned primarily through the operations of the Hotel and recognized when earned. Income Taxes The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities are passed through to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. F-35 GEORGETOWN LATHAM HOTEL NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Use of Estimates Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) INTEREST EXPENSE On December 23, 1994, the Hotel obtained financing from CPC Advisors No. 3, L.L.C. The original note balance was $4,500,000 and had a fixed interest rate of 10.53%. Principal and interest payments were due monthly. The note was scheduled to mature on December 27, 1999. (4) RELATED-PARTY TRANSACTIONS The Hotel was managed by an affiliate of LCP Ventures. For the period from January 1, 1993 through September 30, 1993 the Hotel incurred management fees of 4% of gross revenue, as defined in the management agreement. For the remainder of 1993 through March 8, 1996 the Hotel incurred base management fees of 3% and an incentive management fee equal to 5% of the amount by which the net operating income exceeds the amount of preferred return, as defined in the management agreement. Management fees incurred during 1996, 1995, 1994 and 1993 were $39,581, $235,523, $248,270 and $288,779, respectively. No incentive management fees were earned. F-36 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Atlanta Renaissance Hotel (the "Hotel") for the period from January 1, 1995 to November 15, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1994 and 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Atlanta Renaissance Hotel's operations and its cash flows for the period from January 1, 1995 to November 15, 1995 and the years ended December 31, 1994 and 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. April 5, 1996 F-37 ATLANTA RENAISSANCE HOTEL STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 15, 1995 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993
1995 1994 1993 ---------- ---------- ---------- Revenue: Rooms................................................ $9,069,888 8,640,768 7,839,244 Food and beverage.................................... 4,054,054 4,342,750 3,828,053 Other operating departments.......................... 689,834 637,278 571,756 ---------- ---------- ---------- 13,813,776 13,620,796 12,239,053 ---------- ---------- ---------- Operating costs and expenses: Rooms................................................ 2,199,381 2,106,483 1,899,024 Food and beverage.................................... 3,220,403 3,392,581 3,096,841 Other operating departments.......................... 363,698 377,110 398,384 Undistributed operating expenses: Administrative and general........................... 1,175,803 1,142,701 1,178,117 Sales and marketing.................................. 1,049,508 1,064,740 1,004,350 Management fees...................................... 498,791 500,769 263,775 Property operating costs............................. 1,029,636 1,193,688 1,157,683 Property taxes, insurance and other.................. 1,286,750 1,232,672 1,100,168 Depreciation and amortization........................ 981,547 1,254,302 1,439,270 Interest expense..................................... 2,290,924 2,618,358 2,641,131 ---------- ---------- ---------- 14,096,441 14,883,404 14,178,743 ---------- ---------- ---------- Net loss............................................... $ (282,665) (1,262,608) (1,939,690) ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to financial statements. F-38 ATLANTA RENAISSANCE HOTEL STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 15, 1995 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993
1995 1994 1993 ---------- ---------- ---------- Cash flows from operating activities: Net loss.......................................... $ (282,665) (1,262,608) (1,939,690) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization................. 981,547 1,254,302 1,439,270 Decrease (increase) in accounts receivable.... (464,896) (474,273) 216,891 Decrease (increase) in other assets........... 33,045 (50,994) 22,875 Decrease in inventory......................... 8,531 16,061 13,530 Increase in accounts payable and accrued expenses.................................... 267,755 83,237 96,551 Decrease in interest payable.................. (108,653) (1,319) (1,193) Increase (decrease) in other liabilities...... 173,892 (13,781) 237,001 Increase in intercompany payable.............. 458,419 897,156 1,041,316 ---------- ---------- ---------- Net cash provided by operating activities........... 1,066,975 447,781 1,126,551 ---------- ---------- ---------- Cash flows from investing activities: Purchase of furniture, fixtures and equipment..... (117,392) (43,179) -- Proceeds from sale of furniture, fixtures and equipment....................................... -- -- 16,240 ---------- ---------- ---------- Net cash provided (used) by investing activities.... (117,392) (43,179) 16,240 ---------- ---------- ---------- Cash flows from financing activities--decrease in notes payable..................................... (159,594) (158,265) (143,264) ---------- ---------- ---------- Net increase in cash and cash equivalents........... 789,989 246,337 999,527 Cash and cash equivalents at beginning of period.... 1,967,782 1,721,445 721,918 ---------- ---------- ---------- Cash and cash equivalents at end of period.......... $2,757,771 1,967,782 1,721,445 ---------- ---------- ---------- ---------- ---------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest............................ $2,399,577 2,619,677 2,642,324 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to financial statements. F-39 ATLANTA RENAISSANCE HOTEL NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 15, 1995 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993 (1) ORGANIZATION The Atlanta Renaissance (the "Hotel") is located near Atlanta Hartsfield International Airport. The Hotel has 496 rooms and suites, a health club, whirlpool, sundeck, indoor and outdoor swimming pool and sauna. The dining and entertainment facilities include the Le Cafe Restaurant, Atrium Lounge and Studebaker's. The Hotel's business is generated from its proximity to the Atlanta Hartsfield International Airport and the Georgia International Convention Center. On November 15, 1995, EquiStar purchased a 1% general partnership interest and an 84.6% limited partnership interest in Lepercq Atlanta Renaissance Partners, L.P. ("Atlanta Partners"), the owner of the Hotel. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Through November 15, 1995, Atlanta Partners leased the Hotel operations to a third party. The accompanying statements of operations and cash flows include the accounts of the Hotel and the accounts of Atlanta Partners. Atlanta Partners' operations related primarily to the Hotel. All intercompany transactions between the Hotel and Atlanta Partners have been eliminated. Depreciation Depreciation is computed on the building using the straight-line method over a useful life of 31.5 years. Building improvements are depreciated using the straight-line method over seven to 31.5 years while furniture, fixtures and equipment are depreciated straight-line over three to ten years. Costs for supplies, maintenance and repairs are charged to expense as incurred. Bad Debt Expense Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. Revenue Revenue is earned primarily through the operations of the Hotel and recognized when earned. Income Taxes The financial statements contain no provision for federal income taxes since Atlanta Partners is a partnership and, therefore, all federal income tax liabilities are passed through to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. Use of Estimates Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-40 ATLANTA RENAISSANCE HOTEL NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) MORTGAGE NOTE PAYABLE Through November 15, 1995, the Hotel was encumbered by a nonrecourse mortgage loan from the Travelers Insurance Company in the amount of $24,725,000. The loan was secured by a mortgage on the Hotel and an assignment of the lease. The mortgage loan had an interest rate of 10% per annum and required monthly payments of principal and interest of $216,980 through July 1, 1999. F-41 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Somerset Marriott Hotel (the "Hotel") for the fiscal years ended September 30, 1995, 1994 and 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Somerset Marriott Hotel's operations and its cash flows for the fiscal years ended September 30, 1995, 1994 and 1993, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. April 26, 1996 F-42 SOMERSET MARRIOTT HOTEL STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
1995 1994 1993 ----------- ---------- ---------- Revenue: Rooms............................................... $10,280,997 9,104,957 9,138,730 Food and beverage................................... 5,249,474 4,816,344 5,100,830 Other operating departments......................... 802,637 682,877 668,821 ----------- ---------- ---------- 16,333,108 14,604,178 14,908,381 ----------- ---------- ---------- Operating costs and expenses: Rooms............................................... 2,766,075 2,552,776 2,425,536 Food and beverage................................... 4,241,806 4,041,375 4,136,987 Other operating departments......................... 239,993 292,510 332,098 Undistributed operating expenses: Administrative and general.......................... 1,622,395 1,647,152 1,723,724 Sales and marketing................................. 1,075,845 852,599 1,034,166 Management fees..................................... 710,174 640,793 648,515 Property operating costs............................ 1,498,497 1,586,722 1,794,374 Property taxes, insurance and other................. 637,759 566,615 753,345 Depreciation and amortization....................... 1,519,441 1,531,226 1,541,746 Interest expense.................................... 1,753,095 1,828,501 1,857,388 Impairment of long lived assets..................... -- -- 2,007,000 ----------- ---------- ---------- 16,065,080 15,540,269 18,254,879 ----------- ---------- ---------- Net income (loss)..................................... $ 268,028 (936,091) (3,346,498) ----------- ---------- ---------- ----------- ---------- ----------
See accompanying notes to financial statements. F-43 SOMERSET MARRIOTT HOTEL STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
1995 1994 1993 ----------- ---------- ---------- Cash flows from operating activities: Net income (loss).................................... $ 268,028 (936,091) (3,346,498) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................... 1,519,441 1,531,226 1,541,746 Decrease (increase) in accounts receivable....... 8,484 413,140 (510,947) Decrease (increase) in intercompany receivable... (47,684) 3,565,876 7,118,692 Decrease (increase) in other assets.............. 36,364 252,389 (182,467) Impairment of long lived assets.................. -- -- 2,007,000 Decrease in accounts payable..................... (62,243) (4,073,542) (4,498,773) Increase in interest payable..................... 2,023 4,226 2,000 ----------- ---------- ---------- Net cash provided by operating activities.............. 1,724,413 757,224 2,130,753 ----------- ---------- ---------- Cash flows from investing activities--acquisition of furniture, fixtures and equipment...................... (2,092,043) (1,528,971) (309,311) ----------- ---------- ---------- Cash flows from financing activities: Proceeds from notes payable.......................... -- 242,628 -- Principal payments on notes payable.................. (170,249) -- (92,260) Principal repayments on capital leases............... (45,693) -- -- ----------- ---------- ---------- Net cash provided (used) by financing activities....... (215,942) 242,628 (92,260) ----------- ---------- ---------- Net increase (decrease) in cash........................ (583,572) (529,119) 1,729,182 Cash at beginning of period............................ 1,187,792 1,716,911 (12,271) ----------- ---------- ---------- Cash at end of period.................................. $ 604,220 1,187,792 1,716,911 ----------- ---------- ---------- ----------- ---------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest............................... $ 1,751,072 1,824,275 1,855,388 Additions to capital lease obligations............... -- 363,872 -- ----------- ---------- ---------- ----------- ---------- ----------
See accompanying notes to financial statements. F-44 SOMERSET MARRIOTT HOTEL NOTES TO FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 (1) ORGANIZATION The Somerset Marriott Hotel (the "Hotel") is centrally located in Somerset, New Jersey, about 25 miles from the Newark Airport. The Hotel has 434 rooms, fine dining in Allie's restaurant, meeting and banquet facilities, an indoor/outdoor pool, business center, exercise room and volleyball courts. The Hotel was owned by MRI Business Properties Fund, Ltd., II ("MRI") until it was sold on October 3, 1995 to EquiStar for a purchase price of $24,950,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accounts of the Hotel were included in the financial records of MRI. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared using the accrual basis of accounting. Depreciation Depreciation is computed on the cost of hotel property and equipment using the straight-line method over 23 to 39 years for the building and building improvements and over five to seven years for furniture, fixtures and equipment. Bad Debt Expense Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivables and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. Revenue Revenue is earned primarily through the operations of the Hotel and recognized when earned. Income Taxes The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities are passed through to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. Use of Estimates Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) INTEREST EXPENSE Private investors provided financing for the Hotel and improvements through two separate loans made on September 26, 1985 and August 26, 1988. Both notes had a fixed interest rate of 8.25%. Principal and interest payments were due monthly. Marriott provided the Hotel with a renovation loan F-45 SOMERSET MARRIOTT HOTEL NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) INTEREST EXPENSE--(CONTINUED) on October 24, 1990 for $650,000 bearing interest at 8.00% with interest payments due monthly. All notes were repaid when the Hotel was purchased by EquiStar on October 5, 1995. (4) PROVISIONS FOR IMPAIRMENT OF VALUE Due to the deterioration of the economic market in Somerset, New Jersey and projected future operational cash flows, recovery of the carrying value of the Hotel was not likely and a provision for impairment of value of $2,007,000 was recognized in 1993. F-46 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Charlotte Sheraton Airport Plaza (the "Hotel") for the period from January 1, 1996 to February 2, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Charlotte Sheraton Airport Plaza's operations and its cash flows for the period from January 1, 1996 to February 2, 1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. March 29, 1996 F-47 CHARLOTTE SHERATON AIRPORT PLAZA STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 2, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 -------- --------- ---------- --------- Revenue: Rooms........................................ $404,646 4,353,741 4,279,608 3,764,540 Food and beverage............................ 330,471 3,136,701 2,698,709 2,625,091 Other operating departments.................. 21,096 609,342 861,007 779,557 -------- --------- ---------- --------- 756,213 8,099,784 7,839,324 7,169,188 -------- --------- ---------- --------- Operating costs and expenses: Rooms........................................ 111,163 1,067,053 1,151,114 976,178 Food and beverage............................ 258,901 2,101,504 1,906,329 1,854,924 Other operating departments.................. 13,740 114,588 82,500 80,354 Undistributed operating expenses: Administrative and general................... 73,487 375,920 263,728 254,309 Sales and marketing.......................... 90,546 922,890 927,186 863,274 Management fees.............................. 22,497 269,689 391,966 358,459 Property operating costs..................... 67,286 618,771 556,634 519,500 Property taxes, insurance and other.......... 41,126 425,563 404,523 356,690 Depreciation and amortization................ 49,600 595,522 603,543 587,150 Interest expense............................. -- 689,563 3,378,933 1,466,088 -------- --------- ---------- --------- 728,346 7,181,063 9,666,456 7,316,926 -------- --------- ---------- --------- Net income (loss).............................. $ 27,867 918,721 (1,827,132) (147,738) -------- --------- ---------- --------- -------- --------- ---------- ---------
See accompanying notes to financial statements. F-48 CHARLOTTE SHERATON AIRPORT PLAZA STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 2, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 -------- ---------- ---------- --------- Cash flows from operating activities: Net income (loss)........................... $ 27,867 918,721 (1,827,132) (147,738) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization........... 49,600 595,522 603,543 587,150 Decrease (increase) in accounts receivable............................. 70,128 (86,461) (45,518) (44,970) Increase in intercompany receivable..... (450,000) (1,444,939) (1,937,634) (263,645) Decrease (increase) in other assets..... 50,127 87,415 (5,447) 40,469 Increase (decrease) in accounts payable and accrued expenses................... (80,687) 165,657 193,488 75,714 Increase in interest payable............ -- 689,563 3,378,346 92,000 -------- ---------- ---------- --------- Net cash provided (used) by operating activities................................... (332,965) 925,478 359,646 338,980 -------- ---------- ---------- --------- Cash flows from investing activities--purchases of furniture, fixtures and equipment............................... (57,124) (257,302) (346,957) (133,901) -------- ---------- ---------- --------- Cash flows from financing activities--principal payments on note payable.................................... -- -- -- (203,839) -------- ---------- ---------- --------- Net increase (decrease) in cash............... (390,089) 668,176 12,689 1,240 Cash at beginning of period................... 712,894 44,718 32,029 30,789 -------- ---------- ---------- --------- Cash at end of period......................... 322,805 712,894 44,718 32,029 -------- ---------- ---------- --------- -------- ---------- ---------- --------- Supplemental disclosure of cash flow information: Cash paid for interest...................... $ -- -- 587 1,374,088 -------- ---------- ---------- --------- -------- ---------- ---------- ---------
See accompanying notes to financial statements. F-49 CHARLOTTE SHERATON AIRPORT PLAZA NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 2, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (1) ORGANIZATION The Charlotte Sheraton Airport Plaza (the "Hotel") is a 226 room, full-service hotel located near the Charlotte Douglas International Airport. The Hotel was constructed in 1985. The Hotel was owned by Krisch Realty Associates, L.P. ("Krisch Realty") during 1993, 1994 and through March 7, 1995, when it was conveyed to the lender. The Hotel was sold on February 2, 1996 to EquiStar for a purchase price of $18,000,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accounts of the Hotel were included in the financial records of Krisch Realty, which owned the Hotel until it was conveyed to the lender. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared on the accrual basis of accounting. Depreciation Depreciation is computed on the cost of hotel property and equipment using the straight-line method over 45 years for the building, 10 years for most building improvements, and five to eight years for furniture, fixtures and equipment. Bad Debt Expense Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivables and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. Revenue Revenue is earned primarily through the operations of the hotel and recognized when earned. Income Taxes The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities are passed through to the individual partners in accordance with the Partnership Agreement and the Internal Revenue Code. Use of Estimates Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-50 CHARLOTTE SHERATON AIRPORT PLAZA NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) INTEREST EXPENSE For the period from January 1, 1995 to February 2, 1995, and during 1994 and 1993, financing for the Hotel was provided through a two-tier loan. The first tier loan, which had an original principal balance of $12,523,925, had an interest rate of prime plus 1%. Principal and interest payments on the first tier loan were due monthly. The second tier loan, which had an original principal balance of $7,444,062, required interest payments based on the Hotel's cash flow. During January 1994, the owner ceased making payments on the loan and the loan went into default. From that point, the first and second tiers of the loan accrued interest at the default rate of 16% until March 7, 1995, when the Hotel was conveyed to the lender. (4) OTHER RELATED-PARTY TRANSACTIONS Krisch Hotels, Inc. ("Krisch"), an affiliate of the Hotel's owner, managed the Hotel until March 7, 1995, and charged the Hotel base management fees of 3% of gross revenues. The Hotel management agreement also provided for incentive management fees to be paid to Krisch of 10% of net operating income, as defined in the agreement. After March 7, 1995, the Hotel incurred only base management fees of 3% of gross revenues. For the period from January 1, 1996 to February 2, 1996, and for 1995, 1994 and 1993, base and incentive management fees incurred by the Hotel totaled $22,497, $269,689, $391,966 and $358,459, respectively. F-51 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying combined statements of income and cash flows of the Cleveland Holiday Inn and Affiliate for the period from January 1, 1996 to February 16, 1996 (date of Acquisition by EquiStar Hotel, Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit 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 the Cleveland Holiday Inn and Affiliate's operations and their cash flows for the period from January 1, 1996 to February 16, 1996 and the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles. Bober, Markey & Company Akron, Ohio April 30, 1996 F-52 CLEVELAND HOLIDAY INN AND AFFILIATE COMBINED STATEMENTS OF INCOME FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 16, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 -------- ---------- ---------- ---------- Revenue Rooms..................................... $474,517 $4,209,885 $3,940,430 $3,588,454 Food and beverage......................... 274,472 2,559,215 2,435,422 2,280,071 Other operating departments............... 40,419 246,911 209,456 205,464 -------- ---------- ---------- ---------- 789,408 7,016,011 6,585,308 6,073,989 Cost of sales Rooms..................................... 158,211 1,122,963 1,064,500 949,018 Food and beverage......................... 237,095 2,055,813 1,964,550 1,803,837 Other operating departments............... 44,467 59,012 57,080 59,001 -------- ---------- ---------- ---------- 439,773 3,237,788 3,086,130 2,811,856 -------- ---------- ---------- ---------- Operating income............................ 349,635 3,778,223 3,499,178 3,262,133 Other expenses Selling, general and administrative expenses.................................... 281,426 2,142,371 2,001,877 1,860,957 Interest.................................. 51,005 347,276 364,500 380,044 Depreciation and amortization............. 39,621 321,859 247,377 272,176 Management fees--related entity 47,060 421,554 382,604 353,763 -------- ---------- ---------- ---------- 419,112 3,233,060 2,996,358 2,866,940 -------- ---------- ---------- ---------- Net income (loss)........................... $(69,477) $ 545,163 $ 502,820 $ 395,193 -------- ---------- ---------- ---------- -------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. F-53 CLEVELAND HOLIDAY INN AND AFFILIATE COMBINED STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 16, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 --------- ---------- --------- --------- Cash flows from operating activities Net income (loss)............................. $ (69,477) $ 545,163 $ 502,820 $ 395,193 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities Depreciation and amortization............. 39,621 321,859 247,377 272,176 Gain (loss) on equipment disposal......... (235) 35,961 33,202 6,248 Decrease (increase) in accounts receivable............................... 30,835 (39,803) (34,335) (4,105) Decrease (increase) in accounts receivable-- affiliates................. -- 1,542 (1,222) (53,624) Decrease (increase) in other assets....... 5,868 (4,087) (4,499) 4,038 Increase (decrease) in accounts payable and accrued expenses.................... (49,238) 161,865 33,007 (130,830) Increase (decrease) in advances from related entities........................ -- 266,500 (9,350) (2,211) --------- ---------- --------- --------- Net cash provided (used) by operating activities..................................... (42,626) 1,289,000 767,000 486,885 Cash flows from investing activities Cash payments for the purchase of property, plant and equipment.......................... (2,836) (680,006) (273,411) (76,419) Cash proceeds on sale of property, plant and equipment.................................... 4,242 1,100 4,530 2,965 Payment of franchise fee...................... -- (71,100) -- -- --------- ---------- --------- --------- Net cash provided (used) by investing activities.................................... 1,406 (750,006) (268,881) (73,454) Cash flows from financing activities Principal payments on long-term debt.......... (37,788) (473,718) (217,981) (199,257) Issuance of note payable-related party........ -- 75,000 -- -- Capital distributions......................... (24,000) (144,000) (243,000) (204,000) (Decrease) increase in escrowed funds......... -- 8,652 (2,871) 642 --------- ---------- --------- --------- Net cash used by financing activities........... (61,788) (534,066) (463,852) (402,615) --------- ---------- --------- --------- Net increase (decrease) in cash................. (103,008) 4,928 34,267 10,816 Cash at beginning of year....................... 336,806 331,878 297,611 286,795 --------- ---------- --------- --------- Cash at end of year............................. $ 233,798 $ 336,806 $ 331,878 $ 297,611 --------- ---------- --------- --------- --------- ---------- --------- --------- Supplemental disclosure of cash flow information Interest paid................................. $ 45,610 $ 348,276 $ 361,786 $ 379,664 Income taxes paid............................. $ 239 $ 2,385 $ 1,850 $ 3,168 --------- ---------- --------- --------- --------- ---------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-54 CLEVELAND HOLIDAY INN AND AFFILIATE NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 16, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (1) ORGANIZATION The Company is engaged in the operation of a hotel in Middleburg Heights, Ohio, which is located in close proximity to the Cleveland Hopkins International Airport. The hotel was opened in June, 1978. The hotel has 242 rooms, a cocktail lounge, restaurant, sauna, pool and approximately 13,800 square feet of meeting space. Bagley Road Properties (a division of Rockside Properties) is a Partnership which held the assets of the Cleveland Holiday Inn until substantially all of the Company's assets were sold to EquiStar Hotel Investors, L.P. (EquiStar) for a purchase price of $9,183,249 on February 16, 1996. The hotel and restaurant operations are reflected within Bagley Road Operating Corporation, an S-corporation. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying combined financial statements include the accounts of Bagley Road Operating Corporation and Bagley Road Properties (a division of Rockside Properties), as they are under common control and collectively represent the Cleveland Holiday Inn. For purposes of these financial statements, the entities are collectively referred to as the "Cleveland Holiday Inn and Affiliate" and/or the "Company". Significant intercompany transactions and balances have been eliminated in the combined financial statements. Depreciation Depreciation is computed for financial reporting purposes using the cost of the property and equipment using the straight line method over 19 to 40 years for the building and building improvements and over 5 to 10 years for the furniture, fixtures and equipment. Bad Debt Expense Management reviews accounts receivable on a regular basis for any potentially uncollectible accounts. The uncollectible accounts are directly written off, as deemed necessary. Revenue Recognition Revenue is earned primarily through the operations of the hotel and is recognized when earned. Income Taxes The financial statements contain no provision for federal income taxes since the Company's property is maintained in a partnership which is not subject to federal income taxes. Instead, its earnings and losses are passed though to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. In addition, the Company's operations are maintained in an S-corporation and therefore, the income is also taxed at the shareholder level. F-55 CLEVELAND HOLIDAY INN AND AFFILIATE NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Use of Estimates Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) INTEREST EXPENSE On July 22, 1976, the Company obtained financing from a real estate investment corporation. The mortgage has a fixed interest rate of 10.25%, with principal and interest payments due monthly. The principal balance was $2,641,541, $2,679,329, $2,893,047, and $3,086,028 as of February 16, 1996 and December 31, 1995, 1994 and 1993, respectively. The loan requires additional interest payments equal to 1% of the year's gross room revenue. The note is scheduled to mature October, 2003. On May 18, 1995, the Company obtained financing of $75,000 from a related party. Interest is being accrued at the applicable federal rates (5.65% at December 31, 1995). On various dates, the Company obtained financing from a bank. The principal, was $50,000, $50,000, $75,000 and $85,000, as of February 16, 1996, and December 31, 1995, 1994 and 1993, respectively, is due on demand and the interest is payable monthly at prime plus 1% (9.5% at December 31, 1995). All of the financing notes above were paid off subsequent to the date of sale of the hotel to EquiStar Hotel Investors, L.P. (4) RELATED-PARTY TRANSACTIONS The hotel and restaurant operations are managed by a related entity. The Management Agreement provides for payment of a management fee of approximately six percent of room rentals, restaurant and bar receipts. Management fees totaled $47,060, $421,554, $382,604, and $353,763 for the period from January 1, 1996 to February 16, 1996 and for the years 1995, 1994 and 1993, respectively. F-56 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying balance sheets of Arlington Hilton Hotel (the "Hotel") as of March 31, 1996, December 31, 1995 and 1994 and the related statements of operations, partners' capital (deficit), and cash flows for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Arlington Hilton Hotel's as of March 31, 1996, December 31, 1995 and 1994 and the results of its operations and its cash flows for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. April 12, 1996 F-57 ARLINGTON HILTON HOTEL BALANCE SHEETS MARCH 31, 1996, DECEMBER 31, 1995 AND 1994
1996 1995 1994 ------------ ----------- ----------- ASSETS Cash and cash equivalents.......................... $ 1,303,629 946,895 1,761,178 Accounts receivable................................ 603,899 344,817 385,876 Inventory and other assets......................... 137,481 59,080 170,022 ------------ ----------- ----------- Total current assets............................... 2,045,009 1,350,792 2,317,076 ------------ ----------- ----------- Property and equipment: Land............................................. 2,000,000 2,000,000 2,000,000 Building......................................... 12,768,851 12,768,851 12,768,851 Furniture, fixtures and equipment................ 9,370,630 9,374,051 8,713,692 ------------ ----------- ----------- 24,139,481 24,142,902 23,482,543 Less--accumulated depreciation................... (13,719,723) (13,511,842) (12,688,428) ------------ ----------- ----------- Total property and equipment....................... 10,419,758 10,631,060 10,794,115 Restricted cash.................................... -- -- 215,868 ------------ ----------- ----------- $ 12,464,767 11,981,852 13,327,059 ------------ ----------- ----------- ------------ ----------- ----------- LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued expenses.............. $ 541,458 457,035 1,484,950 Capital lease obligation........................... 68,067 81,509 122,771 Notes payable--general partner (note 4)............ -- -- 182,055 Notes payable (note 3)............................. -- -- 19,156,349 ------------ ----------- ----------- Total liabilities.................................. 609,525 538,544 20,946,125 Partners' capital (deficit)........................ 11,855,242 11,443,308 (7,619,066) ------------ ----------- ----------- $ 12,464,767 11,981,852 13,327,059 ------------ ----------- ----------- ------------ ----------- -----------
