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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 2001
REGISTRATION NO. 333-62510
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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FELCOR LODGING TRUST INCORPORATED
FELCOR LODGING LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
MARYLAND 75-2541756
DELAWARE 7011 75-2564994
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
LAWRENCE D. ROBINSON, ESQ.
EXECUTIVE VICE PRESIDENT & GENERAL COUNSEL
545 E. JOHN CARPENTER FRWY., SUITE 1300 545 E. JOHN CARPENTER FRWY., SUITE 1300
IRVING, TEXAS 75062 IRVING, TEXAS 75062
(972) 444-4900 (972) 444-4900
(Address, including zip code and telephone number, (Name, address, including ZIP code and telephone
including area code, of registrant's principal executive number, including area code, of agent for service)
offices)
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With copies to:
ROBERT W. DOCKERY, ESQ. RICHARD S. BORISOFF, ESQ. CHRISTOPHER L. BENNETT, ESQ.
JENKENS & GILCHRIST, PAUL, WEISS, RIFKIND, MERISTAR HOSPITALITY CORPORATION
A PROFESSIONAL CORPORATION WHARTON & GARRISON 1010 WISCONSIN AVENUE, N.W.
1445 ROSS AVENUE, SUITE 3200 1285 AVENUE OF THE AMERICAS WASHINGTON, D.C. 20007
DALLAS, TEXAS 75202-2799 NEW YORK, NEW YORK 10019 (202) 965-4455
(214) 855-4500 (212) 373-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: At the effective time of the proposed merger of MeriStar Hospitality
Corporation with and into FelCor Lodging Trust Incorporated and the proposed
merger of MeriStar Hospitality Operating Partnership, L.P. with a wholly-owned
subsidiary of FelCor Lodging Limited Partnership, as described in the Agreement
and Plan of Merger dated as of May 9, 2001, as amended as of July 1, 2001, and
attached as Appendix A to the joint proxy statement/prospectus forming a part of
this Registration Statement, which shall occur as promptly as practicable after
this Registration Statement becomes effective and the satisfaction or waiver of
all conditions to the closing of the mergers under the merger agreement, as
described in this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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(d)
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. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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EXPLANATORY NOTE
This registration statement contains (i) a joint proxy statement/prospectus
relating to the solicitation of proxies for approval by the stockholders of
MeriStar Hospitality Corporation, a Maryland corporation, or MeriStar, with and
into FelCor Lodging Trust Incorporated, a Maryland corporation, or FelCor, under
an agreement and plan of merger dated as of May 9, 2001, as amended as of July
1, 2001, among FelCor, MeriStar, FelCor Lodging Limited Partnership, a Delaware
limited partnership, or FelCor Partnership, and MeriStar Hospitality Operating
Partnership, L.P., a Delaware limited partnership, or MeriStar Partnership,
including the related issuance of shares of common stock by FelCor to the common
stockholders of MeriStar and the election of two new directors of FelCor, and
(ii) a prospectus supplement to such joint proxy statement/prospectus relating
to the issuance of units of limited partnership interest in FelCor Partnership
to the limited partners in MeriStar Partnership as a result of the merger of a
wholly-owned subsidiary of FelCor Partnership with and into MeriStar Partnership
under the same agreement and plan of merger, without solicitation of any votes
or consents of the partners in FelCor Partnership or MeriStar Partnership. The
partnership merger will occur immediately following the merger between FelCor
and MeriStar. The prospectus supplement will be delivered, along with a copy of
the joint proxy statement/ prospectus, only to the holders of the outstanding
units of limited partnership interest in MeriStar Partnership.
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THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS JOINT PROXY
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER
OR SALE IS NOT PERMITTED.
[FelCor]
[MeriStar]
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The boards of directors of FelCor Lodging Trust Incorporated and MeriStar
Hospitality Corporation have approved a merger agreement that provides for the
combination of the two companies. We believe that the merger is in the best
interests of the stockholders of FelCor and MeriStar and that the combined
company will be able to create more stockholder value than the companies
individually could achieve.
If we complete the merger, holders of MeriStar common stock will receive, for
each share of MeriStar common stock, $4.60 in cash and 0.784 of a share of
FelCor common stock. Cash will be paid instead of issuing fractional shares.
Because the portion of the merger consideration to be received in FelCor common
stock is fixed, the value of the consideration to be received by MeriStar common
stockholders in the merger will depend on the market price of FelCor common
stock at the time of the merger. On , 2001, FelCor common stock
closed at $ per share. Assuming that $ is the market price of FelCor
common stock at the time of the merger, the total value of the merger
consideration to be received by MeriStar stockholders would be $ per share,
or an aggregate of approximately $ billion. The common stock of FelCor is
traded on the New York Stock Exchange under the symbol "FCH", as will be the
common stock of the combined company. The MeriStar common stock is currently
traded on the New York Stock Exchange under the symbol "MHX." We estimate that
39.5% of the outstanding FelCor common stock immediately following completion of
the merger will be owned by former MeriStar common stockholders. FelCor
stockholders will continue to own their existing shares of capital stock after
the merger.
AFTER CAREFUL CONSIDERATION, THE BOARDS OF FELCOR AND MERISTAR HAVE DETERMINED
THAT THE MERGER IS IN THE BEST INTERESTS OF THEIR RESPECTIVE STOCKHOLDERS, AND
EACH BOARD RECOMMENDS THAT THEIR RESPECTIVE COMMON STOCKHOLDERS VOTE FOR
APPROVAL OF THE MERGER AGREEMENT AND THE MERGER, INCLUDING THE ELECTION OF PAUL
W. WHETSELL AND STEVEN D. JORNS TO FELCOR'S BOARD OF DIRECTORS.
We cannot complete the merger unless the FelCor and MeriStar common stockholders
approve the merger agreement and the merger at the special meetings to be held
by FelCor and MeriStar. Whether or not you plan to attend your special meeting,
please take the time to vote by completing and mailing the enclosed proxy card.
At the FelCor special meeting, FelCor common stockholders will also be asked to
approve and adopt an equity incentive program.
This document provides you with detailed information about your special meeting
and the proposed merger. You can also get information from publicly available
documents filed by both companies with the Securities and Exchange Commission.
WE ENCOURAGE YOU TO READ THIS ENTIRE DOCUMENT CAREFULLY.
FOR A DISCUSSION OF MATERIAL RISK FACTORS, SEE "RISK FACTORS" BEGINNING ON PAGE
27.
The dates, times and places of the meetings are:
For FELCOR stockholders:
, 2001
9:00 a.m., Central Time
Embassy Suites -- DFW South
4650 W. Airport Frwy.
Irving, Texas 75062
For MERISTAR stockholders:
, 2001
10:00 a.m., Eastern Time
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Thomas J. Corcoran, Jr. Paul W. Whetsell
President and Chief Executive Officer Chairman and Chief Executive Officer
FelCor Lodging Trust Incorporated MeriStar Hospitality Corporation
EACH VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
JOINT PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This joint proxy statement/prospectus is dated , 2001, and
is first being mailed to stockholders on or about , 2001.
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FELCOR LODGING TRUST INCORPORATED
545 E. JOHN CARPENTER FRWY., STE. 1300
IRVING, TEXAS 75062-3933
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2001
A special meeting of stockholders of FelCor Lodging Trust Incorporated, a
Maryland corporation, will be held at 9:00 a.m., Central Time, on
, 2001, at the Embassy Suites -- DFW South hotel, Irving, Texas for the
following purposes:
1. To consider and vote on the approval of the agreement and plan of
merger dated as of May 9, 2001, as amended, by and among FelCor Lodging
Trust Incorporated, FelCor Lodging Limited Partnership, MeriStar
Hospitality Corporation, and MeriStar Hospitality Operating Partnership,
L.P., and the merger of MeriStar with and into FelCor under the merger
agreement, including the election of Paul W. Whetsell and Steven D. Jorns
as two new directors to the board of directors of FelCor. The merger
agreement is attached as Appendix A to this joint proxy
statement/prospectus.
2. To consider and vote on the approval and adoption of the 2001
Restricted Stock and Stock Option Plan.
3. To transact any other business as may properly come before the
special meeting or any adjournment or postponement of the special meeting.
None of the above proposals is conditioned on the approval of another
proposal.
Approval of the merger proposal requires the affirmative vote of a majority
of the votes entitled to be cast at the FelCor special meeting. Approval of the
other proposals requires the affirmative vote of a majority of the votes
actually cast at the meeting.
Only holders of record of FelCor common stock at the close of business on
, 2001 are entitled to notice of and to vote at the special meeting
or any adjournments or postponements of the special meeting.
It is important that your common stock be represented and voted at the
meeting. Whether or not you plan to attend the meeting and vote your common
stock in person, please MARK, SIGN, DATE AND PROMPTLY RETURN your enclosed proxy
card in the postage-paid envelope.
Any proxy may be revoked at any time before its exercise at the meeting.
By the Order of the Board of
Directors of
FelCor Lodging Trust Incorporated
LAWRENCE D. ROBINSON
Secretary
, 2001
YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY CARD.
THE FELCOR BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND THE
MERGER OF MERISTAR WITH AND INTO FELCOR, INCLUDING THE ELECTION OF TWO NEW
DIRECTORS TO FELCOR'S BOARD OF DIRECTORS, AND THE 2001 RESTRICTED STOCK AND
STOCK OPTION PLAN AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE ABOVE PROPOSALS.
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MERISTAR HOSPITALITY CORPORATION
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, DC 20007
(202) 965-4455
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2001
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NOTICE IS GIVEN that a special meeting of the stockholders of MeriStar
Hospitality Corporation, a Maryland corporation, will be held at 10:00 a.m.,
Eastern time on , 2001, at . The board of directors asks you
to attend this meeting, in person or by proxy, for the following purposes:
1. To consider and vote on the approval of the agreement and plan of
merger dated as of May 9, 2001, as amended, by and among MeriStar, MeriStar
Hospitality Operating Partnership, L.P., FelCor Lodging Trust Incorporated
and FelCor Lodging Limited Partnership, and the merger of MeriStar with and
into FelCor under the merger agreement. The merger agreement is attached as
Appendix A to this joint proxy statement/prospectus. Upon completion of the
merger, FelCor will be the surviving corporation.
2. To transact any other business as may properly come before the
special meeting or any adjournment or postponement of the special meeting.
Approval of the above proposal requires the affirmative vote of a majority
of the votes entitled to be cast at the MeriStar special meeting.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE MERGER, AND UNANIMOUSLY RECOMMENDS THAT
HOLDERS OF MERISTAR COMMON STOCK VOTE FOR THE ABOVE PROPOSAL.
Only stockholders of record at the close of business on , 2001,
are entitled to notice of the special meeting and to vote at the special
meeting.
We cordially invite you to attend the special meeting in person because it
is important that your shares be represented at the meeting. However, to ensure
your representation at the special meeting, please sign, date and return the
enclosed proxy card in the accompanying postage-paid envelope as promptly as
possible. If you attend the meeting, you may vote in person, which will revoke a
signed proxy if you have already sent one in. You may also revoke your proxy at
any time before its exercise at the meeting by sending by mail or courier a
written revocation with the Secretary of MeriStar at the address set forth above
or by sending a duly executed proxy bearing a later date.
By the Order of the Board of
Directors of
MeriStar Hospitality Corporation
CHRISTOPHER L. BENNETT
Secretary
, 2001
YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY CARD.
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TABLE OF CONTENTS
PAGE
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Questions And Answers About The Merger...................... 1
Summary..................................................... 4
The Companies............................................. 4
The Merger................................................ 5
The Merger Agreement...................................... 10
Other Matters............................................. 16
Unaudited Pro Forma Condensed Combined Financial Data..... 17
Selected Historical Consolidated Financial Information.... 19
Equivalent Per Share Data................................. 24
Comparative Market Price Information...................... 25
Requests for Incorporated Information....................... 26
Risk Factors................................................ 27
A Warning About Forward-Looking Statements.................. 42
The Combined Company........................................ 43
The Special Meetings........................................ 46
Date, Time, Place and Purpose of the FelCor Special
Meeting................................................ 46
Date, Time, Place and Purpose of the MeriStar Special
Meeting................................................ 46
Who Can Vote.............................................. 46
How You Can Vote; Voting by Proxy Holders................. 46
Required Vote............................................. 47
Voting on Other Matters................................... 47
How You May Revoke Your Proxy Instructions................ 47
How Votes Are Counted..................................... 47
Cost of this Proxy Solicitation........................... 48
Attending the FelCor and MeriStar Special Meetings........ 48
List of FelCor Common Stockholders........................ 48
The Merger.................................................. 49
Background of the Merger.................................. 49
FelCor's Reasons for the Merger; Recommendation of the
FelCor Board........................................... 52
Opinions of FelCor's Financial Advisors................... 54
MeriStar's Reasons for the Merger; Recommendation of the
MeriStar Board......................................... 66
Opinion of MeriStar's Financial Advisor................... 68
Interests of Certain Persons in the Merger and Partnership
Merger................................................. 74
Regulatory Approvals...................................... 76
Accounting Treatment...................................... 76
Restrictions on Resales by Affiliates..................... 76
No Appraisal Rights....................................... 77
The Merger Agreement........................................ 78
General................................................... 78
Treatment of MeriStar Common Stock and FelCor Stock in the
Merger................................................. 78
Treatment of MeriStar Partnership Units in the Partnership
Merger................................................. 78
Dividends Prior to Closing................................ 79
Exchange of Stock Certificates............................ 79
Representations and Warranties............................ 80
Treatment of MeriStar Employees, Stock-Based Compensation
and Other Benefit Plans................................ 81
Certain Covenants......................................... 82
Conditions to the Merger.................................. 86
Termination of the Merger Agreement....................... 88
Expenses and Termination Fees............................. 89
(i)
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PAGE
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Payments from FelCor to MeriStar Upon Termination......... 89
Comparative Per Share Market Prices and Dividend
Information............................................... 91
Unaudited Pro Forma Combined Financial Information.......... 93
Description of FelCor Capital Stock......................... 110
Description of FelCor Common Stock........................ 110
Description of FelCor Preferred Stock..................... 111
Series A Preferred Stock............................... 111
Series B Preferred Stock and Depositary Shares......... 112
Selected FelCor Charter Provisions........................ 113
Maryland Takeover Statutes................................ 114
Comparison of Stockholder Rights............................ 116
United States Federal Income Tax Considerations............. 118
U.S. Federal Income Tax Consequences of the Merger........ 118
U.S. Federal Income Tax Consequences of FelCor's Status as
a REIT................................................. 121
Approval of FelCor's 2001 Restricted Stock and Stock Option
Plan...................................................... 144
Legal Matters............................................... 146
Experts..................................................... 146
Stockholder Proposals....................................... 147
Other Matters............................................... 147
Where You Can Find More Information......................... 148
What Information You Should Rely On......................... 149
Appendix A -- Agreement and Plan of Merger, as amended
Appendix B -- Opinion of Deutsche Banc Alex. Brown Inc.
Appendix C -- Opinion of J.P. Morgan Securities Inc.
Appendix D -- Opinion of Salomon Smith Barney Inc.
Appendix E -- FelCor 2001 Restricted Stock and Stock Option
Plan
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This joint proxy statement/prospectus contains registered trademarks and
servicemarks owned or licensed by companies other than us, including but not
limited to Best Western(R), Bristol House(R), Courtyard by Marriott(R), Crowne
Plaza(R), Disney(R), Doral(R), Doubletree(R), Doubletree Guest Suites(R),
Embassy Suites(R), Fairfield Inn(R), Four Points by Sheraton(R), Hampton Inn(R),
Hampton Inn & Suites(R), Harvey Hotel(R), Hilton(R), Hilton HHonors(R), Holiday
Inn(R), Holiday Inn Express(R), Holiday Inn Select(R), Homewood Suites(R) by
Hilton, Howard Johnson(R), Inter-Continental(R), Marriott(R), Radisson(R),
Ramada(R), Renaissance(R), Sheraton(R), Sheraton Suites(R), Walt Disney
World(R), Westin(R) and Wyndham(R).
(ii)
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT ARE THE PROPOSED TRANSACTIONS?
A: The merger is a transaction in which MeriStar
Hospitality Corporation will be merged with and into FelCor Lodging Trust
Incorporated, with FelCor being the surviving corporation. Immediately
after the merger, a wholly-owned subsidiary of FelCor's operating
partnership will be merged with and into MeriStar's operating partnership,
with MeriStar's operating partnership surviving as a subsidiary of
FelCor's operating partnership. FelCor's current executive officers and
directors will remain executive officers and directors of FelCor following
the merger. In addition, Mr. Paul W. Whetsell, current Chairman, Chief
Executive Officer and a director of MeriStar, and Mr. Steven D. Jorns, the
current Vice Chairman and a director of MeriStar will be added to FelCor's
board of directors.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: MERISTAR STOCKHOLDERS: You will be entitled
to receive $4.60 in cash and 0.784 of a share of FelCor common stock for
each share of MeriStar common stock you own. The merger consideration,
including the exchange ratio, was determined through an arm's-length
negotiation. The closing price of FelCor's common stock on the NYSE was
$ per share on , 2001. Assuming that $ is the market price
of FelCor common stock at the time of the merger, the total value of the
merger consideration to be received by you would be $ per share.
FelCor will not issue any fractional common shares, so you will receive
cash instead of any fractional shares of FelCor common stock.
FELCOR STOCKHOLDERS: You will continue to hold the shares of FelCor
common stock you currently own. You do not need to exchange your FelCor
stock certificates in connection with the merger.
Q: WHAT IF FELCOR OR MERISTAR STOCK PRICES VARY
PRIOR TO THE MERGER?
A: GENERAL: If the average closing price of
FelCor common stock during any ten consecutive trading days falls below
$18.40, either MeriStar or FelCor may terminate the merger agreement
without paying termination fees or reimbursing expenses of the other
party.
MERISTAR STOCKHOLDERS: The amount of cash and FelCor common stock you
will receive per share of MeriStar common stock in the merger is fixed and
will not be adjusted as a result of any changes in the prices of FelCor or
MeriStar common stock. Changes in the market price of FelCor common stock
will therefore affect the total value of merger consideration you will
receive. You should obtain current market prices for both FelCor and
MeriStar common stock.
FELCOR STOCKHOLDERS: You will continue to hold the shares of FelCor
common stock you currently own.
Q: DO I HAVE DISSENTERS' RIGHTS OF APPRAISAL WITH
RESPECT TO THE TRANSACTIONS?
A: No. Under Maryland law, MeriStar and
FelCor stockholders do not have dissenters' rights of appraisal with
respect to the merger.
Q: WHEN DO YOU EXPECT THE TRANSACTIONS TO BE
COMPLETED?
A: MeriStar and FelCor plan to complete the
transactions as soon as possible after the special meetings, subject to
the satisfaction or waiver of the other conditions to the merger as set
forth in the merger agreement. Although they cannot predict when these
conditions will be satisfied, MeriStar and FelCor hope to complete the
transactions during the third quarter of 2001.
Q: WILL THE COMPANIES BE PAYING DIVIDENDS
BETWEEN NOW AND THE CLOSING OF THE MERGER?
A: The companies expect to pay regular
quarterly dividends in accordance with their past practices. Currently,
FelCor is paying $0.55 per share, and MeriStar is paying $0.505 per share,
in quarterly dividends on its common stock. The holder of a share of
MeriStar common stock will receive in the merger, in addition to the $4.60
in cash consideration, 0.784 of a share of FelCor common stock that, at
FelCor's current dividend rate, would pay a quarterly divi-
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dend of $0.43 per 0.784 of a share. In addition, FelCor and MeriStar will
declare partial quarterly dividends payable to record holders as of the
date of the closing of the merger, if the merger closes at any time other
than within 15 days after the record date for a FelCor regularly scheduled
dividend. MeriStar will also declare an additional dividend, payable to
record holders of MeriStar common stock as of the closing date, if
required to maintain its status as a real estate investment trust, or
REIT.
Q: WHAT OTHER MATTERS WILL BE VOTED ON AT THE
SPECIAL MEETINGS?
A: In addition to the merger, FelCor
stockholders will be asked to approve a new restricted stock and stock
option plan for FelCor independent directors, executive officers and key
employees covering a total of 1 million shares of FelCor common stock.
Q: WHAT DO I NEED TO DO NOW?
A: You should carefully read and consider the
information contained in this joint proxy statement/prospectus, including
its appendices. It contains important information about MeriStar and
FelCor. It also contains important information about what the boards of
directors of MeriStar and FelCor considered in evaluating the
transactions. You should then complete and sign your proxy card and return
it in the enclosed return envelope as soon as possible, so that your
shares will be represented at your company's special meeting. If you sign
and send in your proxy but do not indicate how you want to vote, your
proxy will be counted as a vote in favor of all the proposals. If you do
not sign and send in your proxy, or if you abstain from voting at the
special meeting, your action will have the same effect as a vote against
the merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY
SIGNED PROXY CARD?
A: Yes. You can change your vote at any time
before your proxy is voted at your company's meeting. You can do this in
one of three ways:
First, you can send by mail or courier a written notice stating that you
revoke your proxy to MeriStar at the address listed below if you are a
MeriStar stockholder or to FelCor at the address listed below if you are a
FelCor stockholder;
Second, you can complete and submit a new proxy card, dated a later date
than the first proxy card, and send it to MeriStar or FelCor, as the case
may be. The new proxy card will automatically replace any earlier dated
proxy card that you returned; or
Third, you can attend the appropriate special meeting and vote in person.
Your attendance at your special meeting will not, however, by itself
revoke your proxy.
You should send any notice of revocation or your completed new proxy card
to MeriStar or FelCor, as the case may be, to the following applicable
address:
MeriStar Hospitality Corporation
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Attention: Christopher L. Bennett
FelCor Lodging Trust Incorporated
545 E. John Carpenter Frwy., Ste. 1300
Irving, TX 75062-3933
Attention: Lawrence D. Robinson
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY
BROKER, WILL MY BROKER VOTE FOR ME?
A: No. Your broker can vote your shares only if
you instruct your broker to vote by following the directions provided to
you by your broker. Your failure to instruct your broker on how to vote
your shares will be the equivalent of a vote against the proposed merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: MERISTAR STOCKHOLDERS: No. After the
merger is completed, the exchange agent will send you written instructions
for exchanging your stock certificates.
FELCOR STOCKHOLDERS: No. You will keep the certificates you now hold.
There will be no need to exchange your existing stock certificates.
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10
Q: WHOM SHOULD I CALL WITH QUESTIONS ABOUT THE
PROPOSALS?
A: MERISTAR STOCKHOLDERS: You should contact:
MeriStar Hospitality Corporation
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Attention: Melissa Thompson
(202) 965-4455
FELCOR STOCKHOLDERS: You should contact:
FelCor Lodging Trust Incorporated
545 E. John Carpenter Frwy., Ste. 1300
Irving, TX 75062-3933
Attention: Stephen A. Schafer
(972) 444-4900
Q: WHERE CAN I GET MORE INFORMATION?
A: You may obtain more information from
various sources, as set forth under the caption, "Where You Can Find More
Information" beginning on page 148 of this joint proxy
statement/prospectus.
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SUMMARY
This summary and the preceding questions and answers highlight selected
information from this joint proxy statement/prospectus. They do not contain all
of the information that may be important to you. We encourage you to carefully
read this entire joint proxy statement/prospectus and the documents to which we
refer you. Transactions described in this joint proxy statement/prospectus
include the merger between the FelCor operating partnership and the MeriStar
operating partnership. FelCor Partnership refers to FelCor Lodging Limited
Partnership and MeriStar Partnership refers to MeriStar Hospitality Operating
Partnership, L.P. "On a pro forma basis" refers to the pro forma adjustments set
forth in the "Unaudited Pro Forma Combined Financial Information" beginning on
page 93. For more information about FelCor and MeriStar, see "Where You Can Find
More Information" beginning on page 148. Some items in this summary refer to the
pages where that subject is discussed more fully.
THE COMPANIES
FELCOR LODGING TRUST INCORPORATED
545 E. John Carpenter Frwy., Suite 1300
Irving, Texas 75062
Telephone: (972) 444-4900
FelCor Lodging Trust Incorporated is one of the nation's largest hotel
REITs. On June 30, 2001, FelCor had ownership interests in 185 hotels in the
United States and Canada with nearly 50,000 rooms and suites. Of these hotels,
FelCor owns a 100% interest in 160 hotels, a 90% or greater interest in entities
owning seven hotels, a 60% interest in entities owning two hotels and a 50%
interest in separate entities owning 16 hotels. Fifteen of FelCor's hotels have
been designated as held for sale. FelCor owns the largest number of Embassy
Suites, Crowne Plaza, Holiday Inn and independently-owned Doubletree-branded
hotels in the world. FelCor is the sole general partner of, and owns the
controlling interest in, FelCor Lodging Limited Partnership, a Delaware limited
partnership. FelCor owns substantially all of its assets and conducts all of its
operations through FelCor Partnership, which principally is engaged in
acquiring, owning, and leasing hotels.
MERISTAR HOSPITALITY CORPORATION
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Telephone: (202) 965-4455
MeriStar Hospitality Corporation is a REIT which owns a portfolio of
primarily upscale, full service hotels, diversified geographically as well as by
franchise and brand affiliations, in the United States and Canada. On June 30,
2001, MeriStar owned 113 hotels with 28,877 rooms. MeriStar Hospitality
Operating Partnership, L.P., a Delaware limited partnership, is the operating
partnership of MeriStar Hospitality Corporation. MeriStar Hospitality
Corporation, which is the sole general partner of the operating partnership,
operates all of its business through the operating partnership. MeriStar's
hotels are located in major metropolitan areas or rapidly growing secondary
markets and are well located within these markets. A majority of the hotels are
operated under nationally recognized brand names such as Hilton, Sheraton,
Westin, Marriott, Radisson, Doubletree and Embassy Suites.
THE COMBINED COMPANY
Following the merger, FelCor, as the survivor of the merger, is expected to
be the nation's largest hotel REIT in terms of both the number of hotels and
hotel rooms, with ownership interests in 298 hotels and approximately 78,000
rooms located in 39 states and Canada. Based on the per share closing price of
FelCor's common stock on , 2001, the latest practicable date before the
mailing of this joint proxy statement/prospectus, the combined company is
expected to have an equity market capitalization of approximately $ billion,
with total debt of approximately $ billion. The combined company will have
geographic concentrations in Texas with 54 hotels, Florida with 37 hotels and
California with 32 hotels.
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THE MERGER
PROPOSAL TO APPROVE THE MERGER
This joint proxy statement/prospectus describes the proposed merger of
MeriStar with and into FelCor under a merger agreement. The merger is subject to
approval of the stockholders of both companies. Through this joint proxy
statement/prospectus, the boards of directors of FelCor and MeriStar are asking
the stockholders of FelCor and MeriStar, respectively, to approve the merger
agreement and the merger, including the election of Paul W. Whetsell and Steven
D. Jorns to FelCor's board of directors. You should read carefully the merger
agreement attached as Appendix A to this joint proxy statement/prospectus.
RECOMMENDATION OF FELCOR BOARD (SEE PAGE 52)
The FelCor board of directors has approved the merger agreement and the
merger, has determined that the merger agreement and the merger are in the best
interests of FelCor and its stockholders and recommends that FelCor common
stockholders vote FOR approval of the merger agreement and the merger. FelCor
common stockholders also should refer to the reasons that the FelCor board
considered in determining whether to adopt and approve the merger agreement and
the merger, as described beginning on page 52.
FELCOR'S REASONS FOR THE MERGER (SEE PAGE 52)
In determining to approve and recommend the merger agreement and the
merger, the FelCor board considered the terms of the merger agreement, the
historical and prospective information concerning FelCor's and MeriStar's
businesses, operations and financial performance, including FelCor's debt
service, financial obligations, and earnings prospects, and considered, among
other factors, the following potentially positive material factors resulting
from or relating to the merger:
- the increase in the geographic diversity of FelCor's hotels among
regions, the increase in revenue base and room count in key markets,
including East Coast markets, and the reduction of the dependence on any
one region, including Texas;
- the increase in FelCor's hotel brand diversity;
- the expansion of FelCor's focus on the upscale and full service business
segments of the hotel industry;
- annual cost savings of approximately $5 million through net decreases in
corporate payroll, the closing and subletting of the MeriStar offices in
Washington, D.C. and the elimination of other duplicate overhead costs;
- improved hotel-level operations through active asset management across a
larger number of hotel rooms;
- enhancement and expansion of relationships with hotel brand owners;
- the fixed, non-adjustable amount of cash payable in the merger, which
reduces the number of shares to be issued in the merger at current market
prices may benefit FelCor stockholders in the future;
- results of both a due diligence review of MeriStar and its assets, and
FelCor's management's assessment of the overall quality of MeriStar's
hotels;
- letters from the rating agencies indicating that, based upon the
information provided to them regarding the proposed merger and FelCor's
financing plans and subject to customary qualifications, they would
affirm FelCor's existing public debt ratings, with a stable outlook; and
- opinions of FelCor's financial advisors that the consideration to be paid
to MeriStar common stockholders by FelCor under the merger agreement is
fair to FelCor.