See accompanying notes to financial statements. F-58 ARLINGTON HILTON HOTEL STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ---------- --------- --------- --------- Revenue: Rooms....................................... $1,663,094 6,309,256 5,875,281 5,453,149 Food and beverage........................... 707,634 2,846,102 2,755,550 2,708,330 Other operating departments................. 168,265 639,420 505,739 553,640 ---------- --------- --------- --------- 2,538,993 9,794,778 9,136,570 8,715,119 ---------- --------- --------- --------- Operating costs and expenses: Rooms....................................... 366,836 1,526,054 1,361,027 1,342,080 Food and beverage........................... 553,879 2,225,510 2,072,864 2,137,821 Other operating departments................. 93,271 351,577 301,793 276,276 Undistributed operating expenses: Administrative and general.................. 241,304 1,044,680 1,347,488 1,252,493 Sales and marketing......................... 187,725 646,496 510,261 501,991 Management fees............................. 76,196 313,579 90,998 86,165 Property operating costs.................... 261,699 1,004,445 871,365 1,006,770 Property taxes, insurance and other......... 138,268 645,504 479,755 475,144 Depreciation and amortization............... 207,881 823,414 794,256 794,600 Interest expense............................ -- 257,494 927,325 337,114 ---------- --------- --------- --------- 2,127,059 8,838,753 8,757,132 8,210,454 ---------- --------- --------- --------- Net income.................................... $ 411,934 956,025 379,438 504,665 ---------- --------- --------- --------- ---------- --------- --------- ---------
See accompanying notes to financial statements. F-59 ARLINGTON HILTON HOTEL STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
GENERAL AND LIMITED PARTNERS LENDER ---------------- ---------- Balance at December 31, 1992...................................... $ (8,503,169) -- Net income...................................................... 504,665 -- ---------------- ---------- Balance at December 31, 1993...................................... $ (7,998,504) -- Net income...................................................... 379,438 -- ---------------- ---------- Balance at December 31, 1994...................................... $ (7,619,066) -- Net income through March 7, 1995................................ 175,661 -- ---------------- ---------- Balance at March 7, 1995.......................................... $ (7,443,405) -- Transfer to Lender upon foreclosure on March 8, 1995............ 7,443,405 (7,443,405) Conversion of notes payable to equity........................... -- 19,338,404 Distributions................................................... -- (1,232,055) Net income from March 8 to December 31, 1995.................... -- 780,364 ---------------- ---------- Balance at December 31, 1995...................................... $ -- 11,443,308 Net income...................................................... -- 411,934 ---------------- ---------- Balance at March 31, 1996......................................... $ -- 11,855,242 ---------------- ---------- ---------------- ----------
See accompanying notes to financial statements. F-60 ARLINGTON HILTON HOTEL STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ---------- ---------- --------- ---------- Cash flows from operating activities: Net income................................ $ 411,934 956,025 379,438 504,665 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization......... 207,881 823,414 794,256 794,600 Interest added to loan payable to General Partner...................... -- -- 18,777 13,482 Decrease (increase) in accounts receivable........................... (259,082) 41,059 (9,969) 47,634 Decrease (increase) in inventory and other assets......................... (78,401) 110,942 (17,697) 6,803 Decrease (increase) in restricted funds................................ -- 215,868 477,431 (44,462) Increase (decrease) in accounts payable and accrued expenses........ 84,423 (1,027,915) 284,120 231,758 ---------- ---------- --------- ---------- Total adjustments......................... (45,179) 163,368 1,546,918 1,049,815 ---------- ---------- --------- ---------- Net cash provided by operating activities... 366,755 1,119,393 1,926,356 1,554,480 ---------- ---------- --------- ---------- Cash flows from investing activities--deletions (purchases) of furniture and equipment..................... 3,421 (660,359) (232,583) (178,368) ---------- ---------- --------- ---------- Cash flows from financing activities: Principal payments on capital lease obligations................................. (13,442) (41,262) (36,415) (27,314) Repayments of note payable................ -- -- (357,390) (1,532,401) Capital distribution...................... -- (1,232,055) -- -- ---------- ---------- --------- ---------- Net cash used by financing activities....... (13,442) (1,273,317) (393,805) (1,559,715) ---------- ---------- --------- ---------- Net increase (decrease) in cash and cash equivalents................................. 356,734 (814,283) 1,299,968 (183,603) Cash and cash equivalents at beginning of period...................................... 946,895 1,761,178 461,210 644,813 ---------- ---------- --------- ---------- Cash and cash equivalents at end of period...................................... $1,303,629 946,895 1,761,178 461,210 ---------- ---------- --------- ---------- ---------- ---------- --------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest.................... $ 2,570 13,612 18,459 337,114 Additions to property and equipment through capital leases...................... -- -- -- 101,765 Conversion of notes payable to equity..... -- 19,338,404 -- -- ---------- ---------- --------- ---------- ---------- ---------- --------- ----------
See accompanying notes to financial statements. F-61 ARLINGTON HILTON HOTEL NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996, DECEMBER 31, 1995 AND 1994 (1) ORGANIZATION The Arlington Hilton Hotel (the "Hotel") is located near the Dallas/Fort Worth Airport, adjacent to Six Flags over Texas theme park. The Hotel opened in 1984. The Hotel has 310 rooms, one restaurant, one nightclub/bar, meeting facilities for up to 400, a business center, an indoor/outdoor pool and a fitness center. Until March 7, 1995, the Hotel was owned by Hotel Associates of Arlington Limited Partnership ("Hotel Associates"). On March 7, 1995, the Hotel was conveyed through bankruptcy to the holders of the note, Arlington Hotel Investors, LTD ("Arlington Investors"). The Hotel was sold on April 17, 1996 to EquiStar for a purchase price of $18,200,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accounts of the Hotel were included in the financial records of its various owners until the Hotel was sold to EquiStar. The accompanying balance sheets and statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared using the accrual basis of accounting. Cash and Cash Equivalents The Hotel considers all instruments with an original maturity date of three months or less to be cash equivalents. Inventories Inventories, consisting primarily of food and beverage, are stated at lower of cost or net realizable value, using the first-in, first-out ("FIFO") method of inventory valuation. Property and Equipment Property and equipment are reflected at cost. Depreciation of property and equipment is provided using the straight-line method over the estimated useful lives of the assets as follows: Building and building improvements............................... 25 years Furniture and equipment.......................................... 5 years
Bad Debt Expense Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivables and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. Revenue Revenue is earned primarily through the operations of the Hotel and recognized when earned. F-62 ARLINGTON HILTON HOTEL NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Income Taxes The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities were passed through to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. Use of Estimates Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) LONG-TERM DEBT As of March 31, 1996 and December 31, 1995, there is no long-term debt related to the Hotel, as the property had been foreclosed upon on March 7, 1995. At that date, the note was converted to equity and the holders of the note, Arlington Investors, took possession of the property until April 16, 1996 when the property was sold to EquiStar. (4) RELATED-PARTY TRANSACTIONS Prior to March 7, 1995 (the date the lenders took possession of the Hotel), the Hotel was managed by Capitol Hotel Group, Inc. ("CHG"), an affiliate of the owners, for a 1% management fee based on gross revenues. For the period from March 7, 1995 through April 16, 1996 (date of acquisition by EquiStar), the Hotel was managed by DePalma Hotel Corporation, an affiliate of the lenders, for a 3% management fee based on gross revenues. Upon foreclosure on the property, the loan and all related accrued interest payable to the general partner of Hotel Associates was converted to equity in the statement of partners' capital. F-63 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Salt Lake Airport Hilton (the "Hotel") for the period from January 1, 1995 to March 3, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1994 and 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Salt Lake Airport Hilton's operations and its cash flows for the period from January 1, 1995 to March 3, 1995 and the years ended December 31, 1994 and 1993, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. April 19, 1996 F-64 SALT LAKE AIRPORT HILTON STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1995 TO MARCH 3, 1995 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993
1995 1994 1993 ---------- --------- --------- Revenue: Rooms.................................................. $ 890,777 4,992,835 4,371,476 Food and beverage...................................... 299,340 1,922,403 1,652,443 Other operating departments............................ 56,364 261,667 259,080 ---------- --------- --------- 1,246,481 7,176,905 6,282,999 ---------- --------- --------- Operating costs and expenses: Rooms.................................................. 287,299 1,932,546 1,359,691 Food and beverage...................................... 274,434 1,346,960 1,366,367 Other operating departments............................ 43,230 224,564 152,836 Undistributed operating expenses: Administrative and general............................. 153,391 991,058 801,238 Sales and marketing.................................... 76,761 350,199 330,216 Property operating costs............................... 108,327 745,650 915,665 Property taxes, insurance and other.................... 30,112 324,944 325,044 Depreciation and amortization.......................... 104,996 630,200 528,089 Interest Expense....................................... 176,766 1,597,597 1,226,162 ---------- --------- --------- 1,255,316 8,143,718 7,005,308 ---------- --------- --------- Net loss................................................. $ (8,835) (966,813) (722,309) ---------- --------- --------- ---------- --------- ---------
See accompanying notes to financial statements. F-65 SALT LAKE AIRPORT HILTON STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1995 TO MARCH 3, 1995 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993
1995 1994 1993 -------- --------- --------- Cash flows from operating activities: Net loss................................................. $ (8,835) (966,813) (722,309) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization........................ 104,996 630,200 528,089 Decrease (increase) in accounts receivable........... 57,808 (176,471) 204,118 Decrease (increase) in inventory and other assets.... 5,100 233,040 (144,857) Increase (decrease) in accounts payable and accrued expenses............................................ 144,597 84,908 (36,031) Increase in interest payable......................... -- 510,270 40,010 -------- --------- --------- Net cash provided (used) by operating activities........... 303,666 315,134 (130,980) -------- --------- --------- Cash flows from investing activities--purchases of furniture, fixtures and equipment........................ (5,530) (914,264) (117,908) -------- --------- --------- Cash flows from financing activities: Repayments of notes payable.............................. (4,316) (764,498) (394,450) Proceeds from mortgage loans and notes payable........... -- 1,182,000 541,344 Capital contributions.................................... -- 225,463 -- Increase (decrease) in bank overdrafts................... (68,085) (43,835) 101,994 -------- --------- --------- Net cash flows provided (used) by financing activities..... (72,401) 599,130 248,888 -------- --------- --------- Net increase in cash....................................... 225,735 -- -- Cash at beginning of period................................ -- -- -- -------- --------- --------- Cash at end of period...................................... $225,735 -- -- -------- --------- --------- -------- --------- --------- Supplemental disclosure of cash flow information: Cash paid for interest................................... $176,766 1,087,327 1,186,152 -------- --------- --------- -------- --------- ---------
See accompanying notes to financial statements. F-66 SALT LAKE AIRPORT HILTON NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1995 TO MARCH 3, 1995 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993 (1) ORGANIZATION The Salt Lake Airport Hilton (the "Hotel") is a full service hotel located near the Salt Lake City International Airport. The hotel has 287 rooms, complimentary shuttle service to and from the airport, indoor and outdoor pools, a fitness room, outdoor putting green and an outdoor sports court. The Hotel was constructed in two phases. The first phase was constructed in 1980 and consists of public areas including a conference center, recreational amenities and guest rooms on a three level portion of the structure known as the low-rise. In 1984, 99 rooms were added with the construction of the high-rise section of the Hotel. For the period from January 1, 1995 through March 3, 1995 and for the years ended December 31, 1994 and 1993, the Hotel was owned by Airport Hilton Venturers, L.P., a limited partnership ("Airport Venturers"). The Hotel was sold on March 3, 1995 to EquiStar for a purchase price of $14,350,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accounts of the Hotel were included in the financial records of Airport Venturers. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared using the accrual basis of accounting. Depreciation Depreciation is computed on the cost of the Hotel property and equipment using the straight-line method over 40 years for the building, over 15 years for building improvements and over five years for furniture, fixtures and equipment. Bad Debt Expense Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. Revenue Revenue is earned primarily through the operations of the Hotel and is recognized when earned. Income Taxes The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities were passed through to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. F-67 SALT LAKE AIRPORT HILTON NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Use of Estimates Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) INTEREST EXPENSE The Hotel had mortgage loans payable to two lenders of approximately $5,400,000 and $4,200,000 through March 3, 1995. The loans required interest-only payments monthly and had fixed interest rates of 9% and 10%, respectively. The Hotel also had notes payable outstanding with various third parties and affiliates. Total amounts outstanding on these notes payable ranged from approximately $2,958,000 to approximately $3,486,000 from January 1, 1993 to March 3, 1995. During the same period, interest rates on these notes ranged from 7% to 10%. Included in notes payable from January 1, 1993 to March 3, 1995 was a note payable to the Boyer Company, an affiliate of the Hotel. During this period, the amount outstanding on this note ranged from approximately $470,000 to approximately $1,652,000 and the interest rate ranged from 7% to 8.25%. F-68 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying balance sheets of Ballston Hotel Limited Partnership (the "Partnership") as of March 31, 1996 and December 31, 1995 and 1994, and the related statements of operations, partners' deficit, and cash flows for the three months ended March 31, 1996 and for the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Ballston Hotel Limited Partnership as of March 31, 1996 and December 31, 1995 and 1994, and the results of its operations and its cash flows for the three months ended March 31, 1996 and for the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in note 4 to the financial statements, the Partnership's note payable to a financial institution is in default and may be called at any time. This raises substantial doubt about the Partnership's ability to continue as a going concern. Management's plans in regard to this matter are also described in note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG Peat Marwick LLP Washington, D.C. April 30, 1996 F-69 BALLSTON HOTEL LIMITED PARTNERSHIP BALANCE SHEETS MARCH 31, 1996 AND DECEMBER 31, 1995 AND 1994
1996 1995 1994 ----------- ---------- ---------- ASSETS Cash and cash equivalents............................. $ 625,538 501,433 98,904 Certificate of deposit (note 7)....................... 105,596 101,833 250,000 Hotel inventory, at cost.............................. 52,544 51,635 52,794 Accounts receivable: Trade............................................... 263,067 174,833 369,961 Affiliates (note 6)................................. -- -- 757,624 ----------- ---------- ---------- Total accounts receivable, net........................ 263,067 174,833 1,127,585 ----------- ---------- ---------- Hotel property (notes 4 and 7): Land................................................ 2,073,323 2,073,323 2,073,323 Building, net of accumulated depreciation of $2,111,030 in 1996, $2,029,714 in 1995 and $1,704,449 in 1994.................................... 10,899,602 10,980,918 11,306,183 Furniture, fixtures and equipment, net of accumulated depreciation of $1,111,577 in 1996, $1,060,156 in 1995 and $854,609 in 1994........... 1,932,307 1,983,728 1,742,714 Initial hotel supplies, net of accumulated amortization of $190,556 in 1996, $183,187 in 1995 and $153,713 in 1994.............................. 251,557 258,926 288,400 Conversion costs, net of accumulated amortization of $102,836 in 1996, $98,491 in 1995 and $81,111 in 1994............................................. 157,878 162,223 179,603 ----------- ---------- ---------- Total hotel property.................................. 15,314,667 15,459,118 15,590,223 Investment in partnership (note 5).................... 2,263,748 2,259,061 2,332,760 Other Assets.......................................... 131,375 131,409 144,842 ----------- ---------- ---------- $18,756,535 18,679,322 19,597,108 ----------- ---------- ---------- ----------- ---------- ---------- LIABILITIES AND PARTNERS' DEFICIT Accounts payable and accrued expenses: Affiliates (note 6)................................. $ 2,225,849 2,163,011 1,855,114 Trade............................................... 465,241 338,665 340,846 ----------- ---------- ---------- Total accounts payable and accrued expenses........... 2,691,090 2,501,676 2,195,960 Notes payable (notes 4 and 6): Financial institution............................... 17,079,121 17,079,121 17,201,202 Affiliates.......................................... 2,437,377 2,437,377 3,340,277 ----------- ---------- ---------- Total notes payable................................... 19,516,498 19,516,498 20,541,479 ----------- ---------- ---------- Total liabilities..................................... 22,207,588 22,018,174 22,737,439 Partners' deficit (note 3)............................ (3,451,053) (3,338,852) (3,140,331) ----------- ---------- ---------- Commitments (notes 4 and 7)........................... $18,756,535 18,679,322 19,597,108 ----------- ---------- ---------- ----------- ---------- ----------
See accompanying notes to financial statements. F-70 BALLSTON HOTEL LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ---------- --------- --------- --------- Hotel operating revenue: Room rental................................. $1,363,915 5,820,170 5,408,935 5,116,700 Food and beverage sales..................... 445,468 2,000,110 2,045,750 1,792,965 Telephone and other......................... 64,137 303,194 260,190 269,030 ---------- --------- --------- --------- Total hotel operating revenue................. 1,873,520 8,123,474 7,714,875 7,178,695 ---------- --------- --------- --------- Hotel operating expenses: Department expenses......................... 731,008 3,140,757 3,100,077 2,810,690 Energy and engineering...................... 157,150 602,512 574,578 518,924 Sales and marketing......................... 162,556 659,284 604,457 629,567 General and administrative (note 6)......... 214,871 981,849 927,024 907,215 Management fee (note 7)..................... 56,206 243,704 231,446 215,359 Other....................................... 39,127 138,551 84,534 66,640 ---------- --------- --------- --------- Total hotel operating expenses................ 1,360,918 5,766,657 5,522,116 5,148,395 ---------- --------- --------- --------- Income from hotel operations.................. 512,602 2,356,817 2,192,759 2,030,300 ---------- --------- --------- --------- Fixed charges: Financial costs (note 6).................... 370,682 1,571,261 1,438,463 1,327,641 Depreciation and amortization............... 144,759 611,645 700,566 723,020 Property insurance and taxes................ 72,586 266,115 249,394 251,608 Parking costs............................... 16,684 99,093 103,057 106,833 ---------- --------- --------- --------- Total fixed charges........................... 604,711 2,548,114 2,491,480 2,409,102 ---------- --------- --------- --------- Other income (expense): Interest income............................. 3,786 40,169 15,010 12,228 Equity in income of partnership (note 5).... 4,687 36,510 41,105 31,309 Other....................................... (28,565) (83,903) (6,908) (80) ---------- --------- --------- --------- Total other income (expense), net............. (20,092) (7,224) 49,207 43,457 ---------- --------- --------- --------- Net loss...................................... $ (112,201) (198,521) (249,514) (335,345) ---------- --------- --------- --------- ---------- --------- --------- ---------
See accompanying notes to financial statements. F-71 BALLSTON HOTEL LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' DEFICIT FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
GENERAL LIMITED TOTAL PARTNER PARTNERS ----------- ------- ---------- Balance at December 31, 1992............................. $(2,555,472) (46,288) (2,509,184) Net loss............................................... (335,345) (3,353) (331,992) ----------- ------- ---------- Balance at December 31, 1993............................. $(2,890,817) (49,641) (2,841,176) Net loss............................................... (249,514) (2,495) (247,019) ----------- ------- ---------- Balance at December 31, 1994............................. $(3,140,331) (52,136) (3,088,195) Net loss............................................... (198,521) (1,985) (196,536) ----------- ------- ---------- Balance at December 31, 1995............................. $(3,338,852) (54,121) (3,284,731) Net loss............................................... (112,201) (1,122) (111,079) ----------- ------- ---------- Balance at March 31, 1996................................ $(3,451,053) (55,243) (3,395,810) ----------- ------- ---------- ----------- ------- ----------
See accompanying notes to financial statements. F-72 BALLSTON HOTEL LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 --------- ---------- --------- --------- Cash flows from operating activities: Net loss..................................... $(112,201) (198,521) (249,514) (335,345) Adjustments to reconcile net loss to cash provided (used) by operating activities: Depreciation and amortization............ 144,759 611,645 700,566 723,020 Increase (decrease) in provision for doubtful accounts....................... 414 (8,072) 11,323 (1,375) Decrease (increase) in certificates of deposit................................. (3,763) 148,167 -- -- Equity in income of partnership.......... (4,687) (36,510) (41,105) (31,309) Decrease (increase) in accounts receivable.............................. (88,648) 960,824 (789,828) (87,582) Decrease (increase) in hotel inventory... (909) 1,159 (930) (9,997) Decrease (increase) in other assets...... (274) (20,258) (58,614) 42,031 Increase in accounts payable and accrued expenses................................ 189,414 305,716 375,580 320,816 --------- ---------- --------- --------- Total adjustments............................ 236,306 1,962,671 196,992 955,604 --------- ---------- --------- --------- Net cash provided (used) by operating activities.................................... 124,105 1,764,150 (52,522) 620,259 --------- ---------- --------- --------- Cash flows from investing activities: Additions to hotel property.................. -- (446,849) (133,901) (195,323) Distributions from investee partnership...... -- 110,209 120,694 204,761 --------- ---------- --------- --------- Net cash provided (used) by investing activities.................................... -- (336,640) (13,207) 9,438 --------- ---------- --------- --------- Cash flows from financing activities: Principal payments on notes payable.......... -- (1,024,981) (110,072) (818,644) Borrowings on notes payable.................. -- -- -- 20,000 --------- ---------- --------- --------- Net cash used by financing activities.......... -- (1,024,981) (110,072) (798,644) --------- ---------- --------- --------- Net increase (decrease) in cash and cash equivalents................................... 124,105 402,529 (175,801) (168,947) Cash and cash equivalents at beginning of period........................................ 501,433 98,904 274,705 443,652 --------- ---------- --------- --------- Cash and cash equivalents at end of period..... $ 625,538 501,433 98,904 274,705 --------- ---------- --------- --------- --------- ---------- --------- --------- Supplemental disclosure of cash flow information: Cash paid for interest....................... $ 307,844 1,263,364 1,135,123 1,120,853 --------- ---------- --------- --------- --------- ---------- --------- ---------
See accompanying notes to financial statements. F-73 BALLSTON HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 AND DECEMBER 31, 1995 AND 1994 (1) ORGANIZATION Ballston Hotel Limited Partnership (the "Partnership") was formed on January 1, 1988 pursuant to the Commonwealth of Virginia Uniform Limited Partnership Act. The principal business activity of the Partnership is the development and operation of a hotel complex as part of the mixed-use Ballston Metro Center project (the "Project") located in Arlington, Virginia. Ballston Condo Limited Partnership ("BCLP") and Ballston Office Limited Partnership ("BOLP"), affiliates of the Partnership, constructed the condominium and office building components of the Project, respectively. The hotel opened on October 5, 1989 and operates as the Arlington Renaissance Hotel at Ballston Metro Center (the "Hotel"). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting Records and Income Taxes The Partnership maintains its accounting records on the accrual basis for both financial statement and federal income tax reporting purposes. Federal and state income taxes accrue to the individual partners; accordingly, no federal and state income taxes have been provided in the accompanying financial statements. Building and Land Contributed land is recorded at the fair value at the date of contribution as agreed to by the partners. Purchased land and building costs are recorded at cost. The building is depreciated over 40 years using the straight-line method. Hotel Furniture, Fixtures and Equipment Hotel furniture, fixtures and equipment are recorded at cost and are depreciated over their estimated useful lives using the straight-line method. Initial Hotel Supplies Initial hotel supplies required for the Hotel's operations, such as linens, china, silverware and other expendable supplies, are recorded at cost and are being amortized over 15 years using the straight-line method. Additional purchases of linens, china, silverware and other expendable supplies are expensed when purchased. Conversion Costs Conversion costs were incurred to convert the Ramada Hotel into a Renaissance Hotel. These costs are recorded at cost and are being amortized over 15 years using the straight-line method. Investment in Partnership Investment in partnership is accounted for under the equity method. Accordingly, the investment is stated at cost and adjusted for the Partnership's share of earnings or loss and distributions of the investee partnership. F-74 BALLSTON HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Cash Equivalents For financial statement purposes, the Partnership considers investments with an original maturity date of three months or less to be cash equivalents. Certificate of Deposit The certificate of deposit is recorded at cost which approximates market value and matures May 1996. Use of Estimates Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosures of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. (3) PARTNERS' DEFICIT AND ALLOCATION OF PROFITS AND LOSSES All profits and losses are allocated in proportion to each partner's respective percentage interest in the Partnership as follows: General partner..................................................... 1.0% Limited partners.................................................... 99.0 ----- 100.0% ----- ----- (4) NOTES PAYABLE Notes payable at March 31, 1996 and December 31, 1995 and 1994 consist of the following:
1996 1995 1994 ----------- ----------- ----------- Financial institution--prime rate plus 1% or a LIBOR/CD rate option note, secured by a first deed of trust on land and improvements of hotel complex and the shared improvements of the condominium constructed by BCLP and an assignment of existing and future revenue derived from the collateral; interest only payable monthly, principal payable annually, based on 30-year amortization, with remaining principal and interest due October 5, 1995............................................... $17,079,121 17,079,121 17,201,202 Limited partner--prime rate plus 2% unsecured note............................................... 2,437,377 2,437,377 3,340,277 ----------- ----------- ----------- $19,516,498 19,516,498 20,541,479 ----------- ----------- ----------- ----------- ----------- -----------
Ballston Hotel, Inc., the general partner, and IDI, L.C. (formerly IDI Associates), IDI Financial Associates and Ballston Realty, Inc., affiliates of the Partnership, jointly and severally guarantee the financial institution note payable. The note payable to the financial institution, which matured on October 5, 1995, is in default. The Partnership has been unable thus far to refinance the note but continues to make the regular monthly interest payments and continues to negotiate with the lender to refinance the note. F-75 BALLSTON HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (4) NOTES PAYABLE--(CONTINUED) Given the status of the note payable with the financial institution and the nature of the terms of the note payable to the limited partner, management is unable to determine the fair value of the notes payable. (5) INVESTMENT IN PARTNERSHIP Financial Statement Summary The following is a summary of the assets, liabilities and equity of the unconsolidated partnership, Ballston Parking Associates ("BPA") as of March 31, 1996 and December 31, 1995 and 1994, and the results of its operations for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993. The unconsolidated partnership was formed primarily to operate the hotel and office building parking garage of the Project. The Partnership's interest in the unconsolidated partnership was 35.25%, 35.48% and 35.60% as of March 31, 1996 and December 31, 1995 and 1994, respectively. The percentage of the Partnership interest in BPA will decrease in accordance with BPA's partnership agreement based upon the number of parking space easements sold.