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The FelCor board of directors also considered the following potentially
negative material factors in connection with its determination:
- the debt of the combined company, on a pro forma basis at March 31, 2001,
as a percentage of investment in hotel assets is 50%, which is greater
than FelCor's corresponding historical leverage at March 31, 2001, of
39.7%;
- the combined company's continued concentration of hotels in some markets,
including California, Florida and Texas, each of which will represent
more than 10% of the combined company's revenues and collectively will
represent almost 50% of total revenues;
- limits on future capital plans, share repurchases and asset acquisitions;
- financing risks associated with the assumption of an aggregate of $877.8
million of MeriStar debt, including $377.8 million in mortgage debt and
$500.0 million in MeriStar senior notes;
- refinancing risks associated with the satisfaction of an aggregate of
$801.3 million of MeriStar debt, including the repayment of $442.0 million
outstanding at March 31, 2001 under MeriStar's revolving credit
facilities, and the purchase of $154.3 million in MeriStar convertible
subordinated notes and $205.0 million in MeriStar subordinated notes;
- the significant cost, estimated at $59 million, involved in completing
the merger and related financings as well as the diversion of management
time and effort;
- the limitation, resulting from MeriStar's existing agreements, on the
ability of the combined company to use a hotel manager other than MeriStar
Hotels & Resorts to manage any hotels not managed by hotel brand owners;
- the potential conflicts of interest which may arise from the continuing
contractual relationships with, and the payment of management and
termination fees to, MeriStar Hotels & Resorts, of which Mr. Whetsell will
continue to serve as Chief Executive Officer and a director and of which
Mr. Jorns will continue to serve as a director;
- the risk that some of the anticipated benefits of the merger may not be
realized due to changes in the hotel market in general and potential
difficulties or costs in integrating the two companies; and
- the risk that termination fees and expenses totaling up to $40 million
may be payable by FelCor under some circumstances.
RECOMMENDATION OF MERISTAR BOARD (SEE PAGE 66)
The MeriStar board of directors has adopted and approved the merger
agreement and the merger, has determined that they are in the best interests of
MeriStar and its stockholders and recommends that MeriStar common stockholders
vote FOR approval of the merger proposal. MeriStar common stockholders should
refer to the reasons that the MeriStar board considered in making its
determination beginning on page 66.
MERISTAR'S REASONS FOR THE MERGER (SEE PAGE 66)
In making its determination with respect to the merger agreement and the
merger, the MeriStar board of directors considered the entirety of the terms of
the merger agreement. In addition, the MeriStar board of directors considered
the following potentially positive material factors in connection with its
determination:
- that the combined company would be the largest hospitality REIT in terms
of number of hotels and number of rooms;
- the enhanced visibility of the combined company to investors in the
hospitality REIT sector due to a more diversified asset portfolio,
expanded stockholder base and increased public float;
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- the merger consideration payable to MeriStar common stockholders, which
represented a premium of 9% over the average closing price of MeriStar
common stock during the 20 trading days prior to May 9, 2001, the date of
the merger agreement, and a premium of 12% over the average closing price
of MeriStar common stock during the 20 trading days prior to April 16,
2001, the date of the first MeriStar board meeting relating to the
merger;
- the combined company's potentially increased bargaining power in
negotiations with suppliers;
- the combined company's potentially enhanced negotiating power with
existing hotel brand owners;
- the opportunity for revenue growth due to a larger pool of assets;
- potentially improved access to additional financing because of the larger
size of the combined company;
- the treatment under the merger agreement of MeriStar employees who are
not retained by FelCor;
- the relationship between the combined company and MeriStar Hotels &
Resorts, Inc., the current manager of 105 of MeriStar's hotels;
- anticipated annual savings of approximately $5 million in general and
administrative expenses from reductions in personnel, closing and
subletting MeriStar's corporate offices and the elimination of other
duplicate overhead costs; and
- the opinion to the MeriStar board dated May 9, 2001 of Salomon Smith
Barney Inc., MeriStar's financial advisor, as to the fairness, from a
financial point of view and as of that date, of the merger consideration
to be received by the MeriStar common stockholders.
The MeriStar board of directors also considered the following potentially
negative material factors in connection with its determination:
- the inherent risks involved in integrating two companies the size of
MeriStar and FelCor;
- the combined company's continued concentration of hotels in some markets,
including California, Florida and Texas, each of which will represent
more than 10% of the combined company's revenues and collectively will
represent almost 50% of total revenues; and
- the need for FelCor to hire a qualified chief financial officer.
VOTES REQUIRED FOR APPROVAL (SEE PAGE 47)
FelCor. Approval of the merger agreement and the merger, including the
election of two new directors to FelCor's board of directors, requires the
affirmative vote of the holders of at least a majority of the votes entitled to
be cast at the FelCor special meeting. You can vote at the FelCor special
meeting if you owned FelCor common stock at the close of business on
, 2001. A total of shares of FelCor common stock, or %
of the shares of FelCor common stock entitled to vote at the FelCor special
meeting, were held as of , 2001, by FelCor directors, executive
officers and their affiliates. The vote of FelCor preferred stockholders is not
required for approval of the merger agreement or the merger.
MeriStar. Approval of the merger agreement and the merger requires the
affirmative vote of the holders of a majority of the votes entitled to be cast
at the MeriStar special meeting. You can vote at the MeriStar special meeting if
you owned MeriStar common stock at the close of business on , 2001.
A total of shares of MeriStar common stock, or % of the shares of
MeriStar common stock entitled to vote at the MeriStar special meeting, were
held as of , 2001, by MeriStar directors, executive officers and
their affiliates.
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OPINIONS OF FINANCIAL ADVISORS
FelCor (see page 54)
In deciding to approve the merger agreement and the merger, the FelCor
board considered the oral opinions, delivered May 9, 2001, of its financial
advisors, Deutsche Banc Alex. Brown Inc., or DBAB, and J.P. Morgan Securities
Inc., or JPMorgan, that, as of that date, the consideration to be paid to
MeriStar common stockholders by FelCor under the merger agreement was fair, from
a financial point of view, to FelCor. These opinions were confirmed in writing
on May 9, 2001. Under the terms of its engagement, FelCor has agreed to pay DBAB
for its services in connection with the merger an aggregate of $5.0 million,
$3.75 million of which is contingent upon the closing of the merger. JPMorgan
expects to receive between $5.7 million and $7.7 million in merger-related
advisory and financing fees in connection with the merger, of which $3 million
to $5 million is contingent upon the closing of the merger. The DBAB and
JPMorgan opinions, which set forth the assumptions made, procedures followed,
matters considered and limitations on the review undertaken by DBAB and JPMorgan
in connection with their opinions, are attached as Appendices B and C,
respectively, to this document. WE ENCOURAGE FELCOR STOCKHOLDERS TO READ THESE
OPINIONS CAREFULLY. DBAB'S AND JPMORGAN'S OPINIONS ARE ADDRESSED TO THE FELCOR
BOARD, AND NEITHER OPINION CONSTITUTES A RECOMMENDATION TO ANY HOLDER OF
FELCOR'S COMMON STOCK OR MERISTAR'S COMMON STOCK AS TO HOW TO VOTE WITH RESPECT
TO ANY MATTERS RELATING TO THE PROPOSED TRANSACTIONS.
MeriStar (see page 68)
In connection with the proposed merger, the MeriStar board received a
written opinion dated May 9, 2001 from MeriStar's financial advisor, Salomon
Smith Barney, as to the fairness, from a financial point of view, of the merger
consideration to be received by the MeriStar common stockholders. Under the
terms of its engagement, MeriStar has agreed to pay Salomon Smith Barney for its
financial advisory services an aggregate fee of $6.0 million, $4.5 million of
which is contingent upon completion of the merger. The full text of Salomon
Smith Barney's written opinion dated May 9, 2001 is attached to this joint proxy
statement/prospectus as Appendix D. We encourage MeriStar common stockholders to
read this opinion carefully in its entirety for a description of the assumptions
made, procedures followed, matters considered and limitations on the review
undertaken. SALOMON SMITH BARNEY'S OPINION IS ADDRESSED TO THE MERISTAR BOARD
AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER WITH RESPECT TO ANY
MATTERS RELATING TO THE PROPOSED TRANSACTIONS.
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND THE PARTNERSHIP MERGER (SEE PAGE
74)
When you consider the recommendations of FelCor's and MeriStar's boards of
directors, you should be aware that some FelCor and MeriStar executive officers
and directors, because they will receive material benefits as a result of the
merger that are not available to other stockholders, may have interests in the
merger that may be different from, or in addition to, your own.
- Paul W. Whetsell, the current Chairman, Chief Executive Officer and a
director of MeriStar, and Steven D. Jorns, the current Vice Chairman and
a director of MeriStar, will become directors of FelCor.
- Bruce G. Wiles, the current President, Chief Investment Officer and a
director of MeriStar, has been offered employment by FelCor.
- FelCor will be obligated to make severance payments totalling
approximately $1,767,500, $405,000, $1,350,000 and $980,600,
respectively, to Messrs. Whetsell, Jorns, Emery and Wiles, under their
preexisting employment contracts, which require these payments upon their
resignation or termination due to MeriStar's change of control arising
from the merger. In addition, FelCor will be obligated to make tax
reimbursement payments of approximately $4.1 million, $2.2 million and
$550,000, respectively, to Messrs. Whetsell, Emery and Wiles.
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- FelCor expects to make severance payments to approximately 40 other
legal, administrative, accounting and clerical employees of MeriStar,
totalling approximately $2 million, because FelCor does not intend to
employ them after the merger. None of these employees is an executive
officer of MeriStar or entitled to tax reimbursements.
- Any unvested restricted stock and options held by officers and directors
of MeriStar will vest as a result of the merger. Mr. Whetsell owns
125,000 unvested shares of restricted stock and unvested options to
purchase 284,580 shares of MeriStar common stock, all of which will vest
as a result of the merger, with an aggregate value of approximately $3.6
million. Mr. Emery owns 67,334 unvested shares of restricted stock and
unvested options to purchase 156,978 shares of MeriStar common stock, all
of which will vest as a result of the merger, with an aggregate value of
approximately $2.1 million. Mr. Jorns owns unvested options to purchase
8,333 shares of MeriStar common stock, all of which will vest as a result
of the merger, with an aggregate value of approximately $14,900. Mr.
Wiles owns 50,667 unvested shares of restricted stock and unvested
options to purchase 116,666 shares of MeriStar common stock, all of which
will vest as a result of the merger, with an aggregate value of
approximately $1.7 million. Mr. Wiles will be required to waive the
accelerated vesting of these options if he accepts employment with
FelCor. All of the values expressed in this paragraph are based on the
closing price of $21.98 per share of MeriStar common stock on July 17,
2001. Option values are based on the difference between that closing
price per share and the exercise price per share, if positive.
- Each of the profits-only units in MeriStar Partnership of Messrs.
Whetsell and Emery will vest and be exchanged for $4.60 in cash and 0.784
of a common unit in FelCor Partnership as a result of the partnership
merger. Mr. Whetsell owns 342,917 unvested profits-only units in MeriStar
Partnership, all of which will vest as a result of the merger, with an
aggregate value of approximately $7.6 million. Mr. Emery owns 221,459
unvested profits-only units in MeriStar Partnership, all of which will
vest as a result of the merger, with an aggregate value of approximately
$4.9 million. Because each common unit in FelCor Partnership is
redeemable for a share of FelCor common stock, the value of each
profits-only unit is based on 0.784 times the closing price of $22.30 per
share of FelCor common stock on July 17, 2001, plus $4.60. Other officers
and directors of MeriStar collectively own 125,000 profits-only units
that will also be exchanged for cash and common units in FelCor
Partnership, but their unvested profits-only units will be canceled.
- Thomas J. Corcoran, Jr., President, Chief Executive Officer and a
director of FelCor, Richard O. Jacobson, a director of FelCor, and Thomas
L. Wiese, a Vice President of FelCor, collectively own 93,160 common
units in MeriStar Partnership, with an aggregate value of $2.0 million.
Because each MeriStar Partnership common unit is exchangeable for one
share of MeriStar common stock, the aggregate value of these holdings is
based on the closing price of $21.98 per share of MeriStar common stock
on July 17, 2001.
- From and after the effective time of the merger, FelCor will indemnify
the present and former directors and officers of MeriStar and maintain
directors' and officers' liability insurance for these individuals for
six years after the effective time of the merger.
ACCOUNTING TREATMENT (SEE PAGE 76)
The merger will be treated as a purchase of MeriStar by FelCor for
financial accounting purposes.
REGULATORY APPROVALS (SEE PAGE 76)
No material federal or state regulatory requirements must be complied with
or approvals must be obtained by FelCor, FelCor Partnership, MeriStar or
MeriStar Partnership in connection with either the merger or the partnership
merger.
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THE MERGER AGREEMENT
THE MERGER AND THE PARTNERSHIP MERGER (SEE PAGE 78)
The merger agreement, as amended, is attached at the back of this document
as Appendix A. We urge you to read the merger agreement because it is the legal
document that governs the merger.
The merger agreement contemplates the following transactions:
- the merger, in which MeriStar will merge with and into FelCor, with
FelCor as the surviving entity, and
- the partnership merger, in which a subsidiary of FelCor Partnership will
merge with and into MeriStar Partnership, with MeriStar Partnership
surviving as a subsidiary of FelCor Partnership, and the limited partners
of MeriStar Partnership, other than FelCor and its subsidiaries, will
exchange their interests in MeriStar Partnership for interests in FelCor
Partnership and, where applicable, cash.
No vote or consent of the limited partners of either FelCor Partnership or
MeriStar Partnership is required or being sought. FelCor, as the general partner
of FelCor Partnership, and MeriStar, as the general partner of MeriStar
Partnership, have taken all actions necessary under their respective partnership
agreements to approve the partnership merger. The partnership merger will not
occur unless the merger occurs.
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Structure Diagrams
The following diagrams depict in summary form the structure of FelCor and
MeriStar at June 30, 2001, and after the partnership merger and the merger. The
diagrams assume that:
- no unitholder of FelCor Partnership or MeriStar Partnership redeems its
units and receives cash or FelCor or MeriStar common stock, as
applicable, and
- no holder of convertible securities of FelCor or MeriStar, including
stock options of FelCor and MeriStar, converts or exercises those
securities for FelCor or MeriStar common stock.
The percentages in the diagrams reflect ownership of partnership interests
of FelCor Partnership and MeriStar Partnership, other than preferred interests.
All outstanding preferred units of FelCor Partnership are owned by FelCor. All
outstanding preferred interests of MeriStar Partnership are owned by limited
partners other than MeriStar.