CONDENSED BALANCE SHEETS 1996 1995 1994 ---------- --------- --------- ASSETS Cash................................................... $ 97,765 4,263 3,055 Accounts receivable.................................... 30,759 31,200 27,080 Garage property, net of accumulated depreciation....... 4,175,301 4,224,801 4,359,801 Other assets........................................... 4,521 4,521 4,203 ---------- --------- --------- $4,308,346 4,264,785 4,394,139 ---------- --------- --------- ---------- --------- --------- LIABILITIES AND EQUITY Total accounts payable and accrued liabilities......... $ 7,971 6,121 7,000 Equity: The Partnership...................................... 1,511,396 1,501,136 1,552,543 Other partners....................................... 2,788,979 2,757,528 2,834,596 ---------- --------- --------- $4,308,346 4,264,785 4,394,139 ---------- --------- --------- ---------- --------- ---------
CONDENSED STATEMENTS OF OPERATIONS 1996 1995 1994 1993 -------- ------- ------- ------- Parking revenue...................................... $140,803 538,898 520,479 538,047 Loss on sales of parking spaces...................... (7,000) (7,000) (3,329) (20,149) -------- ------- ------- ------- Total income......................................... 133,803 531,898 517,150 517,898 Operating expenses................................... 92,092 353,490 333,542 333,149 -------- ------- ------- ------- Net income........................................... $ 41,711 178,408 183,608 184,749 -------- ------- ------- ------- -------- ------- ------- ------- Equity in net income: The Partnership.................................... $ 10,260 58,802 63,397 53,601 Other partners..................................... 31,451 119,606 120,211 131,148 -------- ------- ------- ------- $ 41,711 178,408 183,608 184,749 -------- ------- ------- ------- -------- ------- ------- -------
F-76 BALLSTON HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (5) INVESTMENT IN PARTNERSHIP--(CONTINUED) Note to Condensed Financial Statements Contributed property is recorded at fair value at the date of contribution as agreed to by the partners. Reconciliation of Investment in Partnership and Equity in Income The following is a reconciliation of the Partnership's investment in partnership as of March 31, 1996 and December 31, 1995 and 1994 and equity in income for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993, as indicated above, to the amounts reported in the accompanying financial statements.
INVESTMENT IN PARTNERSHIP EQUITY IN INCOME ---------------------------------- ------------------------------------ 1996 1995 1994 1996 1995 1994 1993 ---------- --------- --------- ------ ------- ------- ------- Balance per condensed financial statements........................... $1,511,396 1,501,136 1,552,543 10,260 58,802 63,397 53,601 Adjustment for costs incurred in excess of agreed-upon basis in property............................ 752,352 757,925 780,217 (5,573) (22,292) (22,292) (22,292) ---------- --------- --------- ------ ------- ------- ------- $2,263,748 2,259,061 2,332,760 4,687 36,510 41,105 31,309 ---------- --------- --------- ------ ------- ------- ------- ---------- --------- --------- ------ ------- ------- -------
(6) RELATED-PARTY TRANSACTIONS Interest expense of approximately $63,000 in 1996, $308,000 in 1995, $303,000 in 1994 and $294,000 in 1993 was incurred on note payable to BCA, L.P., the limited partner, and are included in financial costs in the accompanying financial statements. Accrued interest payable of $2,225,849, $2,163,011 and $1,855,114 as of March 31, 1996 and December 31, 1995 and 1994, respectively, is recorded as accounts payable to affiliates in the accompanying financial statements. The Partnership entered into an agreement with IDI Management, Inc., an affiliate of the Partnership, to perform administrative services for the Hotel effective January 1, 1991. The administrative fee is based on 0.5% of the gross revenues of the Partnership except for any distributions from BPA related to parking. The Partnership incurred administrative fees of $9,368 in 1996, $41,952 in 1995, $39,771 in 1994 and $37,103 in 1993. These fees are included in general and administrative expenses in the accompanying financial statements. The Partnership has advanced funds to affiliates. Advances outstanding were $757,624 at December 31, 1994. (7) COMMITMENTS Hotel Management Agreement The Partnership has entered into a 20-year agreement with Renaissance Hotel Operating Company ("Renaissance") for the management of the Hotel. The Partnership has committed to pay the following management fees: (1) base management fee equal to 3% of the Hotel's gross revenue, as defined in the agreement, payable monthly; F-77 BALLSTON HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (7) COMMITMENTS--(CONTINUED) (2) reservation and advertising fees equal to 4.5% of the Hotel's gross room revenue, as defined in the agreement, payable monthly; and (3) incentive management fee equal to 10% of the Hotel's gross operating profit, as defined in the agreement, earned and payable annually if certain cash flow requirements are met. Base management fees of $56,206 in 1996, $243,704 in 1995, $231,446 in 1994 and $215,359 in 1993 and reservation and advertising fees of $61,414 in 1996, $261,908 in 1995, $243,402 in 1994 and $230,252 in 1993 were incurred by the Partnership. No incentive management fees were incurred since none of the cash flow requirements were met. In addition, the Partnership must fund a reserve account for capital replacement at 3% of the Hotel's gross revenue annually. Funds set aside for this reserve have been placed in a certificate of deposit. F-78 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Bellevue Hilton Hotel (the "Hotel") for the period from January 1, 1995 to August 4, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1994 and 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Bellevue Hilton Hotel's operations and its cash flows for the period from January 1, 1995 to August 4, 1995, and the years ended December 31, 1994 and 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. April 5, 1996 F-79 BELLEVUE HILTON HOTEL STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 4, 1995 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993
1995 1994 1993 ---------- --------- --------- Revenue: Rooms.................................................. $2,410,592 3,669,316 3,217,466 Food and beverage...................................... 1,038,893 1,761,230 1,575,901 Other operating departments............................ 173,258 316,254 280,040 ---------- --------- --------- 3,622,743 5,746,800 5,073,407 ---------- --------- --------- Operating costs and expenses: Rooms.................................................. 647,515 1,072,831 1,016,798 Food and beverage...................................... 904,803 1,523,578 1,404,418 Other operating departments............................ 117,590 191,894 153,628 Undistributed operating expenses: Administrative and general............................. 397,972 703,739 584,237 Sales and marketing.................................... 192,476 292,142 222,708 Management fees........................................ -- 113,948 100,989 Property operating costs............................... 280,436 493,633 458,288 Property taxes, insurance and other.................... 130,437 230,020 218,177 Depreciation and amortization.......................... 284,191 486,813 466,957 Interest expense....................................... 171,493 305,496 402,676 ---------- --------- --------- 3,126,913 5,414,094 5,028,876 ---------- --------- --------- Income before extraordinary item......................... 495,830 332,706 44,531 Extraordinary item--loss on early extinguishment of debt..................................................... -- 59,242 -- ---------- --------- --------- Net income............................................... $ 495,830 273,464 44,531 ---------- --------- --------- ---------- --------- ---------
See accompanying notes to financial statements. F-80 BELLEVUE HILTON HOTEL STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 4, 1995 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993
1995 1994 1993 ---------- ---------- ---------- Cash flows from operating activities: Net income............................................ $ 495,830 273,464 44,531 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization..................... 284,191 486,813 466,957 Increase in accounts receivable................... (90,295) (40,935) (61,931) Decrease (increase) in other assets............... 49,326 11,792 (7,731) Increase (decrease) in due from affiliates........ 952,205 (514,384) 8,041 Increase in accounts payable and accrued expenses......................................... 55,205 2,604 360,821 ---------- ---------- ---------- Total adjustments..................................... 1,250,632 (54,110) 766,157 ---------- ---------- ---------- Net cash provided by operating activities............... 1,746,462 219,354 810,688 ---------- ---------- ---------- Cash flows from investing activities: Additions to hotel.................................... (50,165) (199,320) (2,771,413) Purchases of furniture and fixtures................... 3,909 (129) 162 ---------- ---------- ---------- Net cash used in investing activities................... (46,256) (199,449) (2,771,251) ---------- ---------- ---------- Cash flows from financing activities: Proceeds from note payable--affiliates................ -- 3,885,000 -- Repayments of note payable............................ -- (3,901,274) (178,298) Capital distributions................................. (1,642,623) -- -- Capital contributions................................. -- -- 2,155,312 ---------- ---------- ---------- Net cash provided (used) by financing activities........ (1,642,623) (16,274) 1,977,014 ---------- ---------- ---------- Net increase in cash and cash equivalents............... 57,583 3,631 16,451 Cash and cash equivalents at beginning of period........ 88,411 84,780 68,329 ---------- ---------- ---------- Cash and cash equivalents at end of period.............. $ 145,994 88,411 84,780 ---------- ---------- ---------- ---------- ---------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest................................ $ 171,493 297,592 398,369 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to financial statements. F-81 BELLEVUE HILTON HOTEL NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 4, 1995 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993 (1) ORGANIZATION The Bellevue Hilton Hotel (the "Hotel") is located approximately ten miles east of downtown Seattle, across Lake Washington. The Hotel opened in March 1980. The Hotel has 180 rooms and complimentary privileges at Bally's Pacific West health club, as well as an indoor pool, jacuzzi and sauna, business center and same day valet service. The dining facilities include Sam's Restaurant, Sam's Lounge and Azteca Restaurant. The Hotel has over 7,746 square feet of meeting space. The Hotel's business is generated mainly from the local corporate market. The corporate headquarters of a number of notable high-tech companies are located in Bellevue or nearby, including Microsoft, Nintendo, AT&T Wireless Systems, Aldus and Microrim. The Hotel was sold on August 4, 1995 to EquiStar for a purchase price of $12,300,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accounts of the Hotel were included in the financial records of Chrisbell Hospitality Company, a limited partnership which owned the Hotel until it was sold to EquiStar. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared using the accrual basis of accounting. Depreciation Depreciation is computed on the cost of hotel property and equipment using the straight-line method over 35 years for the building, over 20 years for most building improvements and over four to five years for furniture, fixtures and equipment. Bad Debt Expense Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivables and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. Revenue Revenue is earned primarily through the operations of the Hotel and recognized when earned. Income Taxes The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities were passed through to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. Use of Estimates Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-82 BELLEVUE HILTON HOTEL NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) INTEREST EXPENSE Prudential Realty Group ("Prudential") provided permanent financing for the Hotel in March of 1980. The original note balance was $5,300,000 and had a fixed interest rate of 10%. Principal and interest payments were due monthly. On February 15, 1994 the remaining balance on the Prudential note was paid off using $3,929,037 of the proceeds from a $66,000,000 note between Washington Square, Inc. (an affiliate) and Connecticut General Life Insurance Co. Interest-only payments were required monthly. The note had an interest rate of 7.60%. The Hotel paid interest to Washington Square, Inc. related to the portion of the proceeds used to pay off the Prudential note. The Hotel incurred a prepayment penalty on the pay-off of the Prudential note in 1994 of $59,242, which is recorded as an extraordinary item in the accompanying statement of operations. (4) RELATED-PARTY TRANSACTIONS During 1994 and 1993, the owner charged the Hotel management fees of 2% of gross revenue. Management fees incurred during 1994 and 1993 were $110,598 and $100,989, respectively. No management fees were charged by the owner in 1995. (5) COMMITMENTS For the period from January 1, 1995 through August 4, 1995 and during 1994 and 1993, certain space in the Hotel was leased to the Azteca Restaurant. Azteca made monthly lease payments of $11,625 to the Hotel in accordance with the lease, which has an expiration date of March 31, 2005. Azteca also paid a portion of the Hotel real estate taxes and common area expenses. F-83 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying combined balance sheets of the Additional Hotels (the "Hotels") as of March 31, 1996, December 31, 1995 and 1994 and related combined statements of operations, owners' capital and cash flows for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993. These combined financial statements are the responsibility of the Hotels' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Additional Hotels as of March 31, 1996, December 31, 1995 and 1994, and the results of their combined operations and their combined cash flows for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. May 24, 1996 F-84 ADDITIONAL HOTELS COMBINED BALANCE SHEETS MARCH 31, 1996, DECEMBER 31, 1995 AND 1994
1996 1995 1994 ------------ ----------- ----------- ASSETS Cash and cash equivalents.......................... $ 2,694,965 2,100,027 1,795,991 Accounts receivable................................ 1,084,588 1,009,479 1,347,062 Inventory and other assets......................... 958,565 1,004,098 1,100,562 ------------ ----------- ----------- Total current assets............................... 4,738,118 4,113,604 4,243,615 ------------ ----------- ----------- Property and equipment: Land............................................. 14,454,496 14,454,496 14,454,496 Building......................................... 48,818,317 48,816,467 48,792,386 Furniture, fixtures and equipment................ 20,054,004 19,968,593 18,993,252 ------------ ----------- ----------- 83,326,817 83,239,556 82,240,134 Less--accumulated depreciation................... (33,455,760) (32,623,613) (29,307,378) ------------ ----------- ----------- Total net property and equipment................... 49,871,057 50,615,943 52,932,756 ------------ ----------- ----------- Total assets....................................... $ 54,609,175 54,729,547 57,176,371 ------------ ----------- ----------- ------------ ----------- ----------- LIABILITIES AND OWNERS' CAPITAL Accounts payable and accrued expenses.............. $ 2,953,396 2,778,452 3,022,008 Advance deposits................................... 100,764 41,927 45,436 ------------ ----------- ----------- Total liabilities.................................. 3,054,160 2,820,379 3,067,444 Owners' capital.................................... 51,555,015 51,909,168 54,108,927 ------------ ----------- ----------- Total liabilities and owners' capital.............. $ 54,609,175 54,729,547 57,176,371 ------------ ----------- ----------- ------------ ----------- -----------
See accompanying notes to combined financial statements. F-85 ADDITIONAL HOTELS COMBINED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ---------- ---------- ---------- ---------- Revenue: Rooms.................................... $5,158,962 21,925,991 21,147,009 21,059,634 Food and beverage........................ 2,567,767 10,442,474 10,513,519 10,699,483 Other operating departments.............. 383,022 1,613,934 1,591,255 1,689,678 ---------- ---------- ---------- ---------- 8,109,751 33,982,399 33,251,783 33,448,795 ---------- ---------- ---------- ---------- Operating costs and expenses: Rooms.................................... 1,361,223 5,751,406 5,673,951 5,840,918 Food and beverage........................ 2,238,050 9,198,740 9,407,042 9,737,488 Other operating departments.............. 216,663 904,143 933,992 985,047 Undistributed operating expenses: Administrative and general............... 823,812 3,342,110 3,314,554 3,431,329 Sales and marketing...................... 602,106 2,320,060 2,343,494 2,436,334 Management fees.......................... 181,554 1,065,175 1,051,710 1,260,199 Property operating costs................. 1,106,018 4,407,863 4,353,126 4,067,892 Property taxes, insurance and other...... 315,981 1,390,174 1,519,555 2,574,155 Depreciation and amortization............ 832,147 3,316,235 4,451,660 4,656,873 ---------- ---------- ---------- ---------- 7,677,554 31,695,906 33,049,084 34,990,235 ---------- ---------- ---------- ---------- Net income (loss).......................... $ 432,197 2,286,493 202,699 (1,541,440) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to combined financial statements. F-86 ADDITIONAL HOTELS COMBINED STATEMENTS OF OWNERS' CAPITAL FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Balance at December 31, 1992.................................................. $57,345,663 Distributions............................................................... (658,109) Net loss.................................................................... (1,541,440) ----------- Balance at December 31, 1993.................................................. $55,146,114 Contributions............................................................... 1,485,114 Distributions............................................................... (2,725,000) Net income.................................................................. 202,699 ----------- Balance at December 31, 1994.................................................. $54,108,927 Contributions............................................................... 215,327 Distributions............................................................... (4,701,579) Net income.................................................................. 2,286,493 ----------- Balance at December 31, 1995.................................................. $51,909,168 Contributions............................................................... 88,650 Distributions............................................................... (875,000) Net income.................................................................. 432,197 ----------- Balance at March 31, 1996..................................................... $51,555,015 ----------- -----------
See accompanying notes to combined financial statements. F-87 ADDITIONAL HOTELS COMBINED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ---------- ---------- ---------- ---------- Cash flows from operating activities: Net income (loss)......................... $ 432,197 2,286,493 202,699 (1,541,440) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization......... 832,147 3,316,235 4,451,660 4,656,873 Decrease (increase) in accounts receivable........................... (75,109) 337,583 (77,086) 119,328 Decrease (increase) in inventory and other assets......................... 45,533 96,464 22,741 (18,439) Decrease (increase) in notes receivable.......................... -- -- 100,000 (100,000) Increase (decrease) in accounts payable and accrued expenses........ 174,944 (243,556) (312,119) (661,001) Increase (decrease) in advance deposits............................ 58,837 (3,509) (10,866) (115,904) ---------- ---------- ---------- ---------- Total adjustments......................... 1,036,352 3,503,217 4,174,330 3,880,857 ---------- ---------- ---------- ---------- Net cash provided by operating activities... 1,468,549 5,789,710 4,377,029 2,339,417 ---------- ---------- ---------- ---------- Cash flows from investing activities-- purchases of furniture and equipment........ (87,261) (999,422) (2,285,579) (1,737,036) ---------- ---------- ---------- ---------- Cash flows from financing activities: Capital contributions..................... 88,650 215,327 1,485,114 -- Capital distributions..................... (875,000) (4,701,579) (2,725,000) (658,109) ---------- ---------- ---------- ---------- Net cash used by financing activities....... (786,350) (4,486,252) (1,239,886) (658,109) ---------- ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents................................ 594,938 304,036 851,564 (55,728) Cash and cash equivalents at beginning of period..................................... 2,100,027 1,795,991 944,427 1,000,155 ---------- ---------- ---------- ---------- Cash and cash equivalents at end of period...................................... $2,694,965 2,100,027 1,795,991 944,427 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to combined financial statements. F-88 ADDITIONAL HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS MARCH 31, 1996, DECEMBER 31, 1995 AND 1994 (1) ORGANIZATION The Additional Hotels (the "Hotels") consists of five hotels which are part of MBL Life Assurance Corporation. Two of the hotels are in California (Sacramento Hilton and Santa Barbara Inn); one is in Louisiana (Lafayette Hilton), one is in Colorado (Holiday Inn) and the other is in Washington, D.C. (Embassy Row). EquiStar has entered into letters of intent to purchase the Hotels for approximately $68,400,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accounts of the Hotels are included in the financial records of MBL Life Assurance Corporation. The accompanying combined financial statements include the accounts of the Hotels only, as if they were a separate legal entity, and have been prepared using the accrual basis of accounting. Cash and Cash Equivalents The Hotels consider all highly liquid instruments with an original maturity date of three months or less to be cash equivalents. Inventories Inventories, consisting primarily of china, tableware, linens and food and beverage items, are stated at cost, using the first-in, first-out ("FIFO") method of inventory valuation. Property and Equipment Property and equipment are reflected in the balance sheets at their fair value at the time of contribution. Depreciation is computed on the buildings and building improvements using the straight-line method over their useful lives of 18 to 39 years. Furniture, fixtures and equipment are depreciated using the straight-line method over five years. Bad Debt Expense Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. Revenue Revenue is earned primarily through the operations of the hotel and recognized when earned. Income Taxes The combined financial statements contain no provision for federal income taxes since the Hotels do not pay any taxes directly. All taxes are the responsibility of the parent company MBL Life Assurance Corporation. F-89 ADDITIONAL HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Use of Estimates Management has made a number of estimates and assumptions to prepare these combined financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) RELATED-PARTY TRANSACTIONS All of the hotels except for Embassy Row are managed by CapStar Management. The Hotels managed by CapStar Management paid base management fees based on gross revenue plus incentive management fees if the Hotels' operating results exceeded levels specified in the management contract. The four hotels incurred management fees of $166,895 in 1996, $926,737 in 1995, $929,013 in 1994 and $1,008,719 in 1993. F-90 - ---------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS 9,250,000 SHARES PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO [LOGO] ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE CAPSTAR HOTEL UNLAWFUL. NEITHER THE DELIVERY OF THIS INVESTORS, INC. PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, CAPSTAR HOTEL UNDER ANY COMMON STOCK CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS ---------------------- DATE. PROSPECTUS ------------------- - , 1996 TABLE OF CONTENTS ---------------------- ------------------- PAGE ---- LEHMAN BROTHERS Prospectus Summary............... 3 GOLDMAN, SACHS & CO. Risk Factors..................... 14 MERRILL LYNCH & CO. Formation Transactions........... 20 SMITH BARNEY INC. Use of Proceeds.................. 21 Dividend Policy.................. 21 Dilution......................... 22 Capitalization................... 23 Selected and Other Financial Data........................... 24 Unaudited Pro Forma Financial Statements..................... 27 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 34 The Company...................... 38 Business and Properties.......... 39 Management....................... 56 Principal Stockholders and Selling Stockholder...................... 64 Certain Relationships and Related Transactions..................... 65 Shares Available for Future Sale. 66 Description of Capital Stock..... 67 Underwriting..................... 70 Legal Matters.................... 71 Experts.......................... 71 Additional Information........... 72 UNTIL - (25 CALENDAR DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK 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. - ---------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses payable in connection with the Offering of the Common Stock being registered hereby, other than underwriting discounts and commissions. All the amounts shown are estimates, except the Securities and Exchange Commission registration fee and the NASD filing fee. All of such expenses are being borne by the Company. SEC Registration Fee............................................. $77,030 NASD Filing Fee.................................................. $22,839 NYSE Listing Fee................................................. - Blue Sky Fees and Expenses....................................... - Accounting Fees and Expenses..................................... - Legal Fees and Expenses.......................................... - Printing and Engraving Expenses.................................. - Registrar and Transfer Agent's Fees.............................. - Miscellaneous Fees and Expenses.................................. - Total........................................................ -
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 102(b)(7) of the Delaware Law permits a provision in the certificate of incorporation of each corporation organized thereunder, eliminating or limiting, with certain exceptions, the personal liability of a director to the corporation or its stockholders for monetary damages for certain breaches of fiduciary duty as a director. The Certificate of Incorporation of the Company eliminates the personal liability of directors to the fullest extent permitted by the Delaware Law. Section 145 of the Delaware Law ("Section 145"), in summary, empowers a Delaware corporation, within certain limitations, to indemnify its officers, directors, employees and agents against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred by them in connection with any suit or proceeding other than by or on behalf of the corporation, if they acted in good faith and in a manner reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to a criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. With respect to actions by or on behalf of the corporation, Section 145 permits a corporation to indemnify its officers, directors, employees and agents against expenses (including attorneys' fees) actually and reasonably incurred in connection with the defense or settlement of such action or suit, provided such person meets the standard of conduct described in the preceding paragraph, except that no indemnification is permitted in respect of any claim where such person has been found liable to the corporation, unless the Court of Chancery or the court in which such action or suit was brought approves such indemnification and determines that such person is fairly and reasonably entitled to be indemnified. Article Eight of the Certificate of Incorporation of the Company provides for the indemnification of officers and directors and certain other parties (the "Indemnitees") of the Company to the fullest extent permitted under the Delaware Law; provided, that except in the case of proceedings to enforce rights to indemnification, the Company shall indemnify such Indemnitee in connection with a proceeding initiated by such Indemnitee only if such proceeding was authorized by the Board. II-1 The Underwriting Agreement provides for indemnification by the Underwriters of the Company, its directors and officers, and persons who control the Company within the meaning of Section 15 of the Securities Act for certain liabilities, including liabilities arising thereunder. Each of the employment agreements described in "Management -- Employment Agreements" contains provisions entitling the executive to indemnification for losses incurred in the course of service to the Company or its subsidiaries, under certain circumstances. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On May 29, 1996, the Company issued 100 shares of Common Stock to Cherwell Investors, Inc., a wholly-owned subsidiary of Acadia Partners, for nominal consideration. The shares were issued without registration under the Securities Act pursuant to the exemption from registration afforded by Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. See "The Formation Transactions" for information regarding shares of Common Stock to be issued in connection with the Formation Transactions, the purchasers thereof and the consideration therefor. Such issuances will be made without registration under the Securities Act pursuant to exemptions from registration afforded by Section 4(2) of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ----------- ------------------------------------------------------------------------------- 1* -- Form of Underwriting Agreement 3.1 -- Certificate of Incorporation of the Company 3.2 -- By-laws of the Company 4* -- Specimen Common Stock certificate 5* -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison 10.1 -- Formation Agreement, dated as of June 20, 1996, among CapStar Hotel Investors, Inc. and the several other parties thereto 10.2 -- Form of Registration Rights Agreement 10.3 * -- Agreement of Sale and Purchase, dated as of June 20, 1996, between MBL Life Assurance Corporation and EquiStar Hotel Investors, L.P. 10.4 * -- Agreement of Sale and Purchase, dated as of June 14, 1996, between Ballston Hotel Limited Partnership and EquiStar Hotel Investors, L.P. 10.5 * -- Form of Employment Agreement between the Company and Paul W. Whetsell 10.6 * -- Form of Employment Agreement between the Company and David E. McCaslin 10.7 * -- Form of Employment Agreement between the Company and William M. Karnes 10.8 * -- Form of Employment Agreement between the Company and John E. Plunket 10.9 * -- Credit Facility 11* -- Computation of earnings per share 21 -- List of Subsidiaries of the Company 23.1 -- Consent of KPMG Peat Marwick LLP 23.2 -- Consent of Bober, Markey & Company 23.3 * -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5) 24 -- Power of Attorney (see signature pages) 27 -- Financial Data Schedule
- ------------ * To be filed by amendment. II-2 (b) Financial Statement Schedules. No schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission are required under the related instructions or are applicable or the information is contained in the financial statements and therefore have been omitted. ITEM 17. UNDERTAKINGS. The Company hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to its Certificate of Incorporation, By-laws, the Underwriting Agreement or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Company hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be a part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, New York, on the 21st day of June, 1996. CAPSTAR HOTEL INVESTORS, INC. By: /s/ PAUL W. WHETSELL .................................. Name: Paul W. Whetsell Title: President, Chief Executive Officer and Chairman of the Board KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Paul W. Whetsell and William M. Karnes, such person's true and lawful attorney-in-fact and agents, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this Registration Statement or any Registration Statement filed pursuant to Rule 462 under the Securities Act of 1933, and to file the same with all exhibits thereto, and the other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and things requisite and necessary to be done, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement and the foregoing Power of Attorney has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------- ------------------------------------- -------------- /s/ PAUL W. WHETSELL President, Chief Executive Officer June 21, 1996 ..................................... and Chairman of the Board Paul W. Whetsell (Principal Executive Officer) /s/ DAVID E. MCCASLIN Chief Operating Officer and Director June 21, 1996 ..................................... David E. McCaslin /s/ WILLIAM M. KARNES Senior Executive Vice President, June 21, 1996 ..................................... Finance and Chief Financial Officer William M. Karnes (Principal Financial and Accounting Officer) /s/ DANIEL L. DOCTOROFF Director June 21, 1996 ..................................... Daniel L. Doctoroff /s/ BRADFORD E. BERNSTEIN Director June 21, 1996 ..................................... Bradford E. Bernstein /s/ JOSEPH MCCARTHY Director June 21, 1996 ..................................... Joseph McCarthy /s/ WILLIAM S. JANES Director June 21, 1996 ..................................... William S. Janes
II-4 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NO. - ----------- ------------------------------------------------------- -------- 1* -- Form of Underwriting Agreement 3.1 -- Certificate of Incorporation of the Company 3.2 -- By-laws of the Company 4* -- Specimen Common Stock certificate 5* -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison 10.1 -- Formation Agreement, dated as of June 20, 1996, among CapStar Hotel Investors, Inc. and the several other parties thereto 10.2 -- Form of Registration Rights Agreement 10.3 * -- Agreement of Sale and Purchase, dated as of June 20, 1996, between MBL Life Assurance Corporation and EquiStar Hotel Investors, L.P. 10.4 * -- Agreement of Sale and Purchase, dated as of June 14, 1996, between Ballston Hotel Limited Partnership and EquiStar Hotel Investors, L.P. 10.5 * -- Form of Employment Agreement between the Company and Paul W. Whetsell 10.6 * -- Form of Employment Agreement between the Company and David E. McCaslin 10.7 * -- Form of Employment Agreement between the Company and William M. Karnes 10.8 * -- Form of Employment Agreement between the Company and John E. Plunket 10.9 * -- Credit Facility 11* -- Computation of earnings per share 21 -- List of Subsidiaries of the Company 23.1 -- Consent of KPMG Peat Marwick LLP 23.2 -- Consent of Bober, Markey & Company 23.3 * -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5) 24 -- Power of Attorney (see signature pages) 27 -- Financial Data Schedule
- ------------ * To be filed by amendment. EX-3.1 2 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION of CAPSTAR HOTEL INVESTORS, INC. The undersigned President and Chief Executive Officer, and Executive Vice President, Finance and Chief Financial Officer of CapStar Hotel Investors, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The Corporation's name is CapStar Hotel Investors, Inc. The date of filing of its original Certificate of Incorporation with the Secretary of State was May 29, 1996. 2. The Amended and Restated Certificate of Incorporation amends the Certificate of Incorporation of the Corporation, as now in effect, to increase its authorized capital stock, and restates and integrates into a single instrument all of the provisions as so amended. The Amended and Restated Certificate of Incorporation was proposed by the Board of Directors and adopted by the sole stockholder of the Corporation in the manner and by the vote prescribed by Section 242 of the General Corporation Law of the State of Delaware, the written consent of the sole stockholder having been given in accordance with Section 228 of such Law, and is as follows: 1. Name. The name of the corporation is CapStar Hotel Investors, ---- Inc. (the "Corporation"). 2. Address; Registered Office and Agent. The address of the ------------------------------------ Corporation's registered office is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801; and its registered agent at such address is The Corporation Trust Company. 3. Purposes. The purpose of the Corporation is to engage in any -------- lawful act or activity for which corporations may be organized under the General Corporation Law. 4. Number of Shares. The total number of shares of stock that the ---------------- Corporation shall have authority to issue is seventy-four million (74,000,000) shares, consisting of forty-nine million (49,000,000) shares of Common Stock, par value of one cent ($0.01) per share (the "Common Stock") and twenty-five million (25,000,000) shares of Preferred Stock, par value of one cent ($0.01) per share (the "Preferred Stock"). 5. Designation of Classes; Relative Rights, Etc. The designation, --------------------------------------------- relative rights, preferences and limitations of the shares of each class are as follows: 5.1 Preferred Stock. The shares of Preferred Stock may be --------------- issued from time to time in one or more series of any number of shares, provided that the aggregate number of shares issued and not canceled of any and all such series shall not exceed the total number of shares of Preferred Stock hereinabove authorized, and with such powers, preferences, rights and qualifications, limitations or restrictions thereof, and such distinctive serial designations, all as shall hereafter be stated and expressed in the resolution or resolutions adopted by the Board of Directors of the Corporation (the "Board of Directors") providing for the issue of such shares of Preferred Stock from time to time pursuant to authority to do so which is hereby vested in the Board of Directors. Each series of shares of Preferred Stock (a) may have such voting rights or powers, full or limited, or may be without voting rights or powers; (b) may be subject to redemption at such time or times and at such prices; (c) may be entitled to receive dividends (which may be cumulative or non- cumulative) at such rate or rates, on such conditions and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or series of stock; (d) may have such rights upon the voluntary or involuntary liquidation, winding up or dissolution of, or upon any distribution of the assets of, 2 the Corporation; (e) may be made convertible into or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation at such price or prices or at such rates of exchange and with such adjustments; (f) may be entitled to the benefit of a sinking fund to be applied to the purchase or redemption of shares of such series in such amount or amounts; (g) may be entitled to the benefit of conditions and restrictions upon the creation of indebtedness of the Corporation or any subsidiary, upon the issue of any additional shares (including additional shares of such series or of any other series) and upon the payment of dividends or the making of other distributions on, and the purchase, redemption or other acquisition by the Corporation or any subsidiary of, any outstanding shares of the Corporation and (h) may have such other relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof; all as shall be stated in said resolution or resolutions providing for the issue of such shares of Preferred Stock. Any of the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of any such series of Preferred Stock may be made dependent upon facts ascertainable outside of the resolution or resolutions adopted by the Board of Directors providing for the issue of such Preferred Stock pursuant to the authority vested in the Board by this Section 5.1, provided that the manner in which such facts shall operate upon the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of such series of Preferred Stock is clearly and expressly set forth in the resolution or resolutions providing for the issue of such Preferred Stock. The term "facts" as used in the preceding sentence shall have the meaning given to it in section 151(a) of the Delaware General Corporation Law. Shares of Preferred Stock of any series that have been redeemed (whether through the operation of a sinking fund or otherwise) or that if convertible or exchangeable have been converted into or exchanged for shares of any other class or classes, shall have the status of authorized and unissued shares of Preferred Stock undesignated as to series and may be reissued as a part of the series of which they were originally a part or as part of a new series of shares of Preferred Stock to be created by resolution or resolutions of the Board of Directors or as part of any other series of shares of Preferred Stock, all subject to any conditions or restrictions on issuance set forth in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of shares of Preferred Stock. 3 5.2 Common Stock. Subject to the provisions of any applicable ------------ law or of the By-laws of the Corporation, 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. Except as otherwise provided by the resolution or resolutions providing for the issue of any series of shares of Preferred Stock, the holders of shares of Common Stock shall be entitled, to the exclusion of the holders of shares of Preferred Stock of any and all series, to receive such dividends as from time to time may be declared by the Board of Directors. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment shall have been made to the holders of shares of Preferred Stock of the full amount to which they shall be entitled pursuant to the resolution or resolutions providing for the issue of any series of shares of Preferred Stock, the holders of shares of Common Stock shall be entitled, to the exclusion of the holders of shares of Preferred Stock of any and all series, to share, ratably according to the number of shares of Common Stock held by them, in all remaining assets of the Corporation available for distribution to its stockholders. 5.3 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 of Directors may from time to time determine. 6. Election of Directors;. Members of the Board of Directors of the ---------------------- Corporation (the "Board") may be elected either by written ballot or by voice vote. 7. Limitation of Liability. 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 4 not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under section 174 of the 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. 8. Indemnification. --------------- 8.1 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 Section 8. 8.2 The Corporation shall, from time to time, 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 under- 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 5 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 The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Section 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 here- after be entitled under any statute, this Certificate of Incorporation, the By- laws of the Corporation (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. 8.4 The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Section 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 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 Section 8, the By-laws or under section 145 of the General Corporation Law or any other provision of law. 8.6 The provisions of this Section 8 shall be a contract between the Corporation, on the one hand, and each director and officer who serves in such capacity at any time while this Section 8 is in effect and any other person entitled to indemnification hereunder, on the other hand, pursuant to which the Corporation and each such director, officer, or other person intend to be, and shall be, legally bound. No repeal or modification of this Section 8 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. 6 8.7 The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Section 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 Board, 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 Board, 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 establish- ing his or her right to such indemnification or reimbursement or advancement of expenses, in whole or in part, in any such proceeding. 8.8 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. 8.9 Any person entitled to be indemnified or to reimbursement or advancement of expenses as a matter of right pursuant to this Section 8 may elect to have the right to indemnification or reimbursement or advancement of expenses interpreted on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the applicable Proceeding, to the extent permitted by law, or on the basis of the applicable law in effect at the time such indemnification or reimbursement or advancement of expenses is sought. Such election shall be made, by a notice in writing to the Corporation, at the time indemnification or reimbursement or advancement of expenses is sought; provided, however, that if no such notice is given, the right to -------- ------- to indemnification or reimbursement or advancement of expenses shall be determined by the law in effect at the time indemnification or reimbursement or advancement of expenses is sought. 7 9. Adoption, Amendment and/or Repeal of By-Laws. The Board may from -------------------------------------------- time to time adopt, amend or repeal the By-laws of the Corporation; provided, -------- however, that any By-laws adopted or amended by the Board may be amended or - ------- repealed, and any By-laws may be adopted, by the stockholders of the Corporation by vote of a majority of the holders of shares of stock of the Corporation entitled to vote in the election of directors of the Corporation. IN WITNESS WHEREOF, the undersigned have signed this instrument the 21st day of June, 1996. /s/ Paul W. Whetsell ------------------------------ Paul W. Whetsell President and Chief Executive Officer Attest: /s/ William M. Karnes ------------------------------ William M. Karnes Senior Vice President, Finance and Chief Financial Officer 8 EX-3.2 3 EXHIBIT 3.2 BY-LAWS of CAPSTAR HOTEL INVESTORS, 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 CapStar Hotel Investors, Inc. 1.8 "Directors" means directors of the Corporation. 2 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. 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. 3 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 in January or February or as may be determined by the Board and designated in the notice of meeting. 2.3 Deferred Meeting for Election of Directors, Etc. If the annual ------------------------------------------------ meeting of stockholders for the election of Directors and the transaction of other business is not held within the months specified in Section 2.2 hereof, the Board shall call a meeting of stockholders for the election of Directors and the transaction of other business as soon thereafter as convenient. 2.4 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 by the Board or by the President or by the Secretary. 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 2.6 hereof or in any waiver of notice thereof given pursuant to Section 2.7 hereof. 2.5 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) unless otherwise provided in the Certificate of Incorporation to express consent to corporate action in 4 writing without a meeting or (iii) 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 (x) in the case of clause (a)(i) above, more than sixty nor less than ten days before the date of such meeting, (y) in the case of clause (a)(ii) above, more than 10 days after the date upon which the resolution fixing the record date was adopted by the Board and (z) 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: 2.5.1 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; 2.5.2 the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting (unless otherwise provided in the Certificate of Incorporation), when no prior action by the Board is required under the General 5 Corporation Law, shall be the first day on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded; and when prior action by the Board is required under the General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board adopts the resolution taking such prior action; and 2.5.3 the record date for determining stockholders for any purpose other than those specified in Sections 2.5.1 and 2.5.2 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 2.5, such determination shall apply to any adjournment thereof unless the Board fixes a new record date for the adjourned meeting. Delivery made to the Corporation's registered office in accordance with 6 Section 2.5.2 shall be by hand or by certified or registered mail, return receipt requested. 2.6 Notice of Meetings of Stockholders. Except as otherwise provided ---------------------------------- in Sections 2.5 and 2.7 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 or of the transfer agent of the Corporation that the notice required by this Section 2.6 has been given shall, in the absence of fraud, 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 meeting if the time and place thereof are announced at the meeting at which the 7 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. 2.7 Waivers 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 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. 2.8 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 8 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. 2.9 Quorum of Stockholders; Adjournment. Except as otherwise ----------------------------------- provided by any statute, the Certificate of 9 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 holders of a majority of the shares of stock present in person or represented by proxy at any meeting of Stockholders, including an adjourned meeting, whether or not a quorum is present, may adjourn such meeting to another time and place. 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 right of the -------- ------- Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. 2.10 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 2.5 hereof. If the Certificate of 10 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 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 11 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. On all other questions, the voting may be viva voce. Each ---- ---- Stockholder entitled to vote at a meeting of Stockholders or to express consent or dissent to corporate action in writing without a meeting 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. 2.11 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 12 vote thereat shall appoint, one or more inspectors to act at the 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. 13 2.12 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. 2.13 Order of Business. The order of business at all meetings of ----------------- Stockholders shall be as determined by the chairman of the meeting, but the order of business to be followed at any meeting at which a quorum is present may be changed 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. 2.14 Written Consent of Stockholders Without a Meeting. Unless ------------------------------------------------- otherwise provided in the Certificate of 14 Incorporation, any action required by the General Corporation Law to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered (by hand or by certified or registered mail, return receipt requested) to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required by this Section 2.14, written consents signed by a sufficient number of holders to take action are delivered to the Corporation as aforesaid. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those Stockholders who have not consented in writing. 15 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; Term of Office. The Board shall consist of one or more ---------------------- members. The number of Directors shall be fixed initially by the incorporator and may thereafter be changed from time to time by action of the stockholders or by action of the Board. Directors need not be stockholders. Each Director shall hold office until a successor is elected and qualified or until the Director's death, resignation or removal. 3.3 Election. Directors shall, except as otherwise required by -------- statute or by the Certificate of Incorporation, be elected by a plurality of the votes cast 16 at a meeting of stockholders by the holders of shares entitled to vote in the election. 3.4 Newly Created Directorships and Vacancies. Unless otherwise ----------------------------------------- provided in the Certificate of Incorporation, newly created Directorships resulting from an increase in the number of Directors and vacancies occurring in the Board for any other reason, including the removal of Directors without cause, may be filled by the affirmative votes of a majority of the entire Board, although less than a quorum, or by a sole remaining Director, or may be elected by a plurality of the votes cast by the holders of shares of capital stock entitled to vote in the election at a special meeting of stockholders called for that purpose. A Director elected to fill a vacancy shall be elected to hold office until a successor is elected and qualified, or until the Director's earlier death, resignation or removal. 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 Removal. Subject to the provisions of Section 141(k) of the ------- General Corporation Law, any or all of the Directors may be removed with or without cause by vote 17 of the holders of a majority of the shares then entitled to vote at an election of Directors. 3.7 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 rea- sonable 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 3.7 shall preclude any Director from serving the Corporation or its subsidiaries in any other capacity and receiving proper compensation therefor. 3.8 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. 18 3.9 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. 3.10 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. 3.11 Special Meetings. Special meetings of the Board may be called ---------------- by the Chairman, the President or the Secretary or by any two or more Directors then serving on at least one day's notice to each Director given by one of the means specified in Section 3.14 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. 3.12 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 19 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 3.12 shall constitute presence in person at such meeting. 3.13 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. 3.14 Notice Procedure. Subject to Sections 3.11 and 3.17 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. 20 3.15 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. 3.16 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 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 21 Assistant Secretaries, the person presiding at the meeting may appoint any person to act as secretary of the meeting. 3.17 Quorum of Directors. 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. 3.18 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. 3.19 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, by resolution passed by a vote of the entire Board, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation. The Board may designate one or more Directors 22 as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. If a member of a committee shall be absent from any meeting, or disqualified from voting thereat, the remaining member or members present and not disqualified from voting, whether or not such member or members constitute a quorum, may, by a unanimous vote, 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 passed as aforesaid, 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 impressed on all papers that may require it, but no such committee shall have the power or authority of the Board in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation under section 251 or section 252 of the General Corporation Law, recommending to the stockholders (a) the sale, lease or exchange of all or substantially all of the Corporation's property and assets, or (b) a dissolution of the Corporation or a revocation of a dissolution, or amending the By-laws of the Corporation; and, unless the resolution designating it expressly so provides, no such committee shall have the power and authority to declare a dividend, to authorize the issuance 23 of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law. Unless otherwise specified in the resolution of the Board designating a committee, at all meetings of such committee a majority of the total number of members of the committee shall constitute a quorum for the transaction of business, and the vote of a majority of the members of the committee present at any meeting at which there is a quorum shall be the act of the committee. Each committee shall keep regular minutes of its meetings. Unless the Board otherwise provides, each committee designated by the Board may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article 3 of these By-laws. 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 24 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 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 25 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. 5.7 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 26 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. 5.8 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. 5.9 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, 27 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 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. 5.10 Treasurer. The Treasurer shall have charge and custody of, and --------- be responsible for, all funds, 28 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 29 corporation and such other duties as may from time to time be assigned to the Treasurer by the Board or the President. 5.11 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. 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 30 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. The shares of capital stock of -------------------------------- the Corporation shall be represented by certificates 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 31 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. The signatures of the officers upon a certificate may be facsimiles, if the certificate is countersigned by a transfer agent or registrar other than the Corporation itself or its employee. 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 "Cancelled," with the date of cancellation, by the 32 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. No transfer of shares of capital stock shall be valid as against the Corporation, its stockholders and creditors for any purpose, except to render the transferee liable for the debts of the Corporation to the extent provided by law, until such transfer shall have been entered on the books of the Corporation by an entry showing from and to whom transferred. 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, 33 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 Certificate of Incorporation, concerning the issue, transfer and registration of certificates representing shares of its capital stock. 7.6 Restriction on Transfer of Stock. A written restriction on the -------------------------------- transfer or registration of transfer of capital stock of the Corporation, if permitted by Section 202 of the General Corporation Law and noted conspicuously on the certificate representing such capital stock, may be enforced against the holder of the restricted capital stock or any successor or transferee of the holder, including an 34 executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder. Unless noted conspicuously on the certificate representing such capital stock, a restriction, even though permitted by Section 202 of the General Corporation Law, shall be ineffective except against a person with actual knowledge of the restriction. A restriction on the transfer or registration of transfer of capital stock of the Corporation may be imposed either by the Certificate of Incorporation or by an agreement among any number of stockholders or among such stockholders and the Corporation. No restriction so imposed shall be binding with respect to capital stock issued prior to the adoption of the restriction unless the holders of such capital stock are parties to an agreement or voted in favor of the restriction. 