[CHART]
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TREATMENT OF MERISTAR STOCK OPTIONS (SEE PAGE 81)
At the effective time of the merger, each option to purchase shares of
MeriStar common stock will become an option to purchase FelCor common stock, and
the number of shares purchasable under the new FelCor stock option will be the
number of shares purchasable under the MeriStar option times 0.784. The exercise
price per share of each option will be the exercise price per share of MeriStar
common stock under the MeriStar option minus $4.60, divided by 0.784. Generally,
the completion of the merger will cause all unvested MeriStar stock options to
vest and become exercisable. The options held by MeriStar employees who do not
continue in the employ of the combined company generally will expire 90 days
after the completion of the merger. Employees retained by FelCor will be
required to waive the accelerated vesting of their options.
NON-SOLICITATION OF COMPETING TRANSACTIONS (SEE PAGE 83)
Under the merger agreement, each of FelCor and MeriStar may not solicit any
competing acquisition proposal. Each party may not respond to an acquisition
proposal except if a disinterested majority of its board of directors determines
in good faith after receipt of advice from outside counsel:
- that furnishing information and engaging in discussions with the
proposing person is required by the duties of the board of directors
under Maryland law; and
- that the proposing person has the ability to complete a superior
proposal.
INTERIM OPERATIONS COVENANTS (SEE PAGE 82)
Each party has agreed to limitations on its operations between the signing
of the merger agreement and the effective time of the merger. The parties have
formed an interim transactions committee composed of one representative from
FelCor and one representative from MeriStar to approve any exceptions to the
limitations.
CONDITIONS TO THE MERGER (SEE PAGE 86)
Neither FelCor nor MeriStar is obligated to complete the transactions
contemplated by the merger agreement unless the following conditions are
satisfied or, if permitted, waived prior to the effective time of the merger:
- all the proposals described in this joint proxy statement/prospectus must
be approved by the required stockholder votes;
- receipt of tax opinions that the merger qualifies as a reorganization
under Section 368(a)(1)(A) of the Internal Revenue Code, that each of the
companies has qualified as a REIT and that the merger will not prevent
FelCor from continuing to operate as a REIT;
- no federal legislative or regulatory change is enacted that would cause
FelCor or MeriStar to cease to qualify as a REIT for federal income tax
purposes;
- the absence of a court order or law preventing the completion of the
merger or the partnership merger; and
- other customary conditions precedent for transactions of this type,
including receipt of all necessary SEC and NYSE approvals and receipt of
necessary consents.
The obligations of FelCor to effect the merger and to complete the
transactions contemplated by the merger agreement are also subject to the
satisfaction or waiver of the following conditions prior to the effective time
of the merger:
- an amendment to the revolving credit agreement between MeriStar and
MeriStar Hotels & Resorts to set its maturity date at February 28, 2004,
to set the interest rate to 600 basis points over the
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30-day London Interbank Offered Rate and to set the default interest rate
to 30-day LIBOR plus 800 basis points;
- receipt of estoppel certificates from MeriStar Hotels & Resorts regarding
the hotel management agreements between that company and MeriStar; and
- other customary conditions precedent for transactions of this type,
including accuracy of representations and warranties of MeriStar,
material compliance with covenants by MeriStar and absence of a material
adverse change to MeriStar.
The obligations of MeriStar to effect the merger and to complete the
transactions contemplated by the merger agreement are also subject to the
satisfaction or waiver by MeriStar of customary conditions precedent for
transactions of this type, including accuracy of representations and warranties
of FelCor, material compliance with covenants by FelCor and absence of a
material adverse change to FelCor.
Where the law permits, FelCor or MeriStar could decide to complete the
merger even though one or more conditions were not satisfied. By law, neither
FelCor nor MeriStar can waive:
- the requirement that FelCor and MeriStar common stockholders approve the
merger; or
- the requirement that there be no court order or law preventing the
closing of the merger or the partnership merger.
In addition, the merger agreement provides that the parties cannot waive the
conditions to the merger requiring the receipt of tax opinions confirming the
REIT status of FelCor and MeriStar and the qualification of the merger as a
tax-free reorganization under the Internal Revenue Code.
Whether any of the other conditions would be waived would depend on the
facts and circumstances as determined by the reasonable business judgment of the
board of directors of FelCor or MeriStar. If FelCor or MeriStar waived
compliance with one or more of the other conditions and the condition was deemed
material to a vote of FelCor and/or MeriStar common stockholders, FelCor and/or
MeriStar would have to resolicit stockholder approval, as applicable, before
closing the merger.
If, prior to the special meetings, either FelCor or MeriStar waives
compliance with any of the material conditions set forth in the merger agreement
or if the parties elect to amend the merger agreement in any material fashion,
each party will promptly file with the SEC a current report on Form 8-K
describing the nature of the waiver or the amendment and issue a press release
doing the same.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 88)
The merger agreement addresses the circumstances when FelCor or MeriStar
may terminate the merger agreement and when FelCor or MeriStar is required to
pay a termination fee. FelCor and MeriStar could agree to terminate the merger
agreement, and either company may terminate the merger agreement if, in general:
- the required stockholder approvals are not obtained;
- the merger is not completed by October 31, 2001;
- a final order, judgment or injunction prevents the merger;
- the average closing price for FelCor common stock is less than $18.40
during any ten consecutive trading days prior to the completion of the
merger;
- the other company breaches, in any material respects, the merger
agreement and cannot cure the breach by October 31, 2001;
- the board of directors of the other company adversely changes its
recommendation of the merger;
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- the other company takes specified actions in connection with a competing
transaction; or
- that company's board of directors, in appropriate circumstances,
determines to pursue a superior competing transaction.
PAYMENT OF TERMINATION FEES AND EXPENSES (SEE PAGE 89)
FelCor must pay MeriStar a termination fee of $35.0 million, plus up to
$5.0 million of MeriStar's out-of-pocket transaction expenses, if the merger
agreement is terminated because of:
- prior to the FelCor special meeting, a change in or withdrawal of the
recommendation of the merger by FelCor's board that is materially adverse
to MeriStar or the merger,
- prior to the FelCor special meeting, entry by FelCor into an agreement,
other than a confidentiality agreement, with respect to another
acquisition proposal, or
- a material breach by FelCor of a representation, warranty or covenant
that could not be cured by October 31, 2001.
Similarly, MeriStar must pay FelCor a termination fee of $35.0 million,
plus up to $5.0 million of FelCor's out-of-pocket transaction expenses, if the
merger agreement is terminated because of:
- prior to the MeriStar special meeting, a change in or withdrawal of the
recommendation of the merger by MeriStar's board that is materially
adverse to FelCor or the merger,
- prior to the MeriStar special meeting, entry by MeriStar into an
agreement, other than a confidentiality agreement, with respect to
another acquisition proposal, or
- a material breach by MeriStar of a representation, warranty or covenant
that could not be cured by October 31, 2001.
If the merger agreement is terminated because the stockholders of either
company fail to give all necessary approvals, that company must pay the other
company up to $5.0 million of its out-of-pocket transaction expenses.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 118)
The income tax consequences summarized below are based on the assumption
that the merger will qualify as a reorganization within the meaning of section
368(a)(1)(A) of the Internal Revenue Code. The obligations of FelCor and
MeriStar to complete the merger are conditioned upon Jenkens & Gilchrist, a
Professional Corporation, counsel to FelCor, and Paul, Weiss, Rifkind, Wharton &
Garrison, counsel to MeriStar, delivering opinions to FelCor and MeriStar,
respectively, at closing that the merger will qualify as a reorganization within
the meaning of section 368(a)(1)(A) of the Internal Revenue Code. The delivery
of those opinions is a non-waivable condition of the merger. The opinions of
counsel will rely on customary representations made by FelCor and MeriStar and
applicable factual assumptions. If any of the factual assumptions or
representations relied upon in the opinions of counsel are inaccurate, the
opinions may not accurately describe the U.S. federal income tax treatment of
the merger, and this summary may not accurately describe the tax consequences of
the merger.
A MeriStar stockholder will recognize gain, but not loss, upon the receipt
of cash consideration in the merger equal to the lesser of:
- the cash consideration received in the merger, excluding cash received
instead of a fractional share of FelCor common stock; or
- the excess of the cash received, excluding cash received instead of a
fractional share of FelCor common stock, plus the fair market value of
the FelCor common stock received by the MeriStar stockholder over the
MeriStar's stockholder's adjusted basis in its shares of MeriStar common
stock.
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In addition, a MeriStar stockholder who receives cash instead of a
fractional share of FelCor common stock also will recognize gain or loss in an
amount equal to the difference between the cash received for the fractional
share and the stockholder's adjusted tax basis in its FelCor common stock that
is allocated to the fractional share.
A MeriStar stockholder will have a tax basis in the FelCor common stock
received in the merger, including any fractional share for which cash is
received, equal to the stockholder's basis in its MeriStar common stock
exchanged, decreased by the amount of cash received in the merger, other than
for a fractional share, and increased by the amount of gain recognized in the
exchange, other than in connection with receiving cash for a fractional share,
but including the amount of gain that is treated as a dividend. A MeriStar
stockholder's holding period for the FelCor common stock received will include
the stockholder's holding period for its MeriStar common stock, assuming that
the stock was held as a capital asset.
Neither FelCor nor its stockholders will recognize any gain or loss as a
result of the merger. MeriStar also will not recognize any gain or loss as a
result of the merger as long as the merger qualifies as a reorganization within
the meaning of section 368(a)(1)(A) of the Internal Revenue Code.
The tax consequences of the merger to you will depend on the facts of your
own situation. You should consult your tax advisor for a full understanding of
the tax consequences to you of the merger.
MERGER FINANCING (SEE PAGE 29)
FelCor intends to obtain an estimated $1.4 billion of financing in
connection with the merger. Approximately $225 million of this financing will be
used to pay the cash portion of the consideration to be paid to MeriStar common
stockholders and MeriStar Partnership unitholders. The financing will consist of
a combination of:
- an increase in its borrowing availability under its existing revolving
credit facility from $600 million to at least $700 million and drawing
$362.7 million under that facility;
- new mortgage financing in the amount of $300 million to $350 million to
be entered into at the closing of the merger;
- $600 million of unsecured senior notes that were issued by FelCor
Partnership in June 2001; and
- the issuance of up to $100 million of a new series of perpetual preferred
stock.
In July 2001, FelCor obtained commitments from lenders to increase the line
of credit, subject to final documentation. FelCor is negotiating with, and
expects to receive soon a commitment from, a group of lenders to provide the
mortgage financing. FelCor also has received a term sheet from an investment
banking firm for the sale of the preferred stock, but has no commitments from
purchasers for the preferred stock at this time. In addition to this $1.4
billion of financing, FelCor has obtained a commitment from lenders for up to
$500 million in a stock secured term loan facility which will be available for
use to fund, if necessary, FelCor's obligation to repurchase up to $500 million
of outstanding senior notes of MeriStar Partnership after the merger.
DIRECTORS AND EXECUTIVE OFFICERS OF FELCOR AFTER THE MERGER (SEE PAGE 45)
The merger agreement provides that, following the merger, Paul W. Whetsell,
current Chairman, Chief Executive Officer and a director of MeriStar, and Steven
D. Jorns, current Vice Chairman and a director of MeriStar, will become members
of the FelCor board of directors. By voting to approve the merger agreement and
the merger, FelCor stockholders will be voting for the election of Mr. Whetsell
as director with a term ending at the annual meeting of stockholders in 2004 and
Mr. Jorns as director with a term ending at the annual meeting of stockholders
in 2003. Following the merger, the current executive officers of FelCor will
remain as executive officers of FelCor. Bruce G. Wiles, the current President,
Chief Investment Officer and a director of MeriStar, is expected to become an
executive officer of FelCor following the merger. No other current executive
officers of MeriStar are expected to become executive officers of FelCor
following the merger.
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LISTING OF FELCOR COMMON STOCK (SEE PAGE 110)
The shares of FelCor common stock to be issued to holders of MeriStar
common stock in the merger will be listed on the New York Stock Exchange under
the ticker symbol "FCH."
DIFFERENCES IN STOCKHOLDERS' RIGHTS (SEE PAGE 116)
The rights of MeriStar stockholders differ from the rights of FelCor
stockholders in a number of material ways as a result of differences in the
charters and bylaws of the two companies, including:
- The MeriStar board of directors is limited to 15 members by its bylaws,
while the number of members on the FelCor board of directors, which is
currently set at 11 members, can be, and has been, increased to more than
its limit of nine members by a vote of not less than 80% of the members of
the FelCor board of directors.
- The amendment of any stock provisions in MeriStar's charter requires, in
addition to stockholder approval, the approval by all of its independent
directors, while FelCor does not have this requirement.
- The amendment of any provision of FelCor's charter relating to its board
requires, in addition to stockholder approval, the approval of 80% of its
directors, while MeriStar does not have this requirement.
- FelCor has outstanding two series of preferred stock which have
preferences over common stock on dividends or liquidating distributions.
MeriStar has no outstanding preferred stock.
- MeriStar's board, but not FelCor's board, is prohibited by charter
provision from issuing preferred stock for anti-takeover purposes or with
super-majority voting rights.
- Holders of 10% or more of FelCor's outstanding voting stock may call a
stockholders' meeting. For MeriStar, a majority of outstanding voting
shares is required to call a stockholders' meeting and the stockholders
must pay for the costs of the meeting.
- Holders of more than 50% of FelCor's outstanding voting stock may vote to
remove a director for cause. MeriStar's charter permits removal of a
director with or without cause but requires a vote of 75% or more of the
outstanding voting stock.
OWNERSHIP OF FELCOR AFTER THE MERGER
If the merger is completed, FelCor will issue approximately 34.9 million
shares of common stock to MeriStar stockholders. Assuming a market price of
$ for FelCor common stock, which was its closing price on
, 2001, the total value of the merger consideration to be
received by MeriStar stockholders would be approximately $ billion. The shares
of FelCor common stock issued to former MeriStar stockholders will represent
approximately 39.5% of the outstanding common stock of FelCor after completion
of the merger. Stockholders of FelCor immediately prior to the merger will hold
approximately 60.5% of the outstanding shares of FelCor common stock following
the merger. This information is based on the number of shares of FelCor and
MeriStar common stock expected to be outstanding at the effective time of the
merger.
OTHER MATTERS
FelCor stockholders will also vote on the proposal to approve and adopt the
2001 Restricted Stock and Stock Option Plan, a new restricted stock and stock
option plan for FelCor independent directors, executive officers and key
employees covering a total of 1 million shares of FelCor common stock. The
FelCor board of directors has approved the FelCor 2001 Plan, has determined that
it is in the best interest of FelCor and its stockholders and recommends that
FelCor common stockholders vote FOR approval of the FelCor 2001 Plan.
Approval of the FelCor 2001 Plan by common stockholders requires the
affirmative vote of a least a majority of the votes actually cast at the FelCor
special meeting. The vote of holders of FelCor preferred stock is not required
for adoption and approval of the FelCor 2001 Plan.