7.7 Dividends, Surplus, Etc. Subject to the provisions of the ------------------------ Certificate of Incorporation and of law, the Board: 7.7.1 may declare and pay dividends or make other distributions on the outstanding shares of capital stock in such amounts and at such time or times as it, in its discretion, shall deem advisable giving due consideration to the condition of the affairs of the Corporation; 35 7.7.2 may use and apply, in its discretion, any of the surplus of the Corporation in purchasing or acquiring any shares of capital stock of the Corporation, or purchase warrants therefor, in accordance with law, or any of its bonds, debentures, notes, scrip or other securities or evidences of indebtedness; and 7.7.3 may set aside from time to time out of such surplus or net profits such sum or sums as, in its discretion, it may think proper, as a reserve fund to meet contingencies, or for equalizing dividends or for the purpose of maintaining or increasing the property or business of the Corporation, or for any purpose it may think conducive to the best interests of the Corporation. 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 36 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, from time to ----------------------- time, 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 37 disposition of a Proceeding only upon receipt by the Corporation of an under- 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. 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 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. 38 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 provisions of this Article 8 shall be a -------------- contract between the Corporation, on the one hand, and each Director and officer who serves in such capacity at any time while this Article 8 is in effect and any other person entitled to indemnification hereunder, on the other hand, pursuant to which the Corporation and each such Director, officer or other person intend to be, and shall be legally bound. 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 thereafter arising or any proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. 39 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 Board of 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 Board of 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. 8.8 Service Deemed at Corporation's Request. Any Director or officer --------------------------------------- of the Corporation serving in any 40 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. 8.9 Election of Applicable Law. Any person entitled to be indemni- -------------------------- fied or to reimbursement or advancement of expenses as a matter of right pursuant to this Article 8 may elect to have the right to indemnification or reimbursement or advancement of expenses interpreted on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the applicable Proceeding, to the extent permitted by law, or on the basis of the applicable law in effect at the time such indemnification or reimbursement or advancement of expenses is sought. Such election shall be made, by a notice in writing to the Corporation, at the time indemnification or reimbursement or advancement of expenses is sought; provided, however, that if -------- ------- no such notice is given, the right to indemnification or reimbursement or advancement of expenses shall be determined by the law in effect at the time indemnification or reimbursement or advancement of expenses is sought. 41 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 42 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 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. 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 43 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 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 when a quorum of the Corporation's Directors cannot be readily assembled because of some catastrophic event. During such emergency: 13.1 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. 13.2 Temporary Directors and Quorum. One or more officers of the ------------------------------ Corporation present at the emergency Board 44 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. 13.3 Actions Permitted To Be Taken. The Board as constituted in ----------------------------- Section 13.2, and after notice as set forth in Section 13.1 may: 13.3.1 prescribe emergency powers to any officer of the Corporation; 13.3.2 delegate to any officer or Director, any of the powers of the Board; 13.3.3 designate lines of succession of officers and agents, in the event that any of them are unable to discharge their duties; 13.3.4 relocate the principal place of business, or designate successive or simultaneous principal places of business; and 13.3.5 take any other convenient, helpful or necessary action to carry on the business of the Corporation. 45 ARTICLE 14 AMENDMENTS ---------- These By-laws may be amended or repealed and new By-laws may be adopted by a vote of the holders of shares entitled to vote in the election of Directors or by the Board. Any By-laws adopted or amended by the Board may be amended or repealed by the Stockholders entitled to vote thereon. EX-10.1 4 EXHIBIT 10.1 FORMATION AGREEMENT dated as of June 20, 1996 among CAPSTAR HOTEL INVESTORS, INC. and The Parties Identified on the Signature Pages Hereof TABLE OF CONTENTS Page ---- ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . 2 ARTICLE II. THE PLAN OF EXCHANGE . . . . . . . . . . . 5 2.1 Adoption . . . . . . . . . . . . . . . . . . . 5 2.2 The Exchange . . . . . . . . . . . . . . . . . 5 2.3 Effect of Exchange . . . . . . . . . . . . . . 6 2.4 Contribution of EquiStar Assets . . . . . . . . 7 2.5 General Authorization Regarding Documents . . . 7 2.6 Power of Attorney . . . . . . . . . . . . . . . 7 ARTICLE III. ALLOCATIONS . . . . . . . . . . . . . . . 8 3.1 Agreement Regarding Share Allocations . . . . 8 3.2 Special Adjustment for Organizational Capitalization . . . . . . . . . . . . . . . 8 ARTICLE IV. REPRESENTATIONS AND WARRANTIES . . . . . . 8 4.1 Representations and Warranties of Certain Parties . . . . . . . . . . . . . . . 8 (a) Organization . . . . . . . . . . . . . . . 8 (b) Authority . . . . . . . . . . . . . . . . 8 (c) No Conflicts . . . . . . . . . . . . . . . 8 (d) Suits Affecting the Closing . . . . . . . 9 (e) Ownership of Interests . . . . . . . . . . 10 (f) Offering Memorandum . . . . . . . . . . . 10 (g) No Reliance . . . . . . . . . . . . . . . 10 (h) Investment Intent . . . . . . . . . . . . 11 (i) Restricted Securities . . . . . . . . . . 11 4.2 General Representations and Warranties of the Exchanging Entities and CHI . . . . . . . . . . 12 (a) Organization . . . . . . . . . . . . . . . 12 (b) Authority . . . . . . . . . . . . . . . . 12 (c) No Conflicts . . . . . . . . . . . . . . . 12 (d) Suits Affecting the Closing . . . . . . . 12 (e) Brokers . . . . . . . . . . . . . . . . . 13 (f) Tax Classification . . . . . . . . . . . . 13 4.3 Specific Representations and Warranties of CHI . . . . . . . . . . . . . . . . . . 13 (a) CHI Common Stock . . . . . . . . . . . . . 13 (b) Investment Intent . . . . . . . . . . . . 13 (c) Control . . . . . . . . . . . . . . . . . 13 4.4 Representations and Warranties Exclusive. . . . 13 i Page ---- ARTICLE V. COVENANTS AND ACKNOWLEDGMENTS. . . . . . . . . . 14 5.1 Conduct of Business . . . . . . . . . . . . . . 14 5.2 Updated Information . . . . . . . . . . . . . . 14 5.3 Information for Filings . . . . . . . . . . . . 14 5.4 Agreements Related to Initial Public Offering . 14 5.5 Transfers Prior to Closing . . . . . . . . . . 14 5.6 Actions Required for Closing . . . . . . . . . 15 5.7 Characterization for Federal Income Tax Purposes . . . . . . . . . . . . . . . . . 15 ARTICLE VI. INDEMNIFICATION . . . . . . . . . . . . . . . 15 6.1 General Indemnity . . . . . . . . . . . . . . . 15 6.2 Indemnity by CHI . . . . . . . . . . . . . . . 15 6.3 Survival of Representations and Warranties . . 16 6.4 Indemnification Procedures . . . . . . . . . . 16 6.5 Third Party Claims . . . . . . . . . . . . . . 16 6.6 Limitation on Liability . . . . . . . . . . . . 17 ARTICLE VII. CONDITIONS TO CLOSING . . . . . . . . . . . . 17 7.1 General Closing Conditions . . . . . . . . . . . 17 (a) Accuracy of Representations and Warranties . 18 (b) Performance of Covenants . . . . . . . . . . 18 (c) Bankruptcy . . . . . . . . . . . . . . . . . 18 (d) No Orders . . . . . . . . . . . . . . . . . 18 (e) Other Third Party Consents . . . . . . . . . 18 7.2 Specific Closing Condition . . . . . . . . . . . 18 ARTICLE VIII. THE CLOSING . . . . . . . . . . . . . . . . 19 8.1 Effective Time . . . . . . . . . . . . . . . . 19 8.2 Closing Executions and Deliveries . . . . . . . 19 ARTICLE IX. MISCELLANEOUS . . . . . . . . . . . . . . . . 20 9.1 Parties to Agreement . . . . . . . . . . . . . 20 9.2 Captions, Etc . . . . . . . . . . . . . . . . . 20 9.3 Termination . . . . . . . . . . . . . . . . . . 20 9.4 Expenses . . . . . . . . . . . . . . . . . . . 20 9.5 GOVERNING LAW . . . . . . . . . . . . . . . . . 21 9.6 Further Action . . . . . . . . . . . . . . . . 21 9.7 Entire Agreement . . . . . . . . . . . . . . . 21 9.8 Counterparts . . . . . . . . . . . . . . . . . 21 9.9 Binding Effect . . . . . . . . . . . . . . . . 21 9.10 Third Party Beneficiaries . . . . . . . . . . . 21 9.11 Notices . . . . . . . . . . . . . . . . . . . . 21 ii FORMATION AGREEMENT This Formation Agreement (the "Agreement"), dated as of June 20, 1996, is among CapStar Hotel Investors, Inc., a Delaware corporation ("CHI"), the Exchanging Entities, the Existing Owners, (as such terms are defined in Article I), and the other parties identified on the signature pages hereof. WHEREAS, the parties to this Agreement wish to effect certain exchanges and other transactions on the terms and conditions set forth in this Agreement (collectively, the "Formation"), pursuant to which a reconstituted limited partnership in which CHI will be the sole general partner and CapStar LP Corporation, a wholly owned subsidiary of CHI ("CapStar LP Corp."), will be the initial limited partner (the "Operating Partnership") will succeed to the hotel ownership, hotel management and related business operations conducted previously by EquiStar Hotel Investors, L.P., a Delaware limited partnership ("EquiStar"), and CapStar Management Company, L.P., a Delaware limited partnership (the "Partnership"); WHEREAS, the Exchanging Entities are the sole owners of Partnership Interests in EquiStar and the Partnership and will exchange such interests for shares of CHI Common Stock; WHEREAS, the parties have agreed that an aggregate of 6,004,321 shares of CHI Common Stock (the "Formation Shares") will be allocated to the Exchanging Entities; and WHEREAS, the Parties have agreed that 697,498 Formation Shares shall be allocated to the Partnership (the "Partnership Allocation"), and that the remaining Formation Shares shall be allocated to EquiStar (the "EquiStar Allocation"); and WHEREAS, concurrently with the Closing, certain of the Exchanging Entities will be liquidated, and the shares of CHI Common Stock allocated to such Exchanging Entities will be distributed to such Exchanging Entities' Existing Owners; NOW, THEREFORE, in consideration of the mutual agreements set forth herein, the parties hereto agree as follows: 2 ARTICLE I. DEFINITIONS ----------- For purposes of this Agreement, and except as may be otherwise specified in this Agreement, the following terms shall have the meanings indicated: "Business Day" shall mean a day, other than a Saturday or Sunday, on which -------------- commercial banks are open for business with the public in New York, New York. "CapStar LP Corp." shall mean CapStar LP Corporation, a Delaware ------------------ corporation and a wholly owned subsidiary of CHI. "CHI" shall mean CapStar Hotel Investors, Inc., a Delaware ----- corporation. "CHI Common Stock" shall mean the Common Stock, par value $.01 per share, ------------------ of CHI. "Code" shall mean the Internal Revenue Code of 1986, as amended. ------ "Claim Notice" shall have the meaning set forth in Article VI. -------------- "Closing" shall mean the closing of the Formation, as described in --------- Article VIII. "Damage" shall have the meaning set forth in Article VI. -------- "DGCL" shall mean the Delaware General Corporation Law. ------ "Dispute Notice" shall have the meaning set forth in Article VI. ---------------- "Effective Time" shall mean the date and time of the Closing, as more fully ---------------- described in Section 8.1. "Entities" shall mean the Partnership, EquiStar, the Exchanging Entities, ---------- CHI and CapStar LP Corp.. "EquiStar" shall mean EquiStar Hotel Investors, L.P., a Delaware limited ---------- partnership. "EquiStar Allocation" *shall mean 5,306,823 Formation Shares, which shares -------------------- are to be issued by CHI in exchange for the Exchanging Entities' Partnership Interests in EquiStar. 3 "Exchange" shall mean the transfer by the Exchanging Entities of their --------- respective Partnership Interests to CHI in exchange for CHI Common Stock, pursuant to the Plan of Exchange. "Exchanging Entities" shall mean the following entities: --------------------- Acadia/EquiStar Partners, L.P., a Delaware limited partnership; New EquiStar Associates, L.L.C., a Delaware limited liability company; Cherwell Investors, Inc., a Delaware corporation; WMB Hotel Associates, L.L.C., a Delaware limited liability company; CapStar Executive Investors I, L.L.C., a Delaware limited liability company; Penobscot/CapStar Partners, L.P., a Delaware limited partnership; New Management Associates, L.L.C., a Delaware limited liability company; MC Investment Corporation, a Delaware corporation; CapStar Equity Associates, a Delaware general partnership; CapStar GP Corp., a Delaware corporation; and CapStar Executive Investors II, L.L.C., a Delaware limited liability company. "Existing Owners" shall mean a member or partner, general or limited, of a ----------------- Liquidating Entity, each such Existing Owner being identified as such on the signature pages hereto. "Existing Partnerships" shall mean the Partnership and EquiStar. Each of ----------------------- the Partnership and EquiStar is an "Existing Partnership." ---------------------- "Formation" shall have the meaning set forth in the recitals to this ----------- Agreement. The Formation shall be effected through the Exchange and the other transactions described in this Agreement (including in the recitals to this Agreement). The Formation shall result in CHI's (or, as applicable, a subsidiary of CHI's) succession to the assets and liabilities of EquiStar and the Partnership. "Formation Shares" shall mean an aggregate of 6,004,321 shares of CHI ------------------ Common Stock, which shares are to be issued by CHI in exchange for the Exchanging Entities' Partnership Interests in the Existing Partnerships. "Governmental Body" shall mean any governmental or quasi-governmental ------------------- agency, authority, commission, board or other body. "Indemnified Party" shall have the meaning set forth in Article VI. ------------------- "Indemnitor" shall have the meaning set forth in Article VI. ------------ 4 "Initial Public Offering" shall have the meaning set forth in* ------------------------- Section 7.2. "Liquidating Entities" shall mean the following Exchanging Entities: ---------------------- Acadia/EquiStar Partners, L.P.; New EquiStar Associates, L.L.C.; Penobscot/CapStar Partners, L.P.; New Management Associates, L.L.C.; and CapStar Equity Associates "Offering Memorandum" shall mean the Confidential Offering Memorandum of --------------------- CHI dated June 20, 1996, relating to the Formation, together with the exhibits and other attachments to such Memorandum. "Operating Partnership" shall mean CapStar Management Company, L.P., a ----------------------- Delaware limited partnership, after the Effective Time and the amendment and restatement of the such partnership's Agreement of Limited Partnership, as contemplated in Section 2.6(d). "Order" shall mean any order, injunction, decree, writ, judgment, ------- determination or award of any court, arbitrator or Governmental Body. "Ownership Interest" shall mean the ownership interest of an Existing Owner -------------------- in a Liquidating Entity. Set forth on Exhibit B hereto is a list of owners of Ownership Interests in each Liquidating Entity. "Partnership" shall mean CapStar Management Company, L.P., a Delaware ------------- limited partnership, prior to the Effective Time and the amendment and restatement of its Agreement of Limited Partnership, as contemplated by Section 2.6(d). "Partnership Allocation" shall mean 697,498 Formation Shares, which shares ------------------------ are to be issued by CHI in exchange for the Exchanging Entities' Partnership Interests in the Partnership. "Partnership Interest" shall mean the ownership interests of an Exchanging ---------------------- Entity in an Existing Partnership, as set forth in the respective Limited Partnership Agreements of the Existing Partnerships. Set forth on Exhibit A hereto is a list of owners of Partnership Interests in each Existing Partnership. "Permit" shall mean any permit, license, authorization, approval, -------- certification, franchise or other right issued by any Governmental Body. 5 "Person" shall mean any individual, corporation, partnership, joint -------- venture, business association, trust or other business entity. "Plan of Exchange" shall mean the Plan of Exchange set forth in Sections ------------------ 2.2 through 2.6, inclusive. "Registration Rights Agreement" shall mean the Registration Rights ------------------------------- Agreement substantially in the form of Exhibit C. "Securities Act" shall mean the Securities Act of 1933, as amended. ---------------- ARTICLE II. THE PLAN OF EXCHANGE ------------------- 2.1 Adoption. By its execution and delivery of this Agreement, each --------- Exchanging Entity hereby adopts the Plan of Exchange set forth below in this Article II. In addition, each Exchanging Entity that is the holder of a Partnership Interest in the Partnership, hereby consents to and approves the prior transfers contemplated by Sections 2.2(a) and (b) hereof and agrees that upon the transfer contemplated by the first sentence of Section 2.2(b), CHI shall become the sole general partner of the Partnership. Each Exchanging Entity hereby gives such other consents, waivers or approvals as may be necessary under the terms of the agreement of limited partnership of the Existing Partnership in which it owns a Partnership Interest to permit each other partner of such Existing Partnership to consummate the transactions contemplated by this Agreement. By its execution and delivery of this Agreement, each Existing Owner hereby irrevocably approves of and irrevocably consents to the Plan of Exchange. 2.2 The Exchange. ------------ (a) Preliminary Transactions. Immediately prior to the Effective Time ------------------------- and the consummation of the transactions contemplated by Section 2.2(b), CapStar Executive Investors II, L.L.C. shall contribute its Partnership Interest in the Partnership to CHI in exchange for the issuance to it by CHI at the Effective Time of shares of CHI Common Stock representing that percentage of the Partnership Allocation (rounded to the nearest full share) as is set forth beside such Exchanging Entity's name on Exhibit A. Also, immediately prior to the Effective Time and the consummation of the transactions contemplated by Section 2.2(b) (but after the contribution of the Partnership Interest described in the first sentence of this Section 2.2(a)), CHI shall transfer to CapStar LP Corp., as a capital contribution, the Partnership Interest in the Partnership contributed to CHI pursuant to the first sentence of this Section 2.2(a). 6 (b) Pre-Effective Time Transactions. Immediately prior to the Effective -------------------------------- Time (but following the contribution of the Partnership Interest described in Section 2.2(a)), (i) the Partnership Interest of each Exchanging Entity holding a Partnership Interest in the Partnership (a "Partnership Exchanging Entity") (other than CapStar Executive Investors II, L.L.C.) shall be contributed to CHI in exchange for the issuance by CHI at the Effective Time of the number of shares of CHI Common Stock representing that percentage of the Partnership Allocation (rounded to the nearest full share) set forth beside the name of such Partnership Exchanging Entity on Exhibit A, and (ii) the Partnership Interest of each Exchanging Entity holding a Partnership Interest in EquiStar (an "EquiStar Exchanging Entity") shall be contributed to CHI in exchange for the issuance by CHI at the Effective Time of the number of shares of CHI Common Stock representing that percentage of the EquiStar Allocation (rounded to the nearest full share) set forth beside the name of such EquiStar Exchanging Entity on Exhibit A. (c) Effective Time Transactions. At the Effective Time (and immediately ---------------------------- following the contribution of the Partnership Interests described in Section 2.2(b)), CHI shall issue to each Exchanging Entity that is not a Liquidating Entity and to the Existing Owners of each Liquidating Entity the shares of CHI Common Stock contemplated by Sections 2.2(a) and (b). The shares of CHI Common Stock to be issued in exchange for the Partnership Interest of each Exchanging Entity that is a Liquidating Entity shall be issued to the Existing Owners of such Liquidating Entity in connection with the liquidation of such Liquidating Entity. Set forth beside the name of each Existing Owner on Exhibit B is the percentage of the Formation Shares which are allocated to the Liquidating Entity in which it is an Existing Owner which are to be issued to such Existing Owner (except that with respect to the Existing Owners of Acadia/EquiStar Partners L.P., Exhibit B indicates the method by which the Formation Shares which are allocated to such Liquidating Entity are to be allocated among such Existing Owners). 2.3 Effect of Exchange. At the Effective Time, as a result of the ------------------- transactions contemplated by Section 2.2 hereof: (a) CHI shall be the sole general partner of the Partnership and CapStar LP Corp. shall be the sole limited partner of the Partnership; (b) EquiStar shall be immediately dissolved, wound up and terminated and CHI, as the sole holder of Partnership Interests of such Existing Partnership prior to such dissolution winding up and termination, shall hold by automatic succession under operation of law all rights, titles and interests to all tangible and intangible property and assets owned by EquiStar. Such tangible or intangible property and assets shall be vested in CHI without reversion or impairment, without the need or requirement of further act or deed, subject only to existing liens and other encumbrances thereon. In addition, through the Exchange, the other 7 transactions contemplated hereby and such dissolution, winding up and termination, CHI shall be liable for the liabilities and obligations of EquiStar; and (c) Each of the Liquidating Entities shall be dissolved, wound-up and terminated and as a result thereof each Existing Owner shall receive the number of shares of CHI Common Stock corresponding to the percentage set forth beside such Existing Owner's name on Exhibit B as a liquidating distribution in connection with the dissolution and winding-up of the Liquidating Entities. 2.4 Contribution of EquiStar Assets. Immediately after the Effective Time, -------------------------------- CHI shall cause all assets and properties previously owned by EquiStar (along with all liabilities of EquiStar) to be contributed, transferred and assigned to the Operating Partnership. As a result of the contributions, transfers and assignments described in this Section 2.4, immediately following the Effective Time, the Operating Partnership shall possess all assets and liabilities held by EquiStar immediately prior to the Effective Time. 2.5 General Authorization Regarding Documents. At and after the Effective ------------------------------------------ Time, each of the parties to this Agreement agrees to execute and deliver such instruments, agreements and other documents, if any, as CHI determines to be necessary or appropriate to effect this Plan of Exchange. 2.6 Power of Attorney. Each of the parties to this Agreement hereby ------------------ irrevocably makes, constitutes and appoints CHI (acting alone, with full power of substitution and resubstitution) as its or his or her true and lawful attorney to make, execute, consent to, acknowledge, swear to, deliver, record, or file any certificate or other instrument, agreement or document that CHI, EquiStar, any of the Exchanging Entities, or such other party may be required to file in connection with or as a result of the Exchange and the other transactions contemplated hereby under the applicable laws of any jurisdiction or that CHI determines to be necessary or appropriate to effect or reflect the transfers occasioned by this Plan of Exchange and the other transactions contemplated hereby. The grant of the power of attorney in this Section 2.6 is coupled with an interest, is irrevocable and shall survive death, legal incompetency, disability, dissolution, termination or bankruptcy of the grantor. Without limiting the foregoing, at and after the Effective Time, CHI may so execute and deliver any and all documents necessary or appropriate to reflect (a) CHI's ownership of any property, interests and rights owned immediately prior to the Formation by EquiStar, (b) the contribution by CHI to the Operating Partnership of any or all property owned, interests and rights immediately prior to the Formation by EquiStar, (c) the dissolution, winding up and termination of EquiStar and the Liquidating Entities, and (d) the adoption of an Amended and Restated Agreement of Limited Partnership of the Operating Partnership and the ownership of Partnership Interests therein to CHI and CapStar LP Corp. ARTICLE III. ALLOCATIONS ----------- 3.1 Agreement Regarding Share Allocations. Each Exchanging Entity and -------------------------------------- Existing Owner has carefully reviewed Exhibits A and B, and by executing and ---------- - delivering this Agreement hereby irrevocably consents thereto, subject to the provisions of Section 3.2 hereof. 3.2 Special Adjustment for Organizational Capitalization. Cherwell ----------------------------------------------------- Investors, Inc., which owns 100 shares of CHI Common Stock as of the date of this Agreement for which it paid $100, hereby agrees to accept 100 fewer shares of CHI Common Stock in the Formation than would otherwise be issued to it pursuant to Exhibit A. --------- ARTICLE IV. REPRESENTATIONS AND WARRANTIES ----------------------------- 4.1 Representations and Warranties of Certain Parties. Each Exchanging -------------------------------------------------- Entity, severally, as to itself, and each Existing Owner, severally, as to itself, hereby represents and warrants as follows: (a) Organization. Such Person, if not an individual, is a corporation, ------------- limited liability company or partnership duly formed, validly existing and in good standing under the laws of its jurisdiction of incorporation. (b) Authority. Such Person has the requisite power and authority to ---------- execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby to be consummated by him, her or it, as applicable. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate, company, partnership or other applicable action on the part of such Person, if not an individual. This Agreement constitutes the legal, valid and binding agreement of such Person, enforceable against such Person in accordance with its terms. (c) No Conflicts. Except for such consents, notices and other actions ------------- as have been obtained or will be obtained at or prior to the Closing, the execution, delivery and performance of this Agreement by such Person do not violate any provision of the articles of incorporation, bylaws, agreement of partnership or agreement of limited liability company (each if and as applicable) of such Person or any applicable law, rule, regulation, order or comparable requirement. 9 (d) Suits Affecting the Closing. No suit, action or other legal or ---------------------------- administrative proceeding has been instituted, or claim or demand made, against such Person seeking to restrain or prohibit any portion of the Formation or that questions the validity or legality of any portions of the Formation. Such Person has no knowledge of any actual or pending litigation or proceeding against it with respect to or against its Partnership Interest or Ownership Interests in any Existing Partnership or Liquidating Entity (as applicable to each). (e) Ownership of Interests. (i) If an Exchanging Entity, such ----------------------- Exchanging Entity is the record and beneficial Owner of a Partnership Interest in the Existing Partnership identified in Exhibit A and now owns and immediately prior to the contribution of such equity interest to CHI pursuant to Section 2.2 will own such equity interests free and clear of all liens, claims and encumbrances. To the knowledge of each Exchanging Entity that is a general partner of an Existing Partnership, no Person who is not listed on Schedule A owns or asserts ownership of any Partnership Interest or any warrants, options or other equity interests in the Existing Partnership of which it is the general partner. Each Exchanging Entity hereby waives any claim to record or beneficial ownership of any Partnership Interest, warrants, options or other equity interests in any Existing Partnership other than the ownership set forth for such Exchanging Entity in Exhibit A. (ii) If an Existing Owner, such Existing Owner is the record and beneficial owner of the equity interests in the Liquidating Entities described with respect to such Existing Owner and now owns and immediately prior to the Closing will own such equity interests free and clear of all liens, claims and encumbrances. To the knowledge of each Existing Owner that is a general partner of a Liquidating Entity, no Person who is not listed on Schedule B owns or asserts ownership of any Ownership Interests in the Liquidating Entity of which it is a general partner, or any warrants, options or other equity interests in any the Liquidating Entity. Each Existing Owner hereby waives any claim to record or beneficial ownership of Ownership Interests, warrants, options or other equity interests in any of the Liquidating Entities other than the ownership set forth for such Existing Owner in Exhibit B. (f) Offering Memorandum. Such Person has received and carefully -------------------- reviewed the Offering Memorandum, INCLUDING THE SECTIONS THEREOF CAPTIONED "RISKS FACTORS" and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," the historical financial statements of certain of the Existing Partnerships contained therein, the historical and pro forma financial statements of CHI contained herein, and such other documents and information relating to CHI and the other Entities as such Person has requested. Such Person has had an opportunity to ask questions of, and has received satisfactory answers from, the management of CHI and the other Entities concerning their businesses, financial condition, prospects and the terms and conditions of the Formation. Such Person is familiar with and understands the terms of the offering, and has such knowledge and 10 experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in the securities to be issued to it in the Formation. (g) No Reliance. Such Person acknowledges that (i) the transaction ------------ contemplated by this Agreement involve complex tax consequences for such Person (including its partners or members) and such Person is relying solely on the advice of their own tax advisors in evaluating such consequences, (ii) neither CHI, the Existing Partnerships nor the Operating Partnership has made (or shall be deemed to have made) any representations or warranties as to the tax consequences or other economic considerations of the transactions contemplated hereby to such Person (or to its partners or members) Such Person remains solely responsible for considering and assessing all tax matters relating to itself (and its partners or members) and has relied on the advice of, or has consulted with, its own professional advisors with respect thereto. (h) Investment Intent. Such Person was not formed for the purpose of ------------------ participating in the Formation and is acquiring the CHI Common Stock, if any, to be issued to such Person in the Formation for investment and not with a view to the distribution thereof except in compliance with the Securities Act and any applicable state securities laws. Without limiting the foregoing, such Person (other than a Liquidating Entity) is not under a binding commitment to sell or otherwise dispose of the CHI Common Stock to be received in the Formation and has no plan to sell or otherwise dispose of such CHI Common Stock for a period of at least one year from the Effective Time; provided, however, that shares of ------------------ CHI Common Stock may be pledged to secure (x) the indebtedness of any Exchanging Entity or Existing Owner outstanding on the date hereof and currently secured by such Exchanging Entity's Partnership Interest or such Existing Owner's Ownership Interest, or (y) any refinancing subsequent to the date hereof of any indebtedness described in clause (x) hereof; provided, further, that an ------------------ aggregate of up to 2,500,000 Formation Shares (but in no event more Formation Shares than will represent in the aggregate 19.9% of the outstanding shares of CHI Common Stock immediately following the IPO closing) may be sold by parties hereto in a public offering registered together with the IPO. (i) Restricted Securities. Such Person understands and agrees ---------------------- that (i) the shares of CHI Common Stock, if any, to be issued to such Person in the Formation will be "restricted securities" within the meaning of the Securities Act, (ii) the holding period applicable to such shares under Rule 144 under the Securities Act will not begin earlier than the Effective Time, and may not begin until the "purchase price" of such shares is paid in full, (iii) in the absence of a registration statement filed pursuant to the Registration Rights Agreement or otherwise in accordance with the Securities Act and applicable state securities laws, or an exemption from the registration requirements of such securities laws, such shares or units may not be offered or sold to any Person and (iv) such certificate representing such shares or units will bear the following legend: 11 "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION, AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE REQUIREMENTS OF SUCH ACT AND THE APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION." Such Person understands that an investment in the securities to be received by such Person in the Formation involves a high degree of risk. Such Person is able to bear the economic risks of such investment for an indefinite period of time and has no current need for liquidity in such investment. Such Person further understands that the Company is relying upon representations and warranties of such Person set forth herein in proceeding with the transactions contemplated hereby and that the Company will make certain representations to the underwriters in the Initial Public Offering in reliance on the representation and warranties of such Person set forth herein. 4.2 General Representations and Warranties of the Exchanging Entities and -------------------------------------------------------------------- CHI. Each of the Exchanging Entities hereby represents and warrants to CHI with - ---- respect to the Existing Partnership in which it owns a Partnership Interest, each of the Existing Owners that is a general partner or managing member of a Liquidating Entity hereby represents and warrants to CHI with respect to such Liquidating Entity, and CHI hereby represents and warrants to the Exchanging Entities and the Existing Owners, with respect to itself, as follows: (a) Organization. Such Entity is a corporation, limited liability ------------- company or partnership duly formed, validly existing and in good standing under the laws of the State of Delaware. (b) Authority. Such Entity has the requisite corporate, company or ---------- partnership power and authority (i) to own and operate its properties, (ii) to carry on its business as now conducted and as currently proposed to be conducted and (iii) to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby to be performed by it. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby to be performed by it have been duly and validly authorized by all necessary corporate or partnership action on the part of such Entity. This Agreement constitutes the legal, valid and binding agreement of such Entity, enforceable against such entity in accordance with its terms. (c) No Conflicts. The execution, delivery and performance of this ------------- Agreement by such Entity do not violate any provision of the articles or certificate of incorporation, by-laws, limited liability company agreement or 12 partnership agreement (as applicable) of such Entity or any applicable law, rule, regulation, Order or comparable requirement, which violation would have a material adverse effect on the business, financial condition or results of operations of CHI on a consolidated basis (giving effect tot the Formation on a pro forma basis). (d) Suits Affecting the Closing. No suit, action or other legal or ------------------------------- administrative proceeding has been instituted, or claim or demand made, against such Entity seeking to restrain or prohibit any portion of the Formation or that questions the validity or legality of any portion of the Formation. (e) Brokers. No commission or other brokerage fees are owing in -------- connection with the transactions contemplated hereby arising from the acts or omissions of such Exchanging Entity. (f) Tax Classification. With respect to each Existing Partnership, for ------------------- the period of its existence (through the Effective Time), such entity has been properly classified as a partnership for federal income tax purposes. Each Existing Partnership has paid all income taxes to which it is subject, except where the failure to so pay would not have a material adverse effect on the business, financial condition or results of operations of CHI on a consolidated basis (giving effect to the Formation on a pro forma basis). 4.3 Specific Representations and Warranties of CHI. CHI hereby represents ----------------------------------------------- and warrants to the Exchanging Entities and the Existing Owners as follows: (a) CHI Common Stock. When issued and delivered at the Closing in ----------------- accordance with this Agreement, the Formation Shares to be issued at the Effective Time will be duly authorized, validly issued, fully paid and nonassessable and, free of any preemptive or other similar rights of any Person. (b) Investment Intent. CHI is accepting the Partnership Interests to be ------------------ received by it in the Exchange for its own account, for investment and not with a view to the sale or distribution thereof. (c) Control. CHI has no plan or intent to issue additional CHI Common -------- Stock or shares of stock of a different class in CHI, such that the parties receiving CHI Common Stock pursuant to the Formation, and the Initial Public Offering would no longer satisfy the control requirement of Code Sections 35 1(a) and 368(c). 4.4 Representations and Warranties Exclusive. EACH PARTY (INCLUDING CHI) ----------------------------------------- ACKNOWLEDGES THAT, EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE IV AND IN THE DOCUMENTS TO BE EXECUTED AND DELIVERED AT THE CLOSING, THE OTHER PARTIES 13 HAVE MADE NO REPRESENTATION OR WARRANTY REGARDING THE FORMATION OR ITS CONSTITUENT TRANSACTIONS, AND SUCH FORMER PARTY IS NOT RELYING ON ANY OTHER REPRESENTATION OR WARRANTY MADE BY ANY PERSON ACTING ON ANY OTHER PARTY'S BEHALF. EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE IV AND IN THE DOCUMENTS TO BE EXECUTED AND DELIVERED AT THE CLOSING, EACH PARTY (INCLUDING CHI) ACKNOWLEDGES THAT THE FORMATION AND ITS CONSTITUENT TRANSACTIONS WILL OCCUR ON AN "AS IS, WHERE IS" BASIS. ARTICLE V. COVENANTS AND ACKNOWLEDGMENTS ---------------------------- 5.1 Conduct of Business. Except as contemplated by the Offering Memorandum -------------------- or this Agreement, between the date of this Agreement and the Closing each Liquidating Entity shall conduct its business in the ordinary course, substantially consistent with past practice. 5.2 Updated Information. Each party covenants to immediately notify the -------------------- other parties if any representation or warranty made by such party in Article IV --------- becomes, or will become, untrue before the Effective Time. 5.3 Information for Filings. Each party shall furnish the other parties ------------------------ hereto with all information concerning such party as may be required for inclusion in any application or filing required to be made by such other party with any Governmental Body in connection with the Formation. 5.4 Agreements Related to Initial Public Offering. Each party hereby ---------------------------------------------- irrevocably consents and agrees that (i) its name may be disclosed in a registration statement proposed to be prepared and filed by CHI in connection with the Initial Public Offering, (ii) any information provided pursuant to this Agreement to CHI, or representations and warranties made herein by any party, may be disclosed in such registration statements, (iii) to the extent required by federal or other applicable securities laws, a copy of this Agreement (and any and all amendments and exhibits hereto) may be attached as an exhibit to such registration statements and (iv) that the underwriters in the Initial Public Offering may rely upon, and shall be deemed a beneficiary of the representations and warranties of such party contained herein. In addition, each party agrees to supply such additional information regarding its financial condition, results of operations, cash flows and equity ownership as CHI may reasonably require in connection with the Initial Public Offering, including for use in the completion of any audits required in connection with the Initial Public Offering. 14 5.5 Transfers Prior to Closing. Except as contemplated by the Offering --------------------------- Memorandum, this Agreement or in connection with a pledge by certain or all of the Existing Owners of their Ownership Interests in any Liquidating Entity, each Exchanging Entity and each Existing Owner hereby agrees that, between the date of this Agreement and the Closing (or, in the case of each Exchanging Entity, the time of the contribution of its Partnership Interest to CHI pursuant to Section 2.2 hereof), such Exchanging Entity or Existing Owner, as the case may be, shall not sell, transfer or assign, directly or indirectly or as collateral, to any Person any equity interest in any Existing Partnership or Liquidating Entity. 5.6 Actions Required for Closing. Each party agrees to take all reasonable ----------------------------- actions within its control to cause the conditions to the consummation of the Formation set forth in Article VI to be satisfied; provided, however, that ------------------ nothing in this Section 5.6 shall obligate CHI to consummate the Initial Public Offering if in CHI's sole discretion the terms thereof are not satisfactory to CHI. 5.7 Characterization for Federal Income Tax Purposes. Each party receiving ------------------------------------------------- CHI Common Stock pursuant to the Plan of Exchange acknowledges that such exchanges, together with the issuance of CHI Common Stock pursuant to the Initial Public Offering, are intended to collectively constitute transactions qualifying under Section 35 1 of the Code. Each of such parties agrees to report the transactions contemplated by this Agreement consistent with the provisions of such section and the Treasury Regulations promulgated thereunder and not to take any action that would cause such transactions not so to qualify. ARTICLE VI. INDEMNIFICATION -------------- 6.1 General Indemnity. From and after the Closing, each party making a ------------------ representation or warranty in Article IV (the "Indemnitor") shall indemnify each party to whom he, she or it makes such representation or warranty (including each underwriter in the Initial Public Offering) (and, in the case of any indemnity benefitting CHI, any officer, director and control person of CHI (within the meaning of Section 15 of the Securities Act)) (the "Indemnified Parties"), from and against any and all liabilities, costs, losses, lawsuits, damages and expenses, whether or not arising out of third-party claims (including, without limitation, interest and penalties), and all amounts paid in defense or settlement thereof (collectively, "Damage"), arising out of, resulting from or incident to, any breach of such representation or warranty. 6.2 Indemnity by CHI. From and after the Closing, CHI, for itself and its ----------------- successors and assigns (the "Indemnitor"), shall indemnify each Existing Owner and each Existing Owner's partners, owners, subsidiaries and affiliates, and 15 each of their respective officers, directors, employees, shareholders, partners, agents, representatives and advisors (collectively, the "Indemnified Parties") from and against any and all Damage arising solely out of third-party claims and resulting from the Formation or any one or more of its constituting transactions (but in either case excluding (i) any taxes payable by an Indemnified Party as a result of the Formation, (ii) costs and expenses expressly stated herein to be borne or paid by such Indemnified Party and (iii) other amounts that such Indemnified Party in this Agreement or otherwise has agreed to pay); provided, -------- however, that this Section 6.2 shall not create rights to indemnity in favor of - -------- an Indemnified Party for a matter (a) in respect of which such Indemnified Party is in breach of a representation or warranty made by him, her or it, as applicable, in Article IV (or would so be in breach but for (i) the ------- qualification of such representation or warranty as to knowledge or (ii) the expiration and termination of such representation or warranty pursuant to Section 6.3) or (b) in respect of which such Indemnified Party was grossly negligent or engaged in willful misconduct. For purposes of this Section 6.2, a "third-party claim" shall mean a claim alleged or asserted by any Person or Persons other than (w) an Existing Owner, (x) a Liquidating Entity or any other party to this agreement, and (y) a direct or indirect partner, member, stockholder or affiliate (as such term is defined in Rule 405 promulgated under the Securities Act) of any of the foregoing. 6.3 Survival of Representations and Warranties. It is the express intention ------------------------------------------- and agreement of the parties that the representations and warranties set forth in Article IV shall survive the consummation of the Formation for a period of one year, except that the representation and warranty (a) set forth in Section 4.2(e) shall survive for the applicable limitations period, and (b) set forth in Section 4.1(e) shall survive indefinitely. At the expiration of the applicable period such representations and warranties shall expire and be terminated and extinguished forever, except with respect to claims asserted pursuant hereto (subject to the limitations of Section 6.6) by written notice at any time within one year from the Closing. Any written notice given within such one-year period must set forth specifically the nature and details of the claim. 6.4 Indemnification Procedures. If any Indemnified Party seeks --------------------------- indemnification hereunder then it shall give the applicable Indemnitor a notice (a "Claim Notice") describing in reasonable detail the facts giving rise to any claims for indemnification hereunder and the amount or method of computation of the amount of such claim, and a reference to the provision of this Agreement or any agreement, document or instrument executed pursuant hereto or in connection herewith upon which such claim is based; provided, however, that failure to give ------------------ such notice shall not relieve the Indemnitor of its obligations hereunder. The Indemnitor shall have thirty (30) days after the giving of any Claim Notice pursuant hereto to (a) agree to the amount or method of determination set forth in the Claim Notice and pay such amount or method of determination set forth in the Claim Notice and pay such 16 amount to the Indemnified Party in immediately available funds, or (b) provide the Indemnified Party with notice that it disputes the amount or method of determination set forth in the Claim Notice (the "Dispute Notice"). Within fifteen (15) days after the giving of the Dispute Notice, a representative of the Indemnitor and a representative of the Indemnified Party shall negotiate in a bona fide attempt to resolve the matter. If the dispute is not resolved within thirty (30) days of the giving of the Dispute Notice, then the parties shall be free to pursue whatever remedies are available to them at law or equity. 6.5 Third Party Claims. If a claim by a third person is made against an ------------------- Indemnified Party, and if such party intends to seek indemnity with respect thereto under this Article VI, then such Indemnified Party shall promptly notify the applicable Indemnitor in writing of such claim, setting forth such claim in reasonable detail. The Indemnitor shall have ten (10) days after receipt of such notice to elect to undertake, conduct and control, through counsel of its own choosing and at its own expense, the settlement or defense thereof, and the Indemnified Party shall cooperate with it in connection therewith; provided, -------- however, that the Indemnified Party may participate in such settlement or - -------- defense through counsel chosen by such Indemnified Party; provided, further, ----------------- however, that if in the reasonable judgment of the Indemnified Party there - -------- exists a conflict between the Indemnified Party and the Indemnitor, then the Indemnitor shall bear all costs and expenses of the Indemnified Party's separate counsel of choice. So long as the Indemnitor is reasonably contesting any such claim in good faith, the Indemnified Party shall not pay or settle any such claim without the consent of the Indemnitor. If the Indemnitor does not notify the Indemnified Party within ten (10) days after receipt of the Indemnified Party's notice of a claim of indemnity hereunder that it elects to undertake the defense thereof, then the Indemnified Party shall have the right to contest, settle or compromise the claim and shall be entitled to indemnification for all fees, costs and expenses incurred in connection therewith. The Indemnitor shall not, except with the consent of each Indemnified Party, enter into any settlement that does not include as an unconditional term thereof the giving by the person or persons asserting such claim to all Indemnified Parties of an unconditional release from all liability with respect to such claim or consent to entry of any judgment. The Indemnitor shall not be liable for Damages relating to any settlement entered into without the Indemnitor's consent. 6.6 Limitation on Liability. Notwithstanding anything to the contrary ------------------------ contained in this Agreement or otherwise, except as otherwise provided in this Section 6.6, the liability of an Existing Owner for the breach of any representation or warranty and for any indemnification obligation arising from any such breach shall be limited solely to the product of (x) the number of shares of CHI Common Stock to be received by such Person in the Formation and (b) the per share price to public paid by purchasers in the Initial Public Offering. The parties hereto acknowledge and agree that no party shall have recourse against any of the general partners of any Exchanging Entities or any Existing Owner or against any of the assets of any of the general partners of any Exchanging Entities or any Existing Owner with respect to the 17 liabilities and obligations of any Exchanging Entities or any Existing Owner hereunder or in connection herewith. ARTICLE VII. CONDITIONS TO CLOSING -------------------- 7.1 General Closing Conditions. The obligation of a party to consummate the --------------------------- Formation is subject to the satisfaction at or prior to the Closing of each of the following conditions, any one or more of which may be waived in whole or part by such party: (a) Accuracy of Representations and Warranties. Each of the ------------------------------------------- representations and warranties of the other parties contained in Article IV shall be true and correct in all material respects on and as of the Effective Time as if made on and as of such time, except where the failure of the same to be true and correct would not have a material adverse effect on the business, financial condition or results of operation of CHI on a consolidated basis, giving pro forma effect to the Formation. (b) Performance of Covenants. Each other party shall have performed and ------------------------- complied in all material respects with each covenant and agreement contained in this Agreement that is required to be performed or complied with by such other party on or prior to the Closing, except where the failure of the same to be so performed or complied with would not have a material adverse effect on the business, financial condition or results of operation of CHI on a consolidated basis, giving pro forma effect to the Formation. (c) Bankruptcy. No other party will have filed a voluntary petition in ----------- bankruptcy, and no involuntary petition in bankruptcy will have been filed against any other party that is not controverted within ten Business Days, or dismissed within 60 days, after commencement. (d) No Orders. There will not be issued and in effect at the Closing ---------- any Order restraining, prohibiting or delaying consummation of the Formation. (e) Other Third Party Consents. Each other party will have obtained all --------------------------- material consents, authorizations and approvals from all Governmental Bodies and other Persons required to be obtained by such other party for the consummation of the Formation, except where the same would not have a material adverse effect on the business, financial condition or results of operation of CHI on a consolidated basis, giving pro forma effect to the Formation. 18 7.2 Specific Closing Condition. The obligation of a party to consummate the --------------------------- Formation is subject to the condition that on or about the Effective Time, CHI shall have consummated an initial public offering of CHI Common Stock resulting in gross proceeds to CHI of not less than $100 million (the "Initial Public Offering"). ARTICLE VIII. THE CLOSING ---------- 8.1 Effective Time. Unless this Agreement is terminated before the Closing --------------- pursuant to Section 9.3, the Closing of the Exchange and, except as expressly provided below, the other transactions constituting the Formation, will occur at the same date and time (the "Effective Time") as the closing of the Initial Public Offering. The transfers described in Sections 2.2(a) shall become effective immediately prior to the transfers described in Section 2.2(b), which shall in turn become effective immediately prior to the Effective Time. 8.2 Closing Executions and Deliveries. At the Closing: ---------------------------------- (a) CHI shall issue to each Exchanging Entity and each Existing Owner receiving CHI Common Stock in the Formation a certificate or certificates for the number of shares of CHI Common Stock to be issued to such Exchanging Entity or Existing Owner in accordance with Exhibits A or B, as applicable, each bearing the legends set forth in Section 4.1 (i). Absent any mutually satisfactory other arrangement, each such certificate, duly executed, shall be delivered to such Existing Owner at the Closing, or, if its, his or her representative does not attend the Closing, to its or his or her address shown on the signature pages to this Agreement. (b) Each of CHI, CapStar Executive Investor I, L.L.C., CapStar Executive Investor II, L.L.C., CapStar GP Corp., WMB Hotel Associates, L.L.C., and the Existing Owners shall execute and deliver the Registration Rights Agreement. (c) CHI shall execute, for filing with the Secretary of State of the State of Delaware, a certificate of cancellation with respect to EquiStar and a certificate of amendment with respect to the Operating Partnership. CHI, as attorney in fact for each Existing Owner, shall execute, for filing with the Secretary of State of the State of Delaware, a certificate of cancellation, dissolution, termination or other appropriate document with respect to each Liquidating Entity. 19 (d) CHI shall execute and deliver such instruments of transfer as shall be necessary to evidence the contributions to capital to be made by it pursuant to this Agreement. ARTICLE IX. MISCELLANEOUS ------------ 9.1 Parties to Agreement. Notwithstanding the Persons listed on the --------------------- signature pages hereto, all references herein to "the parties," i.e., the parties to this Agreement, refer only to those Persons who have executed and delivered this Agreement. 9.2 Captions, Etc. The Article and Section headings in this Agreement are -------------- for convenience of reference only and shall not affect the construction of this Agreement. All references in this Agreement to Articles, Sections and Exhibits refer to the Articles, Sections and Exhibits of this Agreement, respectively, unless the context requires otherwise. All references to a party or parties refer to a party or parties to this Agreement, unless the context otherwise requires. All uses of the word "including" shall be construed to mean "including, without limitation." 9.3 Termination. If the Closing has not occurred by March 31, 1997, then ------------ this Agreement shall terminate automatically, without any further act or instrument. CHI may terminate this Agreement at any time by notice given to the other parties if it determines in its sole discretion that the Initial Public Offering may not be consummated on terms satisfactory to it. 9.4 Expenses. CHI shall be responsible for any documentary transfer taxes --------- and any sales, use or other taxes (other than income taxes), escrow fees, recording, transfer or filing fees (and any deficiency, interest or penalty asserted with respect thereto) incurred in connection with the transfers made by each Exchanging Entity in the Formation. Each party to this Agreement shall pay its own legal, accounting and other professional fees and expenses in connection with the preparation and negotiation of this Agreement and the Registration Rights Agreement. With respect to all other fees, expenses and costs not provided for above in this Section 9.4, the parties agree to in good faith determine the beneficiary or beneficiaries thereof and allocate responsibility for such fees, expenses and costs accordingly. The provisions of this Section 9.4 shall survive any termination of this Agreement. 2O 9.5 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN -------------- ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PRINCIPLE OR RULE THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION. 9.6 Further Action. The parties hereto agree to execute such documents and --------------- certificates and take such further actions as may be reasonably required or desirable to carry out the provisions of this Agreement and consummate the Formation and its constituent transactions. Without limiting the foregoing, to the extent that the consummation of the Formation or any constituent transaction thereof or hereof requires a consent or approval of, or a waiver by, a party to this Agreement, then this Agreement constitutes such consent, approval or waiver (all of which shall be irrevocable). 9.7 Entire Agreement. This Agreement and the Exhibits hereto supersede any ----------------- other agreements, whether written or oral, that may have been made or entered into by the parties hereto relating to the matters contemplated hereby. This Agreement and the Exhibits hereto constitute the entire agreement among the parties with respect to the subject matter of this Agreement, and there are no agreements, commitments, representations, warranties or covenants relating thereto except as expressly set forth herein. 