16
24
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following table sets forth unaudited pro forma condensed combined
financial data for FelCor and MeriStar as a combined entity, giving effect to
the merger as if it had occurred on the dates indicated and after giving effect
to the pro forma adjustments. The unaudited pro forma condensed combined
operating data are presented as if the merger had been completed on January 1,
2000 for the year ended December 31, 2000 and January 1, 2001 for the three
months ended March 31, 2001. The unaudited pro forma condensed combined balance
sheet data at March 31, 2001 is presented as if the merger had occurred on March
31, 2001. In the opinion of management of FelCor, all adjustments necessary to
reflect the effects of these transactions have been made. The merger will be
accounted for under the purchase method of accounting as provided by Accounting
Principles Board Opinion No. 16. Based on FelCor's current estimate of value for
the MeriStar assets to be acquired in the amount of approximately $3.0 billion
and liabilities to be assumed in the amount of approximately $1.9 billion, no
goodwill will be recorded for this transaction.
The unaudited pro forma condensed combined financial data should be read
together with the respective historical audited consolidated financial
statements and financial statement notes of FelCor and of MeriStar incorporated
by reference into this joint proxy statement/prospectus. See "Where You Can Find
More Information" beginning on page 148. The unaudited pro forma condensed
combined financial data are presented for comparative purposes only and are not
necessarily indicative of what the actual combined results of operations of
FelCor and MeriStar would have been for the periods presented, nor do these data
purport to represent the results of future periods. See "Unaudited Pro Forma
Combined Financial Information" beginning on page 93.
PRO FORMA
(UNAUDITED)
---------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
2000(1) 2001
------------ ------------
(IN THOUSANDS, EXCEPT
RATIO DATA)
STATEMENT OF OPERATIONS DATA:
Total revenues............................................ $2,859,104 $ 710,270
Net income before extraordinary items..................... $ 161,392 $ 40,739
Net income before extraordinary items applicable to common
shareholders........................................... $ 126,210 $ 31,964
Diluted earnings per share data:
Net income before extraordinary items applicable to
common shareholders................................... $ 1.38 $ 0.36
Weighted average common shares outstanding............. 91,271 88,814
OTHER DATA:
Funds From Operations(2).................................. $ 472,050 $ 105,303
EBITDA(3)................................................. $ 819,267 $ 195,158
PRO FORMA
(UNAUDITED)
--------------
MARCH 31,
2001
--------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Investment in hotels, net of accumulated depreciation....... $6,561,934
Total assets................................................ $7,202,673
Debt........................................................ $3,685,921
Minority interest in FelCor Partnership..................... $ 317,450
Total shareholder's equity.................................. $2,566,454
- ------------
(1) In the second quarter of 2000, FelCor recorded a $63 million loss related to
the decision to sell certain non-strategic hotel assets, which is reflected
in the income statements presented for the period.
17
25
(2) FelCor considers Funds From Operations to be a key measure of a REIT's
performance which should be considered along with, but not as an alternative
to, net income and cash flow as a measure of operating performance and
liquidity.
The White Paper on Funds From Operations approved by the Board of Governors
of NAREIT defines Funds From Operations as net income or loss, computed in
accordance with GAAP, excluding gains or losses from extraordinary items in
accordance with GAAP and sales of depreciable operating properties, plus
real estate related depreciation and amortization and after comparable
adjustments for our portion of these items related to unconsolidated
entities and joint ventures. FelCor believes that Funds From Operations is
helpful to investors as a measure of the performance of an equity REIT
because, along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an
indication of FelCor's ability to incur and service debt, to make capital
expenditures, and to fund other cash needs. FelCor computes Funds From
Operations in accordance with standards established by NAREIT, except that
FelCor adds back rent deferred under SAB 101, the loss on assets held for
sale and lease termination costs to derive Funds From Operations. This may
not be comparable to Funds From Operations reported by other REITs that do
not define the term in accordance with the current NAREIT definition, that
interpret the current NAREIT definition differently than FelCor does or that
do not adjust Funds From Operations for rent deferred under SAB 101 or the
loss on assets held for sale. Funds From Operations does not represent cash
generated from operating activities determined by GAAP and should not be
considered as an alternative to net income, determined in accordance with
GAAP, as an indication of FelCor's financial performance or to cash flow
from operating activities, determined in accordance with GAAP, as a measure
of FelCor's liquidity, nor is it indicative of funds available to fund
FelCor's cash needs, including FelCor's ability to make cash distributions.
Funds From Operations may include funds that may not be available for
management's discretionary use due to requirements to conserve funds for
capital expenditures and property acquisitions and other commitments and
uncertainties.
The following table details FelCor's computation of Funds From Operations.
PRO FORMA
(UNAUDITED)
---------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
2000 2001
------------ ------------------
(IN THOUSANDS)
Net income before extraordinary charges..................... $161,392 $ 40,739
Loss (gain) on sale of hotels............................... (6,024) 1,072
Loss on assets held for sale................................ 63,000
Series B redeemable preferred distributions................. (12,937) (3,234)
New redeemable preferred distributions...................... (10,500) (2,625)
Depreciation................................................ 251,586 62,246
Depreciation from unconsolidated entities................... 10,167 2,381
Minority interest in FelCor Partnership..................... 15,366 4,724
-------- --------
Funds From Operations....................................... $472,050 $105,303
======== ========
Weighted average shares and units outstanding(a)............ 106,476 105,989
- ------------
(a) Weighted average shares and units outstanding are computed including
dilutive options, unvested stock grants and assuming conversion of
Series A preferred stock to common stock.
(3) EBITDA is computed by adding Funds From Operations, interest expense,
FelCor's portion of interest expense from unconsolidated entities,
amortization expense and FelCor's redeemable preferred distributions. The
computation of EBITDA for FelCor Partnership and FelCor yields the same
result. EBITDA is presented because it provides useful information regarding
FelCor's ability to service debt. EBITDA should not be considered as an
alternative measure of operating results or cash flow from operations, as
determined in accordance with GAAP. EBITDA as presented by FelCor may not be
comparable to other similarly titled measures used by other companies. A
reconciliation of Funds From Operations to EBITDA is as follows:
PRO FORMA
(UNAUDITED)
---------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
2000 2001
------------ ------------------
(IN THOUSANDS)
Funds From Operations....................................... $472,050 $105,303
Interest expense............................................ 309,161 80,331
Interest expense from unconsolidated entities............... 9,188 2,111
Amortization expense........................................ 5,431 1,554
Series B redeemable preferred distributions................. 12,937 3,234
New redeemable preferred distributions...................... 10,500 2,625
-------- --------
EBITDA...................................................... $819,267 $195,158
======== ========
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
FELCOR
The following tables set forth selected historical consolidated financial
information for FelCor. The selected historical information is presented as of
and for the years ended December 31, 1996, 1997, 1998, 1999 and 2000 and as of
and for the three months ended March 31, 2000 and 2001. FelCor derived the
historical financial information for the years ended December 31, 1996, 1997,
1998, 1999 and 2000 from its consolidated financial statements and the notes to
them, audited by PricewaterhouseCoopers LLP, independent accountants. Certain
reclassifications have been made to previously reported amounts to conform to
current year presentation with no effect to previously reported net income or
shareholders' equity. The selected historical financial information as of and
for the three months ended March 31, 2000 and 2001 has been derived from the
unaudited financial statements which have been prepared by FelCor's management
on the same basis as the audited financial statements and, in the opinion of
FelCor's management, include all adjustments consisting of normal recurring
accruals that are considered necessary for a fair presentation of the results
for those periods. The results of operations for the three months ended March
31, 2000 and 2001 are not necessarily indicative of results to be anticipated
for the entire year. The following information should be read together with the
consolidated financial statements and financial statement notes of FelCor
incorporated by reference in this joint proxy statement/prospectus. See "Where
You Can Find More Information" beginning on page 148.
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------------------------------------- -----------------------
1996 1997 1998(1) 1999 2000(2) 2000 2001(3)
--------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AND RATIO DATA)
STATEMENT OF OPERATIONS DATA:
Total revenues....................... $ 98,934 $ 169,688 $ 332,600 $ 495,517 $ 539,964 $ 124,926 $ 285,744
Net income (loss).................... $ 40,937 $ 63,650 $ 114,839 $ 131,080 $ 61,699 $ 18,927 $ (6,806)
Net income (loss) applicable to
common shareholders................ $ 33,203 $ 51,853 $ 93,416 $ 106,345 $ 37,017 $ 12,743 $ (12,956)
Diluted earnings per Share:
Income applicable to common
shareholders before extraordinary
charge........................... $ 1.53 $ 1.65 $ 1.92 $ 1.59 $ 0.74 $ 0.21 $ (0.25)
Net income applicable to common
shareholders..................... $ 1.43 $ 1.64 $ 1.86 $ 1.57 $ 0.67 $ 0.21 $ (0.25)
Weighted average common shares
outstanding...................... 23,218 31,610 50,314 67,581 55,519 59,377 52,595
OTHER DATA:
Cash flows provided by operating
activities......................... $ 67,494 $ 97,478 $ 192,583 $ 282,365 $ 277,304 $ 52,205 $ 40,864
Cash flows (used in) provided by
investing activities............... $(478,428) $ (687,860) $ (550,498) $ (205,517) $ (34,766) $ (18,808) $ 64,763
Cash flows provided by (used in)
financing activities............... $ 251,906 $ 600,132 $ 375,064 $ (75,417) $ (252,601) $ (18,766) $ (70,944)
Cash distributions per common
share(4)........................... $ 1.92 $ 2.10 $ 2.545 $ 2.20 $ 2.20 $ 0.55 $ 0.55
Funds From Operations(5)............. $ 77,141 $ 129,815 $ 217,363 $ 286,895 $ 288,636 $ 68,495 $ 71,423
EBITDA(6)............................ $ 88,355 $ 165,613 $ 306,361 $ 432,689 $ 470,861 $ 112,415 $ 117,337
BALANCE SHEET DATA:
Investment in hotels, net of
accumulated depreciation........... $ 899,691 $1,489,764 $3,964,484 $4,035,344 $3,750,275 $4,018,411 $3,734,891
Total assets......................... $ 978,788 $1,673,364 $4,175,383 $4,255,751 $4,103,603 $4,272,711 $4,096,804
Debt................................. $ 239,425 $ 476,819 $1,594,734 $1,833,954 $1,838,241 $1,899,913 $1,812,690
Minority interest in FelCor
Partnership........................ $ 76,112 $ 73,451 $ 87,353 $ 90,078 $ 252,294 $ 230,658 $ 255,577
Total shareholders' equity........... $ 641,926 $1,078,498 $2,317,617 $2,174,911 $1,834,105 $1,973,995 $1,794,238
- ------------
(1) On July 28, 1998, FelCor completed the merger of Bristol Hotel Company's
real estate holdings with and into FelCor. The merger resulted in the net
acquisition of 107 primarily full-service hotels in return for approximately
31 million shares of newly issued common stock.
(2) In the second quarter of 2000, FelCor recorded a $63 million loss related to
the decision to sell certain non-strategic hotel assets, which is reflected
in the income statements presented for the period.
19
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(3) Includes hotel revenues and expenses with respect to 96 hotels that were
leased to either DJONT or subsidiaries of Bass prior to the effectiveness of
the REIT Modernization Act on January 1, 2001. Prior to January 1, 2001,
revenues were comprised mainly of percentage lease revenues. Additionally in
the first quarter of 2001, FelCor recorded lease termination costs of $36.2
million with respect to the 96 hotels.
(4) In 1998, FelCor declared a special one-time distribution of accumulated but
undistributed earnings and profits as a result of Bristol Hotel Company
merging with and into FelCor, in addition to the annual dividend of $2.20
per common share. The amount of the one-time distribution was $0.345 per
common share.
(5) FelCor considers Funds From Operations to be a key measure of a REIT's
performance which should be considered along with, but not as an alternative
to, net income and cash flow as a measure of operating performance and
liquidity.
The White Paper on Funds From Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts, or NAREIT,
defines Funds From Operations as net income or loss, computed in accordance
with GAAP, excluding gains or losses from extraordinary items in accordance
with GAAP and sales of depreciable operating properties, plus real estate
related depreciation and amortization and after comparable adjustments for
FelCor's portion of these items related to unconsolidated entities and joint
ventures. FelCor believes that Funds From Operations is helpful to investors
as a measure of the performance of an equity REIT because, along with cash
flow from operating activities, financing activities and investing
activities, it provides investors with an indication of FelCor's ability to
incur and service debt, to make capital expenditures, and to fund other cash
needs. FelCor computes Funds From Operations in accordance with standards
established by NAREIT, except that FelCor adds back rent deferred under SAB
101, the loss on assets held for sale and lease termination costs to derive
Funds From Operations. This may not be comparable to Funds From Operations
reported by other REITs that do not define the term in accordance with the
current NAREIT definition, that interpret the current NAREIT definition
differently than FelCor does or that do not adjust Funds From Operations for
rent deferred under SAB 101, the loss on assets held for sale or lease
termination costs. Funds From Operations does not represent cash generated
from operating activities determined by GAAP and should not be considered as
an alternative to net income, determined in accordance with GAAP, as an
indication of FelCor's financial performance or to cash flow from operating
activities, determined in accordance with GAAP, as a measure of FelCor's
liquidity, nor is it indicative of funds available to fund FelCor's cash
needs, including its ability to make cash distributions. Funds From
Operations may include funds that may not be available for discretionary use
by FelCor's management due to requirements to conserve funds for capital
expenditures and property acquisitions and other commitments and
uncertainties.
The following table details the computation of Funds From Operations.
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
--------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Net income (loss)....................... $40,937 $ 63,650 $114,839 $131,080 $ 61,699 $ 18,927 $ (6,806)
Deferred rent........................... 8,854 5,254
Lease termination costs................. 36,226
Gain on sale............................ (2,595)
Loss on assets held for sale............ 63,000
Series B redeemable preferred
distributions......................... (8,373) (12,937) (12,937) (3,234) (3,234)
Extraordinary charge from write-off of
deferred financing fees............... 2,354 185 3,075 1,113 3,865
Depreciation............................ 26,544 50,798 90,835 152,948 160,745 40,400 39,808
Depreciation from unconsolidated
entities.............................. 1,716 9,365 10,487 9,995 10,167 2,544 2,381
Minority Interest in FelCor
Partnership........................... 5,590 5,817 6,500 4,696 4,692 1,004 (2,206)
------- -------- -------- -------- -------- -------- --------
Funds From Operations................... $77,141 $129,815 $217,363 $286,895 $288,636 $ 68,495 $ 71,423
======= ======== ======== ======== ======== ======== ========
Weighted average shares and units
outstanding(a)........................ 29,306 39,157 58,013 75,251 67,239 68,740 66,767
- ------------
(a) Weighted average shares and units outstanding are computed including
dilutive options, unvested stock grants and assuming conversion of
Series A preferred stock to common stock.