9.8 Counterparts. This Agreement may be executed in two or more ------------- counterparts, each of which will be deemed an original, but all of which together will constitute one and the same agreement. 9.9 Binding Effect. This Agreement will be binding upon and inure to the --------------- benefit of the parties hereto and their respective successors and assigns. CHI may, on or after the Effective time, assign as collateral its rights under this Agreement as security for its obligations under a credit agreement contemplated to be entered into among CHI and certain lenders; each other party hereby agrees with and consents to any such assignment as collateral. 9.10 Third Party Beneficiaries. Nothing in this Agreement is intended or -------------------------- should be construed to give any person, other than the parties hereto, any legal or equitable fight, remedy or claim under or in respect of this Agreement or any provision of this Agreement. 9.11 Notices. Any notice or other communication required or permitted under -------- this Agreement shall be by facsimile actually received or in writing and mailed by certified or registered mail, return receipt requested, postage prepaid. Any such notice shall be deemed given upon its receipt at the following addresses: 21 (a) If to CHI: 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 Attention: President Fax: (202) 965-4445 (b) If to any other party, at the address of such party given by written notice to CHI at the time of execution by such party of this Agreement. Any party may, by notice given in accordance with this section to the other parties, designate another address or person for receipt of notices hereunder. IN WITNESS HEREOF, the parties have executed a counterpart signature page of this Agreement as of the date first above written. CHI: CAPSTAR HOTEL INVESTORS, INC. By: /s/Paul W. Whetsell -------------------- Paul W. Whetsell President Exchanging Entities: ACADIA/EQUISTAR PARTNERS, L.P., By: Acadia Partners, L.P., General Partner By: Acadia FW Partners, L.P., General Partner By: Acadia MGP Inc., Managing General Partner By: /s/Daniel L. Doctoroff Daniel L. Doctoroff Executive Vice President 22 NEW EQUISTAR ASSOCIATES, L.L.C. By: New CapStar Group I, L.L.C., Member By: /s/Paul W. Whetsell Paul W. Whetsell Managing Member By: Acadia/EquiStar Partners, L.P., Member By: Acadia Partners, L.P., General Partner By: Acadia FW Partners, L.P., General Partner By: Acadia MGP, Inc., Managing General Partner By: /s/Daniel L. Doctoroff ------------------------- Daniel L. Doctoroff Executive Vice President CHERWELL INVESTORS, INC. By: /s/Daniel L. Doctoroff ----------------------- Daniel L. Doctoroff Vice President WMB HOTEL ASSOCIATES, L.L.C. By: /s/Paul W. Whetsell ----------------------- Paul W. Whetsell Managing Member 23 CAPSTAR EXECUTIVE INVESTORS I, L.L.C. By: /s/Paul W. Whetsell ----------------------- Paul W. Whetsell Managing Member PENOBSCOT/CAPSTAR PARTNERS, L.P. By: Penobscot Partners, L.P., General Partner By: PTJ Merchant Banking Partners, L.P., General Partner By: PTJ, Inc., Managing General Partner By: /s/Daniel L. Doctoroff ----------------------- Daniel L. Doctoroff Executive Vice President NEW MANAGEMENT ASSOCIATES, L.L.C. By: New CapStar Group II, L.L.C., Member By: /s/Paul W. Whetsell ----------------------- Paul W. Whetsell Managing Member By: Penobscot/CapStar Partners, L.P., Member By: Penobscot Partners, L.P., General Partner By: PTJ Merchant Banking Partners, L.P., General Partner By: PTJ, Inc., Managing General Partner By: /s/Daniel L. Doctoroff ----------------------- Daniel L. Doctoroff Executive Vice President 24 MC INVESTMENT CORPORATION By: /s/Daniel L. Doctoroff ----------------------- Daniel L. Doctoroff Executive Vice President CAPSTAR EQUITY ASSOCIATES By: CapStar Hotels, Inc., Partner By: /s/Paul W. Whetsell ----------------------- Paul W. Whetsell President By: Latham Hotels, Inc., Partner By: /s/Paul W. Whetsell ----------------------- Paul W. Whetsell President CAPSTAR GP CORP. By: /s/Paul W. Whetsell ----------------------- Paul W. Whetsell President CAPSTAR EXECUTIVE INVESTORS II, L.L.C. By: /s/Paul W. Whetsell ----------------------- Paul W. Whetsell Managing Member 25 Existing Owners: PENOBSCOT/CAPSTAR PARTNERS, L.P., By: Penobscot Partners, L.P., General Partner By: PTJ Merchant Banking Partners, L.P., General Partner By: PTJ, Inc., Managing General Partner By: /s/Daniel L. Doctoroff ----------------------- Daniel L. Doctoroff Executive Vice President OHP EQUISTAR, L.P. By: Oak Hill Partners, Inc., General Partner By: /s/Daniel L. Doctoroff ----------------------- Daniel L. Doctoroff Executive Vice President OHP EQUISTAR II, L.P. By: Oak Hill Partners, Inc. General Partner By: /s/Daniel L. Doctoroff ----------------------- Daniel L. Doctoroff Executive Vice President PENOBSCOT PARTNERS, L.P. By: PTJ Merchant Banking Partners, L.P., General Partner By: PTJ, Inc., Managing General Partner By: /s/Daniel L. Doctoroff ----------------------- Daniel L. Doctoroff Executive Vice President 26 FWHY COINVESTMENTS VIII PARTNERS, L.P. By: Group 31, Inc., General Partner By: /s/ W. Robert Cotham ----------------------- W. Robert Cotham Vice President ACADIA/EQUISTAR PARTNERS, L.P. By: Acadia Partners, L.P., General Partner By: Acadia FW Partners, L.P., General Partner By: Acadia MGP, Inc., Managing General Partner By: /s/Daniel L. Doctoroff ----------------------- Daniel L. Doctoroff Executive Vice President CAPSTAR HOTELS, INC. By: /s/Paul W. Whetsell ----------------------- Paul W. Whetsell President LATHAM HOTELS, INC. By: /s/Paul W. Whetsell ----------------------- Paul W. Whetsell President INDEX TO EXHIBITS* A Exchanging Entities B Existing Owners C Form of Registration Rights Agreement EXHIBIT A EXCHANGING ENTITIES ------------------ A. CAPSTAR MANAGEMENT COMPANY, L.P. ------------------------------- Exchanging Entity % of Partnership ----------------- --------------- Allocation --------- Penobscot/CapStar Partners L.P. 44.2346 New Management Associates, L.L.C. 29.4529 MC Investment Corporation .0056 CapStar Equity Associates 23.8751 CapStar GP Corp. .8566 CapStar Executive Investors II, L.L.C. 1.575 B. EQUISTAR HOTEL INVESTORS, L.P. Exchanging Entity %of EquiStar ----------------- ----------- Allocation --------- Acadia/EquiStar Partners, L.P. 83.8 New EquiStar Associates, L.L.C. 4.878 Cherwell Investors Inc. 1.0 WMB Hotel Associates, L.L.C. 1.8095 CapStar Executive Investors I, L.L.C. 8.5125 EXHIBIT B EXISTING OWNERS -------------- A. NEW EQUISTAR ASSOCIATES, L.L.C. Existing Owner % of Liquidating -------------- --------------- Entity's Allocation ------------------ New CapStar Group I, L.L.C. 64.807 Acadia/EquiStar Partners, L.P. 35.193 B. ACADIA/EQUISTAR PARTNERS, L.P. A number of Shares allocable to Acadia/EquiStar Partners, L.P. determined by dividing the "Preferred Amount" (as defined below) by the price per share to public in the Initial Public Offering shall be allocated to Acadia Partners, L.P. and the balance of the shares allocable to Acadia/EquiStar Partners, L.P. shall be allocated to its Existing Owners (including Acadia Partner, L.P.) as follows: Existing Owner % of Remainder of -------------- ---------------- Liquidating Entity's ------------------- Allocation --------- OHP EquiStar, L.P. 16.20 OHP EquiStar II, L.P. 1.30 Acadia Partners, L.P. 65.00 FWHY Coinvestments VIII Partners, L.P. 17.50 For purposes hereof, the "Preferred Amount" shall mean $46,930,887.04, plus interest accrued thereon from June 30, 1996 at an annual rate of 14%, compounded quarterly, as of the last day of the month immediately preceding the month in which the Closing takes place. C. NEW MANAGEMENT ASSOCIATES, L.L.C. Existing Owner % of Liquidating -------------- --------------- Entity's Allocation ------------------ New CapStar Group II, L.L.C. 44.05 Penobscot/CapStar Partners, L.P. 55.95 D. PENOBSCOT/CAPSTAR PARTNERS, L.P. Existing Owner % of Liquidating -------------- --------------- Entity' s Allocation ------------------- OHP EquiStar, L.P. 0.0014 OHP EquiStar II, L.P. 17.4986 Penobscot Partners, L.P. 65.00 FWHY Coinvestments VIII Partners, L.P. 17.50 E. CAPSTAR EQUITY ASSOCIATES Existing Owner % of Liquidating -------------- --------------- Entity's Allocation ------------------ CapStar Hotels, Inc. 85.0 Latham Hotels, Inc. 15.0 EX-10.2 5 EXHIBIT 10.2 REGISTRATION RIGHTS AGREEMENT dated as of , 1996 ------------- among CAPSTAR HOTEL INVESTORS, INC. and The Other Parties Listed on the Signature Pages Hereto TABLE OF CONTENTS Page No. 1. Definitions . . . . . . . . . . . . . . . . . . . . 1 2. Executive Investor Entities Registration . . . . . . 3 (a) Request for Registration . . . . . . . . . . . . 3 (b) Filing and Effectiveness . . . . . . . . . . . . 3 3. Demand Registration . . . . . . . . . . . . . . . . 4 (a) Requests for Registration . . . . . . . . . . . . 4 (c) Filing and Effectiveness. . . . . . . . . . . . . 4 (d) Priority on Demand Registration . . . . . . . . . 5 (e) Postponement of Demand Registration . . . . . . . 6 4. Piggyback Registration . . . . . . . . . . . . . . . 6 (a) Right to Piggyback . . . . . . . . . . . . . . . 6 (b) Priority on Piggyback Registrations . . . . . . . 6 5. Restrictions on Sale by Holders of Registrable Securities . . . . . . . . . . . . . . . . . . . 7 6. Registration Procedures . . . . . . . . . . . . . . 7 7. Registration Expenses . . . . . . . . . . . . . . 12 8. Indemnification . . . . . . . . . . . . . . . . . 13 (a) Indemnification by the Company . . . . . . . 13 (b) Indemnification by Holders of Registrable Securities . . . . . . . . . . . . . . . . 14 (c) Conduct of Indemnification Proceedings . . . 15 (d) Contribution . . . . . . . . . . . . . . . . 15 9. Rule 144 . . . . . . . . . . . . . . . . . . . . . 16 10. Underwritten Registrations . . . . . . . . . . . . 16 Page No. ------- 11. Miscellaneous . . . . . . . . . . . . . . . . . . . 17 (a) Remedies . . . . . . . . . . . . . . . . . . . . 17 (b) No Inconsistent Agreements . . . . . . . . . 17 (c) Amendments and Waivers . . . . . . . . . . . . 17 (d) Notices . . . . . . . . . . . . . . . . . . . 17 (e) Owner of Registrable Securities . . . . . . . 18 (f) Successors and Assigns . . . . . . . . . . . 18 (g) Counterparts . . . . . . . . . . . . . . . . . 18 (h) Headings . . . . . . . . . . . . . . . . . . 18 (i) Governing Law . . . . . . . . . . . . . . . . 18 (j) Severability . . . . . . . . . . . . . . . . 18 (k) Entire Agreement . . . . . . . . . . . . . . . 19 (l) Attorneys' Fees . . . . . . . . . . . . . . . 19 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), is made and entered into as of , 1996, by and among Capstar Hotel ---------------------------- Investors, Inc., a Delaware corporation (the "Company"), and the other parties signatory hereto. RECITALS ------- The initial parties hereto have entered into, or are equity owners in entities that have entered into, other agreements which contemplate, among other things, the execution and delivery of this Agreement by the parties hereto. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. Definitions: For purposes of this Agreement, the following terms have ------------ the following meanings when used herein with initial capital letters: "Advice" shall have the meaning set forth in Section 6 hereof. -------- "Common Stock" shall mean the Common Stock, par value $0.01 per share, of -------------- the Company. "Demand Notice" shall have the meaning set forth in Section 3 hereof. --------------- "Demand Registration" shall have the meaning set forth in Section 3 --------------------- hereof. "Executive Investor Entities" shall mean each of the following Delaware ----------------------------- limited liability companies: WMB Hotel Associates, L.L.C.; CapStar GP Corp. CapStar Executive Investors I, L.L.C.; CapStar Executive Investors II, L.L.C.; New CapStar Group I, L.L.C.; New CapStar Group II, L.L.C.; CapStar Hotels, Inc.; and Latham Hotels, Inc. "Executive Investor Shares" shall mean Registrable Securities which, on the --------------------------- date hereof, are owned by an Executive Investor Entity. 2 "Losses" shall have the meaning set forth in Section 8 hereof. -------- "Operating Partnership" shall mean CapStar Management Company, L.P., a ----------------------- Delaware limited partnership. "Piggyback Registration" shall have the meaning set forth in Section 4 ------------------------ hereof. "Prospectus" shall mean the prospectus included in any Registration ------------ Statement (including without limitation a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "Registrable Securities" shall mean each of the Shares, until, in the case ------------------------ of any such Share, (i) it is effectively registered under the Securities Act and disposed of in accordance with the Registration Statement covering it, (ii) it is saleable by the holder thereof pursuant to Rule 144(k), or (iii) it is distributed to the public by the holder thereof pursuant to Rule 144; provided, -------- however, that for purposes of Sections 3(a), 3(d) and 4(a), Registrable Shares - -------- shall not include any Shares that are subject to a lock-up agreement during the period in which disposition of such Shares would violate the terms of such lock- up agreement. "Registration Expenses" shall have the meaning set forth in Section 4 ----------------------- hereof. "Registration Statement" shall mean any registration statement of the ------------------------ Company under the Securities Act that covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the related Prospectus, all amendments and supplements to such registration statement (including post- effective amendments), all exhibits and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "Rule 144" shall mean Rule 144 promulgated by the SEC under the Securities ---------- Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC. "SEC" shall mean the Securities and Exchange Commission. ----- "Securities Act" shall mean the Securities Act of 1933, as amended. ---------------- 3 "Shares" shall mean all shares of Common Stock acquired by any party hereto -------- (other than the Company) pursuant to the Formation Agreement as of June 20, 1996, among the Company and the other parties identified on the signature pages thereof, and any subsequent holder of any such Shares that acquired such Shares in a transaction exempt from registration under the Securities Act. "Special Counsel" shall have the meaning set forth in Section 7(b) ----------------- hereof. "Underwritten registration or underwritten offering" shall mean a sale of ---------------------------------------------------- securities of the Company to an underwriter for reoffering to the public pursuant to a Registration Statement filed by the Company with the SEC under the Securities Act. "Units" shall mean units representing limited partnership ownership ------- interests in the Operating Partnership, which interests may be redeemed, under certain circumstances for Shares. 2. Executive Investor Entities Registration. ---------------------------------------- (a) Request for Registration. Unless the Company has theretofore filed ------------------------- a registration with respect to a Special Demand Registration (as defined in Section 3(b)), at any time after the date that is one year following the date hereof, any or all of the Executive Investor Entities, will have the right, exercisable one time by written notice to the Company (an "Executive Investor Entity Notice"), to require the Company to file with the SEC a registration statement under the Securities Act (an "Executive Investor Entity Registration") registering the distribution of the Registrable Securities held by such Executive Investor Entity to direct or indirect owners of equity interests in such Executive Investor Entity, whether pursuant to the dissolution of such Executive Investor Entity or otherwise, under and in accordance with the provisions of the Securities Act (an "Equity Holder Distribution"). If, in the view of the Company's legal counsel a registration statement relating to an Equity Holder Distribution will not result in the shares to be distributed pursuant thereto to persons other than affiliates of the Company being freely tradable by such non-affiliates under the Securities Act, the Company shall not be required to prepare and file such registration statement and the Company shall so notify the Executive Investor Entities. (b) Filing and Effectiveness. Subject to the last sentence of Section ------------------------- 2(a) hereof, the Company will file a Registration Statement relating to an Executive Investor Entity Registration within 60 calendar days of the date on which the Executive Investor Notice is given an will use all reasonable efforts to cause the same to be declared effective by the SEC within 120 calendar days of the date on which the Executive Investor Notice is first given. Any request made pursuant to this Section 2 will specify the number of Registrable Securities to be registered and will also specify the intended method of distribution thereof. 4 3. Demand Registration. ------------------- (a) Requests for Registration. At any time and from time to time after -------------------------- the date that is 180 days following the date of this Agreement, one or more holders of Registrable Securities will have the right, by written notice delivered to the Company (a "Demand Notice"), to require the Company to register (a "Demand Registration") Registrable Securities under and in accordance with the provisions of the Securities Act; provided, however, that (i) no such Demand ------------------ Registration may be required unless the total amount of Registrable Securities sought to be included in such Demand Registration has a market value of at least $10 million (calculated based on the closing sale price of such securities on the principal securities exchange on which such securities are listed on the business day immediately preceding the date of the Demand Notice) as of the time a Demand Notice is given and (ii) no Demand Notice may be given prior to six months after the effective date of the immediately preceding Demand Registration. Notwithstanding the foregoing, a good faith decision by a holder to withdraw Registrable Securities from registration will not affect the Company's obligations hereunder even if the amount remaining to be registered has a market value of less than $10 million (calculated as aforesaid). Subject to the foregoing, there shall be no limit on the number of Demand Registrations that may be required pursuant to this Agreement. (b) Request for Special Demand Registration. At any time after the date ---------------------------------------- that is one year following the date of this Agreement, one or more holders of Executive Investor Shares will have the right, exercisable one time only by written notice delivered to the Company (a "Special Demand Notice"), to require the Company to register (a "Special Demand Registration") Executive Investor Shares under and in accordance with the provisions of the Securities Act; provided, however., that (i) no such Special Demand Registration may be required - ------------------- unless the total amount of Executive Investor Shares sought to be included in such Demand Registration has a market value of at least $5 million (calculated based on the closing sale price of such securities on the principal securities exchange on which such securities are listed on the business day immediately preceding the date of the Demand Notice) as of the time a Special Demand Notice is given, and (ii) no Special Demand Notice may be given prior to six months after :the effective date of any Demand Registration. Notwithstanding the foregoing, a good faith decision by a holder of Executive Investor Shares to withdraw its Executive Investor Shares will not affect the Company's obligation hereunder even if the amount remaining to be registered has a market value of less than $5 million (calculated as aforesaid) provided that the market value of the amount remaining to be registered is at least $3 million. (c) Filing and Effectiveness. The Company will file a Registration ------------------------- Statement relating to any Demand Registration (including a Special Demand Registration) as soon as possible after the date on which the Demand Notice is given (but in no event later than 60 calendar days after receipt of such Demand 5 Notice) and will use all reasonable efforts to cause the same to be declared effective by the SEC within 120 calendar days of the date on which the holders of Registrable Securities first give the Demand Notice required by Section 3(a) hereof or the Special Demand Notice required by Section 3(b) hereof, as the case may be, with respect to such Demand Registration. All requests made pursuant to this Section 3 will specify the number of Registrable Securities to be registered and will also specify the intended methods of disposition thereof. If any Demand Registration is requested to be effected as a "shelf" registration by the holders of Registrable Securities demanding such Demand Registration, the Company will keep the Registration Statement filed in respect thereof effective for a period of up to six months from the date on which the SEC declares such Registration Statement effective (subject to extension pursuant to Sections 5 and 6 hereof) or such shorter period that will terminate when all Registrable Securities covered by such Registration Statement have been sold pursuant to such Registration Statement. Within ten calendar days after receipt of such Demand Notice, the Company will serve written notice thereof (the "Notice") to all other holders of Registrable Securities and will, subject to the provisions of Section 3(d) hereof, include in such registration all Registrable Securities with respect to which the Company receives written requests for inclusion therein within 20 calendar days after the receipt of the Notice by the applicable holder. The holders of Registrable Securities will be permitted to withdraw in good faith all or part of the Registrable Securities from a Demand Registration at any time prior to the effective date of such Demand Registration, in which event the Company will promptly amend or, if applicable, withdraw the related Registration Statement. (d) Priority on Demand Registration. If Registrable Securities are to -------------------------------- be registered pursuant to a Demand Registration (including a Special Demand Registration), the Company shall provide written notice to the other holders of Registrable Securities and will permit all such holders who request to be included in the Demand Registration to include any or all Registrable Securities held by such holders in such Demand Registration. Notwithstanding the foregoing, if the managing underwriter or underwriters of an underwritten offering to which such Demand Registration relates advises the holders of Registrable Securities that the total amount of Registrable Securities that such holders intend to include in such Demand Registration is in the aggregate such as to materially and adversely affect the success of such offering, then (i) in the case of a Demand Registration pursuant to Section 3(a) hereof, the number of Registrable Securities to be included in such Demand Registration will, if necessary, be reduced and there will be included in such underwritten offering the number of Registrable Securities that, in the opinion of such managing underwriter or underwriters, can be sold without materially and adversely 6 affecting the success of such offering, allocated pro rata among the holders of -------- Registrable Securities on the basis of the amount of Registrable Securities requested to be included therein by each such holder, and (ii) in the case of a Special Demand Registration, the amount of Registrable Securities other than Executive Investor Shares (allocated pro rata among such holders on the basis of -------- the Registrable Securities other than Executive Investor Securities requested to be included therein by each such holder) shall be reduced (to zero if necessary) to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter or underwriters. (e) Postponement of Demand Registration. The Company will be entitled ------------------------------------ to postpone the filing period of any Demand Registration for a reasonable period of time not in excess of 90 calendar days, if the Company determines, in the good faith exercise of the business judgment of its Board of Directors, that such registration and offering could materially interfere with bona fide -------- financing plans of the Company or would require disclosure of information, the premature disclosure of which could materially and adversely affect the Company. If the Company postpones the filing of a Registration Statement, it will promptly notify the holders of Registrable Securities in writing when the events or circumstances permitting such postponement have ended. 4. Piggyback Registration. ---------------------- (a) Right to Piggyback. If at any time the Company proposes to file a ------------------- registration statement under the Securities Act with respect to a primary offering of any class of equity securities (or securities convertible into, exchangeable for or exercisable for a class of equity securities of the Company) by the Company (other than a registration statement (i) on Form S-4, S-8 or any successor form thereto, (ii) filed in connection with an exchange offer or an offering of securities solely to the Company's existing stockholders or (iii) filed solely in connection with an offering made solely to employees of the Company or in connection with an Executive Investor Entity Registration), then the Company will give written notice of such proposed filing to the holders of Registrable Securities at least 30 calendar days before the anticipated filing date. Such notice will offer such holders the opportunity to register such amount of Registrable Securities as each such holder may request (a "Piggyback Registration"). Subject to Section 4(b) hereof, the Company will include in each such Piggyback Registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein. The holders of Registrable Securities will be permitted to withdraw all or part of the Registrable Securities from a Piggyback Registration at any time prior to the effective date of such Piggyback Registration. (b) Priority on Piggyback Registrations. The Company will cause the ------------------------------------ managing underwriter or underwriters of a proposed underwritten offering on behalf of the Company to permit holders of Registrable Securities requested to be 7 included in the registration for such offering to include therein all such Registrable Securities requested to be so included on the same terms and conditions as any securities of the Company included therein. Notwithstanding the foregoing, if the managing underwriter or underwriters of such offering deliver an opinion to the holders of Registrable Securities to the effect that the total amount of securities which such holders and the Company propose to include in such offering is such as to materially and adversely affect the success of such offering, then the amount of securities to be included therein for the account of holders of Registrable Securities (allocated pro rata among -------- such holders on the basis of the Registrable Securities requested to be included therein by each such holder) will be reduced (to zero if necessary) to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter or underwriters. The managing underwriter or underwriters, applying the same standard, may also exclude entirely from such offering all Registrable Securities proposed to be included in such offering to the extent the Registrable Securities are not of the same class as securities of the Company included in such offering. 5. Restrictions on Sale by Holders of Registrable Securities. Each holder ---------------------------------------------------------- of Registrable Securities agrees, if such holder is so requested (pursuant to a timely written notice) by the managing underwriter or underwriters in an underwritten offering of any class of securities that constitutes Registrable Securities, not to effect any public sale or distribution of any of the Company's securities of such class (except as part of such underwritten offering), including a sale pursuant to Rule 144, during the 10-calendar day period prior to, and during the 90-calendar day period beginning on, the closing date of such underwritten offering. 6. Registration Procedures. In connection with the Company's registration ------------------------ obligations pursuant to Sections 2, 3 and 4 hereof, the Company will effect such registrations to permit the sale of such Registrable Securities in accordance with the intended method or methods of disposition thereof, and pursuant thereto the Company will as expeditiously as possible, in each case, to the extent applicable: (a) Prepare and file with the SEC a Registration Statement or Registration Statements on any appropriate form under the Securities Act available for the sale of the Registrable Securities by the holders thereof in accordance with the intended method or methods of distribution thereof, and cause each such Registration Statement to become effective and remain effective as provided herein; provided, however, that before filing a Registration ------------------ Statement or Prospectus or any amendments or supplements thereto (including documents that would be incorporated or deemed to be incorporated therein by reference) the Company will furnish to the holders of the Registrable Securities covered by such Registration Statement, the Special Counsel and the managing underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to review of such holders, the Special Counsel and such underwriters, and the Company will not file any such Registration Statement or amendment thereto or any Prospectus or any supplement thereto (including such 8 documents which, upon filing, would or would be incorporated or deemed to be incorporated by reference therein) to which the holders of a majority of the Registrable Securities covered by such Registration Statement, the Special Counsel or the managing underwriter, if any, shall reasonably object on a timely basis. (b) Prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement continuously effective for the applicable period specified in Section 3; cause the related Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended methods of disposition by the sellers thereof set forth in such Registration Statement as so amended or to such Prospectus as so supplemented. (c) Notify the selling holders of Registrable Securities, the Special Counsel and the managing underwriters, if any, promptly, and (if requested by any such person) confirm such notice in writing, (i) when a Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the SEC or any other federal or state governmental authority for amendments or supplements to a Registration Statement or related Prospectus or for additional information, (iii) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if at any time the representations and warranties of the Company contained in any agreement contemplated by Section 6(m) hereof (including any underwriting agreement) cease to be true and correct, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, (vi) of the occurrence of any event which makes any statement made in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or which requires the making of any changes in a Registration Statement, Prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and, in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (vii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate. 9 (d) Use every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement, or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest possible moment. (e) If requested by the managing underwriters, if any, or the holders of a majority of the Registrable Securities being registered, (i) promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters, if any, and such holder agree should be included therein as may be required by applicable law and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment; provided, however, that the Company will not be required to take any ------------------ actions under this Section 6(e) that are not, in the opinion of counsel for the Company, in compliance with applicable law. (f) Furnish to each selling holder of Registrable Securities, the Special Counsel and each managing underwriter, if any, without charge, at least one conformed copy of the Registration Statement and any post-effective amendment thereto, including financial statements (but excluding schedules, all documents incorporated or deemed incorporated therein by reference and all exhibits, unless requested in writing by such holder, counsel or underwriter). (g) Deliver to each selling holder of Registrable Securities, the Special Counsel and the underwriters, if any, without charge, as many copies of the Prospectus or Prospectuses relating to such Registrable Securities (including each preliminary prospectus) and any amendment or supplement thereto as such persons may request; and the Company hereby consents to the use of such Prospectus or each amendment or supplement thereto by each of the selling holders or Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus or any amendment or supplement thereto. (h) Prior to any public offering of Registrable Securities, to register or qualify or cooperate with the selling holders of Registrable Securities, the underwriters, if any, and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions within the United States as any seller or underwriter reasonably requests in writing; use all reasonable efforts to keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdiction of the Registrable Securities covered by the applicable Registration Statement; provided, however, that the ------------------ Company will not be required to (i) qualify general to do business in any jurisdiction 10 in which it is not then so qualified or (ii) take any action that would subject it to general service of process in any such jurisdiction in which it is not then so subject. (i) Cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters, if any, shall request at least two business days prior to any sale of Registrable Securities to the underwriters. (j) Use all reasonable efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities within the United States except as may be required solely as a consequence of the nature of such selling holder's business, in which case the Company will cooperate in all reasonable respects with the filing of such Registration Statement and the granting of such approvals as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities. (k) Upon the occurrence of any event contemplated by Section 6(c)(vi) or 6(c)(vii) hereof, prepare a supplement or post-effective amendment to each Registration Statement or a supplement to the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (l) Use all reasonable efforts to cause all Registrable Securities covered by such Registration Statement to be listed on each securities exchange, if any, on which similar securities issued by the Company are then listed. (m) Enter into such agreements (including, in the event of an underwritten offering, an underwriting agreement in form, scope and substance as is customary in underwritten offerings) and take all such other actions in connection therewith (including those requested by the holders of a majority of the Registrable Securities being sold or, in the event of an underwritten offering, those requested by the managing underwriters) in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration, (i) make such representations and warranties to the holders of such Registrable Securities and the underwriters, if any, with respect to the business of the Company and its subsidiaries, the Registration Statement, Prospectus and documents incorporated by reference or deemed incorporated by reference, if any, in each case, 11 in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings and confirm the same if and when requested; (ii) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority of the Registrable Securities being sold) addressed to such selling holder of Registrable Securities and each of the underwriters, if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such holders and underwriters, including without limitation the matters referred to in Section 6(M)(i) hereof; (iii) use its best efforts to obtain "comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data is, or is required to be, included in the Registration Statement), addressed to each selling holder of Registrable Securities and each of the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "comfort" letters in connection with underwritten offerings; and (iv) deliver such documents and certificates as may be requested by the holders of a majority of the Registrable Securities being sold, the Special Counsel and the managing underwriters, if any, to evidence the continued validity of the representations and warranties of the Company and its subsidiaries made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or similar agreement entered into by the Company. The foregoing actions will be taken in connection with each closing under such underwriting or similar agreement as and to the extent required thereunder. (n) Make available for inspection by a representative of the holders of Registrable Securities being sold, any underwriter participating in any disposition of Registrable Securities, and any attorney or accountant retained by such selling holders or underwriter, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and cause the officers, directors and employees of the Company and its subsidiaries to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such Registration Statement; provided, however, that any records, information or ------------------ documents that are designated by the Company in writing as confidential at the time of delivery of such records, information or documents will be kept confidential by such persons unless (i) such records, information or documents are in the public domain or otherwise publicly available, (ii) disclosure of such records, information or documents is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities, or (iii) disclosure of such records, information or documents, in the opinion of counsel to such person, is otherwise required by law (including, without limitation, pursuant to the requirements of the Securities Act). 12 (o) Comply with all applicable rules and regulations of the SEC and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 45 calendar days after the end of any 12-month period (or 90 calendar days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts underwritten offering, and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company, after the effective date of a Registration Statement, which statements shall cover said 12-month period. (p) In connection with any underwritten offering, cause appropriate members of its management to cooperate and participate on a reasonable basis in the underwriters' "road show" conferences related to such offering. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such Registrable Securities as the Company may, from time to time, reasonably request in writing and the Company may exclude from such registration the Registrable Securities of any seller who unreasonably fails to furnish such information within a reasonable time after receiving such request. Each holder of Registrable Securities will be deemed to have agreed by virtue of its acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in Section 6(c)(ii), 6(c)(iii), 6(c)(v), 6(c)(vi) or 6(c)(vii) hereof, such holder will forthwith discontinue disposition of such Registrable Securities covered by such Registration Statement or Prospectus until such holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(k) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus. In the event the Company shall give any such notice, the time period prescribed in Section 3(a) hereof will be extended by the number of days during the time period from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement shall have received (x) the copies of the supplemented or amended Prospectus contemplated by Section 6(k) hereof or (y) the Advice. 7. Registration Expenses. --------------------- (a) All fees and expenses incident to the performance of or compliance with this Agreement by the Company will be borne by the Company whether or not any of the Registration Statements become effective. Such fees and 13 expenses will include, without limitation, (i) all registration and filing fees (including without limitation fees and expenses (x) with respect to filings required to be made with the National Association of Securities Dealers, Inc. and (y) of compliance with securities or "blue sky" laws (including without limitation fees and disbursements of counsel for the underwriters or selling holders in connection with "blue sky" qualifications of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as the managing underwriters, if any, or holders of a majority of the Registrable Securities being sold may designate)), (ii) printing expenses (including without limitation expenses of printing certificates for Registrable Securities in a form eligible for deposit with The Depository Trust Company and of printing prospectuses if the printing of prospectuses is requested by the holders of a majority of the Registrable Securities included in any Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company and the Special Counsel for the sellers of the Registrable Securities, (v) fees and disbursements of all independent certified public accountants referred to in Section 6(m)(iii) hereof (including the expenses of any special audit and "comfort" letters required by or incident to such performance), (vi) any fees and expenses of any "qualified independent underwriter" or other independent appraiser participating in an offering pursuant to Section 3 of Schedule E to the By-laws of the National Association of Securities Dealers, Inc., (vii) Securities Act liability insurance if the Company so desires such insurance, and (viii) fees and expenses of all other persons retained by the Company. In addition, the Company will pay its internal expenses (including without limitation all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on any securities exchange on which similar securities issued by the Company are then listed and the fees and expenses of any person, including special experts, retained by the Company. In no event, however, will the Company be responsible for any underwriting discount or selling commission with respect to any sale of Registrable Securities pursuant to this Agreement. (b) In connection with any Demand Registration (including a Special Demand Registration) or Piggyback Registration hereunder, the Company will reimburse the holders of the Registrable Securities being registered in such registration for the reasonable fees and disbursements of not more than one counsel (the "Special Counsel"), together with appropriate local counsel, chosen by the holders of a majority of the Registrable Securities being registered. 8. Indemnification. --------------- (a) Indemnification by the Company. The Company will, without ------------------------------- limitation as to time, indemnify and hold harmless, to the fullest extent permitted by law, each holder of Registrable Securities registered pursuant to this Agreement, the officers, directors and agents and employees of each of them, each 14 person who controls such holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of any such controlling person, from and against all losses, claims, damages, liabilities, costs (including without limitation the costs of investigation and attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising out of or based upon any untrue or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or form of Prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are based solely upon information furnished in writing to the Company by such holder expressly for use therein; provided, however, that the Company ------------------ will not be liable to any holder of Registrable Securities to the extent that any such Losses arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus if either (A) (i) such holder failed to send or deliver a copy of the Prospectus with or prior to the delivery of written confirmation of the sale by such holder of a Registrable Security to the person asserting the claim from which such Losses arise and (ii) the Prospectus would have completely corrected such untrue statement or alleged untrue statement or such omission or alleged omission; or (B) such untrue statement or alleged untrue statement, omission or alleged omission is completely corrected in an amendment or supplement to the Prospectus previously furnished by or on behalf of the Company with copies of the Prospectus as so amended or supplemented, and such holder thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale of a Registrable Security to the person asserting the claim from which such Losses arise. (b) Indemnification by Holders of Registrable Securities. In connection ----------------------------------------------------- with any Registration Statement in which a holder of Registrable Securities is participating, such holder of Registrable Securities will furnish to the Company in writing such information as the Company reasonably requests for use in connection with any Registration Statement or Prospectus and will indemnify, to the fullest extent permitted by law, the Company, its directors and officers, agents and employees, each person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling persons, from and against all Losses arising out of or based upon any untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary prospectus or arising out of or based upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such holder to the Company expressly for use in such Registration Statement or Prospectus and was relied upon by the Company in the preparation of such Registration Statement, Prospectus or preliminary prospectus. In no event will the liability of any selling holder of Registrable Securities hereunder be greater in amount 15 than the dollar amount of the proceeds (net of payment of all expenses) received by such holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) Conduct of Indemnification Proceedings. If any person shall become --------------------------------------- entitled to indemnity hereunder (an "indemnified party"), such indemnified party shall give prompt notice to the party from which such indemnity is sought (the "indemnifying party") of any claim or of the commencement of any action or proceeding with respect to which such indemnified party seeks indemnification or contribution pursuant hereto; provided, however, that the failure to so notify ------------------ the indemnifying party will not relieve the indemnifying party from any obligation or liability except to the extent that the indemnifying party has been prejudiced materially by such failure. All fees and expenses (including any fees and expenses incurred in connection with investigating or preparing to defend such action or proceeding) will be paid to the indemnified party, as incurred, within five calendar days of written notice thereof to the indemnifying party (regardless of whether it is ultimately determined that an indemnified party is not entitled to indemnification hereunder). The indemnifying party will not consent to entry of any judgment or enter into any settlement or otherwise seek to terminate any action or proceeding in which any indemnified party is or could be a party and as to which indemnification or contribution could be sought by such indemnified party under this Section 8, unless such judgment, settlement or other termination includes as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release, in form and substance satisfactory to the indemnified party, from all liability in respect of such claim or litigation for which such indemnified party would be entitled to indemnification hereunder. (d) Contribution. If the indemnification provided for in this Section 8 is ------------- unavailable to an indemnified party under Section 8(a) or 8(b) hereof in respect of any Losses or is insufficient to hold such indemnified party harmless, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, will, jointly and severally, contribute to the amount paid or payable by such indemnified party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the indemnifying party or indemnifying parties, on the one hand, and such indemnified party, on the other hand, in connection with the actions, statement or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such indemnifying party or indemnifying parties, on the one hand, and such indemnified party, on the other hand, will be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or related to the information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party 16 as a result of any Losses will be deemed to include any legal or other fees or expenses incurred by such party in connection with any action or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata ------- allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provision of this Section 8(d), an indemnifying party that is a selling holder of Registrable Securities will not be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities sold by such indemnifying party and distributed to the public were offered to the public exceed the amount of any damages which such indemnifying party has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The indemnity, contribution and expense reimbursement obligations of the Company hereunder will be in addition to any liability the Company may otherwise have hereunder or otherwise. The provisions of this Section 8 will survive so long as Registrable Securities remain outstanding, notwithstanding any transfer of the Registrable Securities by any holder thereof or any termination of this Agreement. 9. Rule 144. The Company will file the reports required to be filed by it --------- under the Securities Act and the Exchange Act, and will cooperate with any holder of Registrable Securities (including without limitation by making such representations as any such holder may reasonably request), all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitations of the exemptions provided by Rule 144. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such filing requirements. Notwithstanding the foregoing, nothing in this Section 9 will be deemed to require the Company to register any of its securities under any section of the Exchange Act. 10. Underwritten Registrations. If any of the Registrable Securities covered --------------------------- by any Demand Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will manage the offering will be selected by the holders of a majority of the Registrable Securities included in the Demand Notice; provided, that such investment banker --------- or manager shall be reasonably satisfactory to the Company. If any Piggyback Registration is an underwritten offering, the Company will have the right to select the investment banker or investment bankers and managers to administer the offering. 17 11. Miscellaneous. ------------- (a) Remedies. In the event of a breach by the Company of its --------- obligations under this Agreement, each holder of Registrable Securities, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specified performance in respect of such breach, it will waive the defense that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company has not, as of the date --------------------------- hereof, and will not, on or after the date hereof, enter into any agreement with respect to its securities which is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. (c) Amendments and Waivers. The provisions of this Agreement, ----------------------- including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the holders of 90% of the then-outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of holders of Registrable Securities whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other holders of Registrable Securities may be given by holders of at least 75 % of the Registrable Securities being sold by such holders; provided, -------- however, that the provisions of this sentence may not be amended, modified, or - -------- supplemented except in accordance with the provisions of the immediately preceding sentence. (d) Notices. All notices and other communications provided for or -------- permitted hereunder shall be made in writing and will be deemed given (i) when made, if made by hand delivery, (ii) upon confirmation, if made by telecopier, or (iii) one business day after being deposited with a reputable next-day courier, to the parties as follows: (x) if to the Company, initially at 1010 Wisconsin Avenue, N.W., Washington, D.C. 20007, Telecopier (202) 965-4455, Attention: President, and thereafter at such other address, notice of which is given to the holders of Registrable Securities in accordance with the provisions of this Section 11(e); and 18 (y) if to any holder of Registrable Securities, at the most current address given by such holder to the Company in accordance with the provisions of this Section 11(e). (e) Owner of Registrable Securities. The Company will maintain, or will -------------------------------- cause its registrar and transfer agent to maintain, a stock book with respect to the Common Stock, in which all transfers of Registrable Securities of which the Company has received notice will be recorded. The Company may deem and treat the person in whose name Registrable Securities are registered in the stock book of the Company as the owner thereof for all purposes, including without limitation the giving of notices under this Agreement. (f) Successors and Assigns. This Agreement will inure to the benefit ----------------------- of and be binding upon the successors and assigns of each of the parties (including any pledgee acquiring securities by foreclosure) and will inure to the benefit of each holder of any Registrable Securities. Notwithstanding the foregoing, no transferee will have any of the rights granted under this Agreement (i) until such transferee shall have acknowledged its rights and obligations hereunder by a signed written statement of such transferee's acceptance of such rights and obligations, (ii) if the transferor notifies the Company in writing on or prior to such transfer that the transferee shall not have such rights, or (iii) if such transferee was not a party to this Agreement on the date hereof (or an affiliate of a party hereto) and acquired Registrable Securities in open-market purchases or pursuant to an underwritten public offering. (g) Counterparts. This Agreement may be executed in any number of ------------- counterparts and by the parties hereto in separate counterparts, each of which when so executed will be deemed to be an original and all of which taken together will constitute one and the same instrument. (h) Headings. The headings in this Agreement are for convenience of --------- reference only and will not limit or otherwise affect the meaning hereof. (i) Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED -------------- IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. (j) Severability. If any term, provision, covenant or restriction of ------------- this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein will remain in full force and effect and will in no way be affected, impaired or invalidated, and the parties hereto will use their best efforts to 19 find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. (k) Entire Agreement. This Agreement is intended by the parties as a ----------------- final expression of their agreement and is intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the registration rights granted by the Company with respect to the Registrable Securities. This Agreement supersedes all prior agreements and understandings among the parties with respect to such registration rights. (l) Attorneys' Fees. In any action or proceeding brought to enforce ---------------- any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the prevailing party, as determined by the court, will be entitled to recover reasonable attorneys' fees in addition to any other available remedy. (m) Termination. This Agreement shall terminate, and thereby become ------------ null and void, on the tenth anniversary of the date hereof; provided, however, that the provisions of Section 8 and Sections 11 (i) and (1) shall survive the termination of this Agreement. IN WITNESS HEREOF, the parties have executed a counterpart signature page of this Agreement as of the date first above written. CAPSTAR HOTEL INVESTORS, INC. By: -------------------------------------- Name: Title: CHERWELL INVESTORS, INC. By: -------------------------------------- Name: Title: 20 WMB HOTEL ASSOCIATES, L.L.C. By: ----------------------------- Name: Managing Member CAPSTAR EXECUTIVE INVESTORS I, L.L.C. By: ----------------------------- Name: Managing Member MC INVESTMENT CORPORATION By: ----------------------------- Name: Title: CAPSTAR HOTELS, INC. By: ------------------------------ Name: Title: LATHAM HOTELS, INC., By: ------------------------------ Name: Title: 21 CAPSTAR GP CORP. By: ------------------------------ Name: Title: CAPSTAR EXECUTIVE INVESTORS II, L.L.C. By: ------------------------------ Name: Managing Member OHP EQUISTAR, L.P. By: Oak Hill Partners, Inc., General Partner By: ------------------------------ Name: Title: OHP EQUISTAR II, L.P. By: Oak Hill Partners, Inc., General Partner By: ------------------------------ Name: Title: PENOBSCOT PARTNERS, L.P. By: PTJ Merchant Banking Partners, L.P., General Partner By: PTJ, Inc., Managing General Partner By: ------------------------------ Name: Title: 22 FWHY COINVESTMENTS VIII PARTNERS, L.P. By: Group 31, Inc., General Partner By: ------------------------------ Name: Title: EX-21 6 EXHIBIT 21 Jurisdiction of Incorporation or Doing Name Organization Business As ---- ------------ ---------- 1. CMC Airport, Inc. New York -- 2. EquiStar Acquisition Delaware Corporation 3. EquiStar Arlington Partners, Delaware Arlington Hilton Hotel L.P. 4. EquiStar Atlanta Company, Delaware -- L.L.C. 5. EquiStar Atlanta GP Delaware -- Company, L.L.C. 6. EquiStar Atlanta LP Delaware -- Company, L.L.C. 7. EquiStar Ballston Company, Delaware Arlington Renaissance Hotel L.L.C. 8. EquiStar Bellevue Company, Delaware Bellevue Hilton Hotel L.L.C. 9. EquiStar Charlotte Company, Delaware Charlotte Sheraton Airport L.L.C. Plaza 10. EquiStar Cleveland Company, Delaware Cleveland Holiday Inn L.L.C. 11. EquiStar Colorado Company, Delaware Colorado Springs Sheraton L. L.C. Hotel 12. EquiStar Irvine Company, Delaware Irvine Hilton Hotel L.L.C. 13. EquiStar Latham Company, Delaware Georgetown Latham Hotel L.L.C. 14. EquiStar Salt Lake Company, Delaware Salt Lake Airport Hilton L.L.C. 15. EquiStar Schaumberg Delaware Schaumberg Radisson Hotel Company, L.L.C. 16. EquiStar Somerset Company, Delaware Somerset Marriott Hotel L.L.C, 17. Leperq Atlanta Renaissance Delaware Atlanta Airport Westin Partners, L.P. EX-23.1 7 EXHIBIT 23.1 ACCOUNTANTS' CONSENT The Partners EquiStar Hotel Investors, L.P. and CapStar Management Company, L.P.: We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG PEAT MARWICK LLP Washington, D.C. June 21, 1996 EX-23.2 8 EXHIBIT 23.2 [BOBER, MARKEY & COMPANY LETTERHEAD] INDEPENDENT AUDITORS' CONSENT As independent auditors, we hereby consent to the use of our report dated April 30, 1996 with respect to the Cleveland Holiday Inn and Affiliate in this Registration Statement on Form S-1 filed by CapStar Hotel Investors, Inc.. We also consent to the reference to us under the heading "Experts" in the Prospectus, which is part of such Registration Statement. /s/ BOBER, MARKEY & COMPANY BOBER, MARKEY & COMPANY Akron, Ohio June 21, 1996 EX-27 9
5 CAPSTAR HOTEL INVESTORS, INC. FINANCIAL DATA SCHEDULE AT DECEMBER 31, 1995 AND MARCH 31, 1996 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED BALANCE SHEETS OF EQUISTAR HOTEL INVESTORS, L.P. AND SUBSIDIARIES AND CAPSTAR MANAGEMENT COMPANY, L.P. AS OF MARCH 31, 1996 AND DECEMBER 31, 1995 AND THE RELATED COMBINED STATEMENTS OF OPERATIONS, PARTNERS' CAPITAL, AND CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND FOR THE PERIOD FROM JANUARY 12, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS 12-MOS MAR-31-1996 DEC-31-1995 MAR-31-1996 DEC-31-1995 7,920,761 6,831,983 0 0 5,370,651 2,839,909 125,000 91,000 437,635 173,514 17,244,520 13,534,998 168,591,950 110,882,762 3,144,894 1,756,412 205,674,753 132,650,230 16,352,039 9,622,552 140,709,685 73,574,038 0 0 0 0 0 0 47,824,039 48,637,722 205,674,753 132,650,230 0 0 18,033,938 26,363,348 0 0 7,121,365 9,626,880 11,548,297 16,523,307 34,000 91,000 0 0 (635,724) 213,161 0 0 (635,724) 213,161 0 0 0 (887,631) 0 0 (642,129) (657,055) 0 0 0 0
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