20
28
(6) EBITDA is computed by adding Funds From Operations, interest expense,
FelCor's portion of interest expense from unconsolidated entities,
amortization expense and FelCor's Series B redeemable preferred
distributions. EBITDA is presented because it provides useful information
regarding FelCor's ability to service debt. EBITDA should not be considered
as an alternative measure of operating results or cash flow from operations,
as determined in accordance with GAAP. EBITDA as presented by FelCor may not
be comparable to other similarly titled measures used by other companies. A
reconciliation of Funds From Operations to EBITDA is as follows:
THREE MONTHS
ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
--------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Funds From Operations................................. $77,141 $129,815 $217,363 $286,895 $288,636 $ 68,495 $ 71,423
Interest expense...................................... 9,803 28,792 73,182 125,435 158,620 37,904 40,093
Interest expense from unconsolidated entities......... 818 5,895 6,521 6,729 9,188 2,620 2,111
Amortization expense.................................. 593 1,111 922 693 1,480 162 476
Series B redeemable preferred distributions........... 8,373 12,937 12,937 3,234 3,234
------- -------- -------- -------- -------- -------- --------
EBITDA................................................ $88,355 $165,613 $306,361 $432,689 $470,861 $112,415 $117,337
======= ======== ======== ======== ======== ======== ========
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MERISTAR
The following table sets forth selected historical consolidated financial
information for MeriStar. The selected historical information is presented as of
and for the years ended December 31, 1996, 1997, 1998, 1999 and 2000 and as of
and for the three months ended March 31, 2000 and 2001. The historical financial
information for the years ended December 31, 1996, 1997, 1998, 1999 and 2000 has
been derived from the consolidated financial statements and financial statement
notes of MeriStar which have been audited by KPMG LLP, independent auditors. The
selected historical financial information as of and for the three months ended
March 31, 2000 and 2001 has been derived from the unaudited financial statements
which have been prepared by management of MeriStar, on the same basis as the
audited financial statements and, in the opinion of management of MeriStar,
include all adjustments consisting of normal recurring accruals that are
considered necessary for a fair presentation of the results for such periods.
The results of operations for the three months ended March 31, 2000 and 2001 are
not necessarily indicative of results to be anticipated for the entire year. The
following information should be read together with the consolidated financial
statements and financial statement notes of MeriStar incorporated by reference
in this joint proxy statement/prospectus. See "Where You Can Find More
Information" beginning on page 148.
THREE MONTHS
ENDED MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------------------------------------- -----------------------
1996 1997 1998(A) 1999 2000 2000 2001(B)
--------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
RESULTS OF OPERATIONS:
Total revenues.......................... $ 109,792 $ 316,393 $ 525,297 $ 374,904 $ 400,778 $ 67,100 $ 302,684
Net operating income.................... $ 19,334 $ 61,512 $ 133,906 $ 217,065 $ 229,174 $ 25,402 $ 45,942
Interest expense, net................... $ 12,346 $ 21,024 $ 64,378 $ 100,398 $ 117,524 $ 28,760 $ 30,229
Income (loss) before gain (loss) on sale
of assets, extraordinary gain (loss)
and cumulative effect of accounting
change................................. $ 4,353 $ 24,152 $ 48,708 $ 103,496 $ 99,382 $ (3,426) $ 14,098
Gain (loss) on sale of assets, net of
tax(C)................................. $ -- $ -- $ -- $ -- $ 3,425 $ -- $ (1,059)
Extraordinary gain (loss), net of
tax(D)................................. $ (1,956) $ (4,092) $ (4,080) $ (4,532) $ 3,054 $ 3,054 $ (1,224)
Cumulative effect of accounting change,
net of tax(E).......................... $ -- $ -- $ (921) $ -- $ -- $ -- $ --
Net income (loss)....................... $ 2,397 $ 20,060 $ 43,707 $ 98,964 $ 105,861 $ (372) $ 11,815
Basic earnings (loss) per share before
extraordinary gain (loss)(F)........... $ 0.31 $ 1.29 $ 1.45 $ 2.19 $ 2.21 $ (0.07) $ 0.29
Diluted earnings (loss) per share before
extraordinary gain (loss)(F)........... $ 0.31 $ 1.27 $ 1.40 $ 2.11 $ 2.14 $ (0.07) $ 0.28
Dividends per common share(G)........... $ -- $ -- $ 0.82 $ 2.02 $ 2.02 $ 0.505 $ 0.505
Number of shares of common stock issued
and outstanding(H)..................... 12,754 24,867 46,718 47,257 44,380 47,058 44,527
OTHER FINANCIAL DATA:
EBITDA(I)............................... $ 27,582 $ 82,502 $ 194,609 $ 320,164 $ 341,121 $ 52,032 $ 87,048
Net cash provided by operating
activities............................. $ 13,373 $ 59,882 $ 162,796 $ 229,193 $ 224,037 $ 47,484 $ 47,784
Net cash (used in) provided by investing
activities............................. $(225,251) $ (586,259) $ (785,505) $ (187,952) $ (14,286) $ 34,032 $ (31,994)
Net cash provided by (used in) financing
activities............................. $ 226,830 $ 588,428 $ 543,256 $ (42,812) $ (212,121) $ (84,071) $ 2,726
BALANCE SHEET DATA:
Investments in hotel properties,
gross.................................. $ 343,092 $ 950,052 $2,957,543 $3,118,723 $3,193,730 $3,143,594 $3,192,731
Total assets............................ $ 379,161 $1,124,642 $2,998,460 $3,094,201 $3,013,008 $3,042,763 $3,101,851
Long-term debt.......................... $ 200,361 $ 492,771 $1,602,352 $1,676,771 $1,638,319 $1,629,672 $1,674,978
- ------------
(A) MeriStar was created on August 3, 1998, when American General Hospitality
Corporation, a corporation operating as a real estate investment trust, or
REIT, and its associated entities merged with CapStar Hotel Company and its
associated entities. In connection with the merger between CapStar and
American General, MeriStar Hotels & Resorts, a separate publicly traded
company, was created to be the lessee and manager of nearly all of
MeriStar's hotels. Prior to August 2, 1998, MeriStar's operating results
consisted of the revenues and expenses of the hotels.
(B) From August 3, 1998 until January 1, 2001, MeriStar Hotels & Resorts leased
substantially all of MeriStar's hotels, and MeriStar earned lease revenue
under the participating lease agreements with MeriStar's lessees. Upon
assigning the 106 leases with MeriStar Hotels & Resorts to MeriStar's
taxable REIT subsidiaries on January 1, 2001, in conjunction with the REIT
Modernization Act, MeriStar's operating results now include the revenues
and expenses of these hotels.
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(C) During 2000, MeriStar sold three limited service hotels that resulted in a
gain on sales of assets. During 2001, MeriStar sold one hotel that resulted
in a loss on the sale of the asset.
(D) During 1996, 1997, 1998, and 1999 some loan facilities were refinanced and
the write-offs of deferred costs associated with these facilities were
recorded as extraordinary losses in accordance with GAAP. During 2000,
MeriStar repurchased some of its convertible notes at a discount, which
resulted in an extraordinary gain. During 2001, MeriStar paid down a
portion of its revolving credit facility resulting in an extraordinary
loss.
(E) Under AICPA Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities," which MeriStar adopted on July 1, 1998, the cumulative effect
of this accounting change was a pre-tax reduction of income for the year
ended December 31, 1998 of $1,485 ($921 net of tax effect).
(F) Basic and diluted earnings per share before extraordinary loss for the year
ended December 31, 1996 is based on earnings for the period from August 20,
1996, the date of CapStar's initial public offering, through December 31,
1996.
(G) No dividends were declared prior to August 3, 1998, the date of the merger
between American General and CapStar.
(H) As of the end of the period presented.
(I) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. MeriStar's 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 and minority interests of common
and preferred holders of units in MeriStar Partnership, which is generally
equivalent to EBITDA, and because EBITDA is unaffected by the debt and
equity structure of the entity. EBITDA does not represent cash flow from
operations as defined by GAAP, is not necessarily indicative of cash
available to fund all cash flow needs, and should not be considered as an
alternative to net income under GAAP for purposes of evaluating MeriStar's
results of operations and may not be comparable to other similarly titled
measures used by other companies.
For the three months ended March 31, 2001, EBITDA has been presented before
the effect of non-recurring items; swap termination costs of $9,297 and the
write-down of MeriStar's investment in STS Hotel Net of $2,112.
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EQUIVALENT PER SHARE DATA
We have summarized below specified per common share information for FelCor
and MeriStar on a historical basis, pro forma combined basis and pro forma
combined equivalent basis. The pro forma combined amounts are based on the
purchase method of accounting. The MeriStar per common share pro forma combined
equivalents are calculated by multiplying the pro forma combined per common
share amounts by the common stock exchange ratio of 0.784.
The following information should be read together with the historical and
pro forma financial statements included or incorporated by reference in this
joint proxy statement/prospectus. See "Where You Can Find More Information"
beginning on page 148.
FOR THE THREE MONTHS ENDED
MARCH 31, 2001
-------------------------------------------------
MERISTAR
PRO
FORMA
COMBINED
FELCOR MERISTAR FELCOR EQUIVALENT
HISTORICAL HISTORICAL PRO FORMA VALUE
---------- ---------- --------- ----------
Basic net income (loss) per common share
before extraordinary items................ $(0.25) $0.29 $ 0.37 $ 0.29
Diluted net income (loss) per common share
before extraordinary items................ $(0.25) $0.28 $ 0.36 $ 0.28
Cash distributions per common share......... $ 0.55 $0.505 $ 0.55(1) $ 0.43
Book value per common share................. $28.15 $25.14 $24.62(2) $19.30
FOR THE YEAR ENDED
DECEMBER 31, 2000
------------------------------------------------
MERISTAR
PRO
FORMA
COMBINED
FELCOR MERISTAR FELCOR EQUIVALENT
HISTORICAL HISTORICAL PRO FORMA VALUE
---------- ---------- --------- ----------
Basic net income per common share before
extraordinary items........................ $ 0.74 $ 2.21 $1.40 $1.10
Diluted net income per common share before
extraordinary items........................ $ 0.74 $ 2.14 $1.38 $1.08
Cash distributions per common share.......... $ 2.20 $ 2.02 $2.20(1) $1.72
Book value per common share.................. $29.34 $25.56
- ---------------
(1)FelCor does not anticipate that there will be any change from its historical
distribution policy as a result of the merger and related transactions.
(2)Pro forma book value per common share is calculated as pro forma
shareholders' equity less preferred equity divided by pro forma common shares
outstanding of 88,255 at March 31, 2001.
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COMPARATIVE MARKET PRICE INFORMATION
The following table sets forth the price per share of FelCor common stock
and MeriStar common stock based on the last reported sale prices per share on
the NYSE on May 9, 2001, the last trading day before the public announcement of
the execution of the merger agreement, and on , 2001, the latest
practicable date before mailing this joint proxy statement/prospectus.
CLOSING PRICE PER COMMON SHARE
---------------------------------------
MERISTAR PRO FORMA
FELCOR MERISTAR EQUIVALENT VALUE(1)
------ -------- -------------------
May 9, 2001....................................... $22.10 $21.45 $21.93
, 2001(2).............................
- ---------------
(1) Computed by multiplying the FelCor common stock closing price by the 0.784
exchange ratio and adding the $4.60 cash amount per share.
(2) The average last reported sale price per share of FelCor common stock for
the ten trading days preceding , 2001 was $ . The MeriStar
pro forma equivalent value, based on the same ten trading days, would be
$ .
Because the 0.784 exchange ratio is fixed, and the market price of FelCor
common stock is subject to fluctuation, the market value of FelCor common stock
that MeriStar stockholders will receive in the merger may increase or decrease
prior to and following the merger. The relative value of the merger
consideration and the MeriStar common stock to be exchanged in the merger will
not be known until the effective time of the merger. Stockholders are urged to
obtain current market quotations for FelCor and MeriStar common stock. See "Risk
Factors -- The total value of the merger consideration to be paid to MeriStar
stockholders and the value of MeriStar common stock to be exchanged in the
merger, in each case, at the time of the special meetings and at the effective
time of the merger, is currently not known" beginning on page 27.
See also "Comparative Per Share Market Prices and Dividend Information"
beginning on page 91.
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REQUESTS FOR INCORPORATED INFORMATION
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND
FINANCIAL INFORMATION ABOUT OUR COMPANIES THAT IS NOT INCLUDED IN OR DELIVERED
WITH THIS DOCUMENT. IF YOU ARE A STOCKHOLDER OF FELCOR OR MERISTAR YOU CAN
OBTAIN ANY OF THE DOCUMENTS INCORPORATED BY REFERENCE FROM FELCOR OR MERISTAR,
AS THE CASE MAY BE, OR THROUGH THE SEC OR THE SEC'S WEB SITE. THE ADDRESS OF
THAT SITE IS HTTP://WWW.SEC.GOV. DOCUMENTS INCORPORATED BY REFERENCE ARE
AVAILABLE FROM THE COMPANIES, WITHOUT CHARGE, EXCLUDING ALL EXHIBITS, UNLESS
SPECIFICALLY INCORPORATED BY REFERENCE AS AN EXHIBIT TO THIS DOCUMENT.
STOCKHOLDERS OF FELCOR OR MERISTAR MAY OBTAIN DOCUMENTS INCORPORATED BY
REFERENCE IN THIS DOCUMENT BY REQUESTING THEM IN WRITING OR BY TELEPHONE FROM
THE APPROPRIATE COMPANY AT THE FOLLOWING ADDRESSES:
FELCOR LODGING TRUST INCORPORATED MERISTAR HOSPITALITY CORPORATION
545 E. JOHN CARPENTER FRWY., SUITE 1300 1010 WISCONSIN AVENUE, N.W.
IRVING, TEXAS 75062 WASHINGTON, D.C. 20007
ATTENTION: LAWRENCE D. ROBINSON ATTENTION: CHRISTOPHER L. BENNETT
TELEPHONE: (972) 444-4900 TELEPHONE: (202) 965-4455
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, IN ORDER TO ENSURE TIMELY DELIVERY, YOU
MUST DO SO AT LEAST FIVE BUSINESS DAYS BEFORE THE DATE OF THE SPECIAL MEETINGS.
THIS MEANS YOU MUST REQUEST THIS INFORMATION NO LATER THAN , 2001.
IF YOU REQUEST ANY INCORPORATED DOCUMENTS, WE WILL MAIL THEM TO YOU BY FIRST
CLASS MAIL, OR ANOTHER EQUALLY PROMPT MEANS, WITHIN ONE BUSINESS DAY AFTER WE
RECEIVE YOUR REQUEST.
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RISK FACTORS
The following material risk factors, including the material risks
associated with the merger and related transactions, should be considered by
holders of MeriStar common stock and by holders of FelCor common stock in
evaluating whether to approve the merger. These factors should be considered in
conjunction with the other information included elsewhere in this joint proxy
statement/prospectus.
THE TOTAL VALUE OF THE MERGER CONSIDERATION TO BE PAID TO MERISTAR STOCKHOLDERS
AND THE VALUE OF MERISTAR COMMON STOCK TO BE EXCHANGED IN THE MERGER, IN EACH
CASE, AT THE TIME OF THE SPECIAL MEETINGS AND AT THE EFFECTIVE TIME OF THE
MERGER, IS CURRENTLY NOT KNOWN.
MeriStar common stockholders will receive $4.60 in cash and 0.784 of a
share of FelCor common stock in the merger for each share of MeriStar common
stock held at the time of the closing of the merger. The market prices of FelCor
and MeriStar common stock at the time of the merger may vary significantly from
their prices on the date of execution of the merger agreement or from their
prices on either the date of this joint proxy statement/prospectus or the date
of the FelCor and MeriStar special meetings. These variances may arise due to,
among other things:
- changes in the business, operations and prospects of FelCor or MeriStar,
- market assessments of the likelihood that the merger will be completed,
- interest rates,
- hotel industry performance, and
- general market and economic conditions and other factors.
During the 12-month period ending on , 2001, the most recent
date practicable before the mailing of this joint proxy statement/prospectus,
the closing per share price of FelCor common stock varied from a low of $ to
a high of $ and ended that period at $ . During the same period, the
closing per share price of MeriStar common stock varied from a low of $ to a
high of $ and ended that period at $ . Historical trading prices are not
necessarily indicative of future performance.
The following table illustrates how the implied value of the merger
consideration will fluctuate based on changes in the trading prices of FelCor
common stock.
IMPLIED VALUE PER
MERISTAR COMMON SHARE OF IMPLIED AGGREGATE VALUE OF
ASSUMED FELCOR FELCOR COMMON STOCK AND FELCOR COMMON STOCK AND
COMMON STOCK PRICE CASH DELIVERED IN MERGER(1) CASH DELIVERED IN MERGER(2)
- ------------------ --------------------------- ---------------------------
$25.00 $24.20 $1,076,225,000
$22.50 $22.24 $ 989,072,500
$20.00 $20.28 $ 901,920,000
$18.40 $19.03 $ 846,142,400
- ---------------
(1)Value determined by multiplying the FelCor common stock price by the exchange
ratio of 0.784 and then adding the cash consideration of $4.60 per share.
(2)Value determined by multiplying the FelCor common stock price by 34,861,000
shares, which is the approximate number of shares of FelCor common stock that
will be issued to MeriStar stockholders in the merger, and then adding $204.7
million, which is the approximate cash consideration that will be paid to
MeriStar stockholders in the merger.
The exchange ratio for shares of MeriStar common stock to be converted into
FelCor common stock in the merger was fixed at the time of the signing of the
merger agreement and will not be adjusted based on changes in the trading price
of FelCor common stock or MeriStar common stock before the closing of the
merger. Accordingly, the value of the merger consideration that MeriStar
stockholders will receive will vary, depending on fluctuations in the price of
FelCor common stock, and the value of the MeriStar common stock to be exchanged
in the merger will also fluctuate. Therefore, the relative value of the
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MeriStar common stock and the merger consideration will not be known until the
effective time of the merger.
THE INTEGRATION OF MERISTAR WILL MAKE SUBSTANTIAL DEMANDS ON FELCOR'S RESOURCES,
WHICH COULD DIVERT NEEDED ATTENTION AWAY FROM FELCOR'S OTHER OPERATIONS.
The integration of MeriStar with FelCor will make substantial demands on
FelCor's management, operational resources and financial and internal control
systems. FelCor's future operating results will depend in part on FelCor's
ability to continue to implement and improve its operating and financial
controls. The devotion of management's time to the integration of MeriStar may
limit the time available to management to attend to other operational, financial
and strategic issues of FelCor.
THERE MAY BE UNDISCLOSED LIABILITIES IN CONNECTION WITH THE MERGER.
Either MeriStar or FelCor may be subject to undisclosed or otherwise
unforeseen environmental, tax, pension, litigation or other liabilities which
are not known to the other party, or either MeriStar or FelCor may underestimate
the liabilities of the other party of which it is aware. If unknown liabilities
materialize or known liabilities are greater than are currently estimated, they
could result in a material adverse effect on the merged company's business,
financial condition and results of operations and, going forward, could
adversely affect the results of the combined company and the market price of
FelCor's common stock.
THE OPERATIONS OF FELCOR AND MERISTAR MAY NOT BE INTEGRATED SUCCESSFULLY, AND
INTENDED BENEFITS OF THE MERGER MAY NOT BE REALIZED, WHICH COULD HAVE A NEGATIVE
IMPACT ON THE MARKET PRICE OF FELCOR COMMON STOCK AFTER THE MERGER.
The future operations and earnings of the combined company will depend in
part on FelCor's ability to integrate MeriStar's properties into its system and
operations and realize synergies and cost savings. In order to achieve the
anticipated benefits of the merger, FelCor will need to:
- realize the anticipated $5 million of annual cost savings in general and
administrative expenses from reductions in personnel, closing and
subletting MeriStar's corporate offices and the elimination of other
duplicate overhead costs;
- capitalize on increased purchasing power, including for furniture,
fixtures, equipment, insurance and utilities;
- leverage the increased scale in hotel brand negotiations; and
- effectively control the progress of the integration process and the
associated costs.
FelCor's assessment of the potential synergies and cost savings is
preliminary and subject to change. FelCor may need to incur additional costs to
realize them, none of which costs are currently expected to be material. In
addition, if FelCor fails to integrate MeriStar successfully and/or fails to
realize the intended benefits of the merger, the market price of FelCor common
stock could decline from its market price at the time of the completion of the
merger.
Statements regarding the increased earnings estimates, the anticipated
operating efficiencies, cost savings and other benefits FelCor expects to
realize from the integration of MeriStar are forward-looking statements. Actual
results for the combined operations could differ materially from results
currently anticipated depending upon, among other things:
- FelCor's and MeriStar's future revenues, expenses and other operating
results;
- FelCor's and MeriStar's ability to maintain present efficiency levels and
realize expected cost savings and synergies;
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- unforeseen costs and expenses incurred in connection with the integration
of MeriStar into FelCor; and
- economic or competitive uncertainties and contingencies.
FELCOR MAY BE UNABLE TO COMPLETE FINANCING PLANS FOR THE MERGER.
FelCor intends to obtain an estimated $1.4 billion of financing in
connection with the merger. Approximately $225 million of this financing will be
used to pay the cash portion of the consideration to be paid to MeriStar common
stockholders and MeriStar Partnership unitholders. The financings will consist
of a combination of:
- an increase in FelCor's borrowing availability under its existing
revolving credit facility from $600 million to $700 million and drawing
$362.7 million under that facility;
- new mortgage financing in the amount of $300 million to $350 million to
be entered into at the closing of the merger;
- $600 million of unsecured senior notes that were issued by FelCor
Partnership in June 2001; and
- the issuance of up to $100 million of a new series of perpetual preferred
stock.
In July 2001, FelCor obtained commitments from lenders to increase the line
of credit, subject to final documentation. FelCor is negotiating with, and
expects to receive soon a commitment from, a group of lenders to provide the
mortgage financing. FelCor also has received a term sheet from an investment
banking firm for the sale of the preferred stock, but has no commitments from
purchasers for the preferred stock at this time. In addition to this $1.4
billion of financing, FelCor has obtained a commitment from lenders for up to
$500 million in a stock secured term loan facility which will be available for
use to fund, if necessary, FelCor's obligation to repurchase up to $500 million
of outstanding senior notes of MeriStar Partnership after the merger.
FELCOR WILL BE REQUIRED TO MAKE OFFERS TO PURCHASE ALL OF THE OUTSTANDING
MERISTAR NOTES AS A RESULT OF THE MERGER.
The terms of approximately $859.3 million in aggregate principal amount of
convertible subordinated notes, subordinated notes and senior notes of MeriStar
and MeriStar Partnership will require FelCor or FelCor Partnership to make an
offer to repurchase those notes because of the completion of the merger. The
offers to purchase must be made within ten days after the merger occurs, and the
purchases must be completed within 30 to 60 days after the offers are made.
FelCor currently expects, based on the market prices, that the holders of the
convertible subordinated notes, of which $154.3 million in principal amount is
outstanding, and the subordinated notes, of which $205.0 million in principal
amount is outstanding, will accept FelCor's offer to repurchase. If all of these
notes are tendered, FelCor will have to pay 100% of the principal amount of the
convertible subordinated notes and 101% of the principal amount of the
subordinated notes, in each case, plus accrued interest. Based on the current
market price of the senior notes, FelCor cannot predict at this time whether the
holders of those senior notes will tender those notes under the offer. If those
noteholders tender their senior notes in that offer, FelCor Partnership will be
required to redeem the tendered notes at 101% of their principal amount of $500
million outstanding plus accrued interest. In order to fund the repurchase of
these notes, FelCor has obtained a commitment from lenders for up to $500
million in a stock secured term loan facility. The commitment letter is subject
to final documentation, and this funding may not be completed.
FAILURE TO COMPLETE THE MERGER MAY REQUIRE, UNDER SPECIFIED CIRCUMSTANCES,
PAYMENT OF TERMINATION FEES AND MAY RESULT IN A DECREASE IN THE MARKET PRICE OF
EACH PARTY'S COMMON STOCK.
The merger is subject to stockholder approval of both FelCor and MeriStar
and other customary conditions. Each of FelCor and MeriStar might not be able to
satisfy its obligations under the merger agreement and complete the merger.
Failure by either party to complete the merger, under specified
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circumstances, may require a party to pay a termination fee and the other
party's expenses in connection with the merger. These payments could amount to
as much as $40 million. In addition, failure to complete the merger could result
in a possible decline in the market price of FelCor and MeriStar common stock to
the extent current market prices reflect a market assumption that the merger
will be completed. See "The Merger Agreement -- Expenses and Termination Fees."
THE DIRECTORS AND EXECUTIVE OFFICERS OF FELCOR AND MERISTAR HAVE INTERESTS IN
THE COMPLETION OF THE MERGER THAT MAY CONFLICT WITH THE INTERESTS OF THE
STOCKHOLDERS OF THEIR RESPECTIVE COMPANIES.
In considering the recommendations of FelCor's and MeriStar's boards of
directors with respect to the merger, MeriStar and FelCor stockholders should be
aware that some FelCor and MeriStar executive officers and directors have
interests in, and will receive benefits from, the merger and the partnership
merger that differ from, or are in addition to, and, therefore, may conflict
with the interests of MeriStar or FelCor stockholders generally, including the
following:
- Paul W. Whetsell, the current Chairman, Chief Executive Officer and a
director of MeriStar, and Steven D. Jorns, the current Vice Chairman and a
director of MeriStar, will become directors of FelCor.
- Bruce G. Wiles, the current President, Chief Investment Officer and a
director of MeriStar, has been offered employment by FelCor.
- FelCor will be obligated to make severance payments totalling
approximately $1,767,500, $405,000, $1,350,000 and $980,600, respectively,
to Messrs. Whetsell, Jorns, Emery and Wiles, under their preexisting
employment contracts, which require these payments upon their resignation
or termination due to MeriStar's change of control arising from the
merger. In addition, FelCor will be obligated to make tax reimbursement
payments of approximately $4.1 million, $2.2 million and $550,000,
respectively, to Messrs. Whetsell, Emery and Wiles.
- FelCor expects to make severance payments to approximately 40 other
legal, administrative, accounting and clerical employees of MeriStar,
totalling approximately $2 million, because FelCor does not intend to
employ them after the merger. None of these employees is an executive
officer of MeriStar or entitled to tax reimbursements.
- Any unvested restricted stock and options held by officers and directors
of MeriStar will vest as a result of the merger. Mr. Whetsell owns 125,000
unvested shares of restricted stock and unvested options to purchase
284,580 shares of MeriStar common stock, all of which will vest as a
result of the merger, with an aggregate value of approximately $3.6
million. Mr. Emery owns 67,334 unvested shares of restricted stock and
unvested options to purchase 156,978 shares of MeriStar common stock, all
of which will vest as a result of the merger, with an aggregate value of
approximately $2.1 million. Mr. Jorns owns unvested options to purchase
8,333 shares of MeriStar common stock, all of which will vest as a result
of the merger, with an aggregate value of approximately $14,900. Mr. Wiles
owns 50,667 unvested shares of restricted stock and unvested options to
purchase 116,666 shares of MeriStar common stock, all of which will vest
as a result of the merger, with an aggregate value of approximately $1.7
million. Mr. Wiles will be required to waive the accelerated vesting of
these options if he accepts employment with FelCor. All of the values
expressed in this paragraph are based on the closing price of $21.98 per
share of MeriStar common stock on July 17, 2001. Option values are based
on the difference between that closing price per share and the exercise
price per share, if positive.
- Each of the profits-only units in MeriStar Partnership of Messrs.
Whetsell and Emery will vest and be exchanged for $4.60 in cash and 0.784
of a common unit in FelCor Partnership as a result of the partnership
merger. Mr. Whetsell owns 342,917 unvested profits-only units in MeriStar
Partnership, all of which will vest as a result of the merger, with an
aggregate value of approximately $7.6 million. Mr. Emery owns 221,459
unvested profits-only units in MeriStar Partnership, all of which will
vest as a result of the merger, with an aggregate value of
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approximately $4.9 million. Because each common unit in FelCor Partnership
is exchangeable for a share of FelCor common stock, the value of each
profits-only unit is based on 0.784 times the closing price of $22.30 per
share of FelCor common stock on July 17, 2001, plus $4.60. Other officers
and directors of MeriStar collectively own 125,000 profits-only units that
will also be exchanged for cash and common units in FelCor Partnership,
but their unvested profits-only units will be canceled.
- Thomas J. Corcoran, Jr., President, Chief Executive Officer and a
director of FelCor, Richard O. Jacobson, a director of FelCor, and Thomas
L. Wiese, a Vice President of FelCor, collectively own 93,160 common units
in MeriStar Partnership, with an aggregate value of $2.0 million. Because
each MeriStar Partnership common unit is exchangeable for one share of
MeriStar common stock, the aggregate value of these holdings is based on
the closing price of $21.98 per share of MeriStar common stock on July 17,
2001.
- From and after the effective time of the merger, FelCor will indemnify
the present and former directors and officers of MeriStar and maintain
directors' and officers' liability insurance for these individuals for six
years after the effective time of the merger.
FAILURE TO COMPLETE THE MERGER MAY RESULT IN OTHER ADVERSE CONSEQUENCES TO
FELCOR AND MERISTAR.
Under the merger agreement, both FelCor and MeriStar agreed to some
affirmative and negative covenants, including covenants affecting the conduct of
their respective businesses outside the ordinary course of business.
Accordingly, both parties may forego opportunities which otherwise would be
available to them had the merger agreement not been executed. In addition,
transactions such as the merger can disrupt relationships with employees and
others with whom the parties have existing or prospective relationships.
Accordingly, if the merger agreement is terminated, the ability of FelCor or
MeriStar to continue its pre-merger business plans could be adversely affected.
FelCor and MeriStar expect to incur approximately $28 million and $10 million,
respectively, in transaction-related expenses, which may not be reimbursable.
FELCOR HAS HAD AND EXPECTS TO HAVE INCREASES IN LEVERAGE THAT COULD ADVERSELY
AFFECT ITS FINANCIAL CONDITION.
FelCor's leverage has increased to fund its renovation, redevelopment and
rebranding program and its share repurchase program. In addition, FelCor expects
its leverage to further increase as a result of the completion of the merger and
related financings. FelCor's share repurchase program authorizes repurchases of
up to an aggregate maximum of $300 million. Through March 31, 2001, FelCor had
repurchased approximately 10.4 million shares of its common stock under this
program at an aggregate cost of approximately $189 million.
At March 31, 2001, FelCor alone had:
- Approximately $1.8 billion in consolidated debt, of which approximately
$767.6 million was secured by mortgages or capital leases and $13.8
million had a maturity date of less than 12 months;
- A ratio of total debt to market capitalization of 52.0%;
- A ratio of consolidated debt to investment in hotels at cost of 39.7%;
and
- A ratio of earnings before interest, income tax, depreciation and
amortization, or EBITDA, to interest expense for the three months then
ended of 2.9-to-1.
At the same date, MeriStar alone had:
- Approximately $1.7 million in consolidated debt, of which approximately
$377.0 million was secured by mortgages or capital leases and $39.6
million had a maturity date of less than 12 months;
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- A ratio of total debt to market capitalization of 63.4%; and
- A ratio of EBITDA to interest expense for the same three month period of
2.70-to-1.
At March 31, 2001, on a pro forma basis, FelCor would have had:
- Approximately $3.7 billion in consolidated debt, of which approximately
$1.4 billion would have been secured by mortgages or capital leases;
- A ratio of total debt to market capitalization of 58.1%;
- A ratio of consolidated debt to investment in hotels at cost of 50%; and
- A ratio of EBITDA to interest expense for the three months then ended of
2.4-to-1.
The degree to which FelCor will be leveraged could have important
consequences for the combined company going forward and for you. For example, it
could:
- limit FelCor's ability to obtain additional financing, if needed, for
working capital, its renovation, redevelopment and rebranding plans,
acquisitions, debt service requirements or other purposes;
- increase FelCor's vulnerability to adverse economic and industry
conditions, as well as fluctuations in interest rates;
- require FelCor to dedicate a substantial portion of its cash flow from
operations to payments on its debt, thereby reducing funds available for
operations, future business opportunities, payment of dividends or other
purposes;
- limit FelCor's flexibility in planning for, or reacting to, changes in
its business and the industry in which it competes; and
- place FelCor at a competitive disadvantage compared to its competitors
that have less debt.
CONFLICTS OF INTEREST COULD ADVERSELY AFFECT FELCOR'S BUSINESS.
Certain FelCor directors and executive officers. Bass currently leases 88
and manages 91 of FelCor's hotels. Richard C. North, who joined FelCor's board
during 1998, is the Group Finance Director of Bass, which is also the parent of
Holiday Hospitality Franchising, Inc. Holiday Hospitality is the franchisor of
most of the Bass hotels and, together with its affiliates, owns FelCor common
stock and FelCor Partnership units aggregating approximately 16.1% of FelCor's
outstanding common stock and units.
Issues may arise under the leases, franchise agreements and management
contracts, and in the allocation of acquisition and management opportunities,
that present conflicts of interest due to the relationship of Mr. North to the
companies with which he is associated. As an example, in the event FelCor enters
into new or additional hotel management contracts or other transactions with
Bass, the interests of Mr. North, by virtue of his relationship with Bass, may
conflict with FelCor's interests. For example, any increase in management fees
payable to Bass may decrease FelCor's profits to the benefit of Bass. Also, in
the selection of franchises under which FelCor's hotels will be operated, Mr.
North by virtue of his relationship with Holiday Hospitality, may have interests
that conflict with FelCor's interests.
Upon completion of the merger, two of FelCor's directors will serve on the
board of directors of MeriStar Hotels & Resorts, and one of those two directors,
Paul Whetsell, will continue to serve as the Chief Executive Officer of MeriStar
Hotels & Resorts. In addition, Mr. Bruce Wiles, who has been offered employment
with FelCor as an executive officer following the merger, owns 335,823 units of
limited partnership interest in the operating partnership of MeriStar Hotels &
Resorts, with an aggregate value of $601,123, based on the closing price of
$1.79 per share of MeriStar Hotels & Resorts common stock on July 17, 2001.
Further, FelCor's relationship with MeriStar Hotels & Resorts will be governed
by the terms of an intercompany agreement. The initial intercompany agreement
was not negotiated on an arm's-length basis, although the recent amendment to
the intercompany agreement in connection with the REIT Modernization Act was
subject to an arm's-length negotiation. FelCor may have conflicting views with
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MeriStar Hotels & Resorts on the manner in which its hotels are operated and
managed, and with respect to acquisitions and dispositions. Conflicts may also
arise in connection with the $50.0 million revolving credit facility, which had
$36.0 million outstanding as of March 31, 2001, from MeriStar to MeriStar Hotels
& Resorts and the parties' rights under the intercompany agreement. As a result,
FelCor directors and executive officers who serve at MeriStar Hotels & Resorts
may be presented with decisions which benefit FelCor to the detriment of
MeriStar Hotels & Resorts or benefit MeriStar Hotels & Resorts to FelCor's
detriment. Inherent potential conflicts of interest will be present in all of
the numerous transactions between FelCor and MeriStar Hotels & Resorts.
FelCor generally will be obligated under each of its management agreements
with MeriStar Hotels & Resorts to pay a termination fee to MeriStar Hotels &
Resorts if it elects to sell a hotel or if it elects not to restore a hotel
after a casualty and does not replace it with another hotel subject to a
management agreement with a fair market value equal to the fair market value of
MeriStar Hotels & Resorts' remaining management fee due under the management
agreement to be terminated. Where applicable, the termination fee is equal to
the present value, using a discount rate of 10%, of the remaining payments under
the agreement, assuming that MeriStar Hotels & Resorts would have been paid a
management fee under the agreement to be terminated, based on the operating
results for the 12 months preceding termination. Based on operating results for
relevant hotels for the 12 months ended June 30, 2001, the aggregate termination
fees payable under all of the management contracts would have ranged between
$170 million and $180 million. A decision to sell a hotel may, therefore, have
significantly different consequences for FelCor and MeriStar Hotels & Resorts.
FelCor anticipates that any director who has a conflict of interest with
respect to an issue presented to the FelCor board will abstain from voting upon
that issue, although he will have no legal obligation to do so. FelCor has no
provisions in its bylaws or charter that require an interested director to
abstain from voting on an issue as a FelCor director. FelCor does not expect to
add provisions in its charter and bylaws to this effect. Although each director
has a duty to FelCor to act in good faith, there is a risk that, should an
interested director vote upon an issue in which he or one of his affiliates has
an interest, his vote may reflect a bias that could be contrary to FelCor's best
interests. In addition, even if an interested director abstains from voting, the
director's participation in the meeting and discussion of an issue in which he
or companies with which he is associated have an interest could influence the
votes of other directors regarding the issue.
The relationship with MeriStar Hotels & Resorts may restrict future
opportunities. MeriStar is a party to an intercompany agreement with MeriStar
Hotels & Resorts, which will be assumed by FelCor in the merger. The
intercompany agreement will generally grant MeriStar Hotels & Resorts a right of
first refusal with respect to any management opportunity at any FelCor property
that FelCor does not elect to have managed by the hotel brand owner. This
opportunity will be made available to MeriStar Hotels & Resorts only if MeriStar
determines that:
- consistent with MeriStar's status as a REIT, it must enter into a
management agreement with an unaffiliated third party with respect to the
property;
- MeriStar Hotels & Resorts is qualified to be the manager of that
property; and
- MeriStar decides not to have the property operated by the owner of a
hospitality brand under that brand.
Although 90% of FelCor's current properties are managed by hotel brand owners,
the intercompany agreement will limit FelCor's freedom to engage hotel
management companies to manage its hotels that are not managed by hotel brand
owners.
In addition, under the intercompany agreement, each party must cooperate
with the other party to effect any securities issuance of the other party by
assisting in the preparation of any registration statement or other document
required in connection with the issuance.
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Acquisition of lessees. As a result of the passage of the REIT
Modernization Act, FelCor was able to form taxable REIT subsidiaries, referred
to as TRSs, to acquire the lessee's interest in its existing hotel leases and to
serve as lessees for any hotels acquired after January 1, 2001. A TRS is a fully
taxable corporation which may be owned 100% by a REIT. A TRS generally is
permitted to engage in businesses, own assets and earn income that, if engaged
in, owned or earned by the REIT, might jeopardize REIT status or result in the
imposition of penalty taxes on the REIT. A TRS is permitted to lease hotels from
the related REIT as long as it does not directly or indirectly operate or manage
hotels, except through an independent hotel management company that satisfies
applicable requirements under the federal income tax laws. A TRS generally is
not allowed to act as a licensor or a franchisor of any brand name under which
any hotel is operated. See "United States Federal Income Tax
Considerations -- Other Tax Consequences -- Taxable REIT Subsidiaries."
The acquisition of one of FelCor's primary lessees, DJONT Operations
L.L.C., or DJONT, was completed effective January 1, 2001. In consideration for
the acquisition of DJONT, FelCor caused FelCor Partnership to issue 416,667
units of limited partnership interest valued at approximately $10 million. The
acquisition of DJONT required negotiations between FelCor and the owners of
DJONT, including Mr. Corcoran and the children of Charles N. Mathewson, a
director of FelCor. The interests of Mr. Corcoran and Mr. Mathewson were in
direct conflict with FelCor's interests in these negotiations. Accordingly, they
abstained from participation in the discussion and vote by the FelCor board on
this matter.
In December 2000, FelCor sold one Bass hotel and, effective January 1,
2001, completed the acquisition of leases with respect to 12 Bass hotels. In
consideration for the acquisition and termination of these leases and the
related management agreements, 413,585 shares of FelCor common stock valued at
approximately $10 million were issued to Bass. FelCor acquired the remaining 88
leases held by Bass, effective July 1, 2001. FelCor has contributed these leases
to its TRSs. In consideration for these 88 leases, FelCor issued 100 shares of
FelCor common stock and caused its subsidiaries to agree to new long-term
management agreements with Bass subsidiaries to manage hotels. As a result,
FelCor will record a lease termination expense of approximately $125 million in
the quarter ending September 30, 2001, and a corresponding liability of
approximately $125 million that will be amortized over the term of the
management agreements. The acquisition of the leases held by Bass involved
negotiations between FelCor and Bass. Richard C. North, a director of FelCor, is
the Group Finance Director of Bass. The interest of Bass in those negotiations
was in direct conflict with FelCor's interests. Mr. North abstained from
participating in any discussion or vote by FelCor's board relating to these
transactions.
Adverse tax consequences to some affiliates on a sale of some hotels.
Messrs. Corcoran and Mathewson may incur additional tax liability if FelCor
sells its investments in six hotels that it acquired in July 1994 from
partnerships controlled by these individuals. Consequently, FelCor's interests
could differ from Messrs. Corcoran's and Mathewson's interests in the event that
FelCor considers a sale of any of these hotels. Decisions regarding a sale of
any of these six hotels must be made by a majority of the independent directors.
EACH OF THE PARTIES TO THE MERGER HAS, AND THE COMBINED COMPANY WILL HAVE,
RESTRICTIVE DEBT COVENANTS THAT COULD ADVERSELY AFFECT ITS ABILITY TO RUN ITS
BUSINESS.
The parties to the merger are parties to indentures governing an aggregate
$1.6 billion in principal amount of FelCor's issued and outstanding notes, an
aggregate $859.3 million in principal amount of MeriStar's issued and
outstanding notes, and agreements governing FelCor's $600 million line of credit
and MeriStar's $500 million line of credit and $195 million in term loans at
March 31, 2001. On a pro forma basis, the combined company would have an
aggregate of $1.9 billion in indebtedness under its senior notes and an
aggregate of $363.4 million in debt under its line of credit. All of this
indebtedness contains
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or will contain various restrictive covenants including, among others,
provisions restricting the borrower from:
- incurring indebtedness;
- making distributions;
- making investments;
- engaging in transactions with affiliates;
- incurring liens;
- merging or consolidating with another person;
- disposing of all or substantially all of its assets; or
- permitting limitations on the ability of the borrower's subsidiaries to
make payments to the borrower.
These restrictions may adversely affect the ability of the combined company to
finance its operations or engage in other business activities that may be in its
best interest. For example, on a pro forma basis, under the most restrictive of
these covenants that will be applicable to the combined company, the combined
company would be able to incur no more than $840 million in additional
indebtedness for the purpose of acquiring additional hotels and $385 million for
purposes other than acquiring additional hotels following the merger, assuming
the merger had occurred on March 31, 2001.
In addition, some of these agreements will require the combined company to
maintain specified financial ratios. The ability of the combined company to
comply with these ratios going forward may be affected by events beyond its
control. These covenants also may restrict the ability of the combined company
to engage in some transactions. In addition, any breach of these limitations
could result in the acceleration of most of the combined company's outstanding
debt. The combined company may not be able to refinance or repay its debts in
full under those circumstances.
FELCOR AND MERISTAR ENCOUNTER INDUSTRY RELATED RISKS THAT MAY ADVERSELY AFFECT
THEIR BUSINESS, AND THE COMBINED COMPANY WILL ENCOUNTER THE SAME RISKS.
The recent economic slowdown has adversely affected the RevPAR performance
of FelCor and MeriStar and, if it worsens or continues, these effects could be
material. On July 9, 2001, both FelCor and MeriStar announced that they had
experienced declines in revenue per available room, or RevPAR, during the second
quarter of 2001, compared to the comparable period of 2000, between 5.5% to 6.0%
for MeriStar and between 6.5% to 7.0% for FelCor. A sharper than anticipated
decline in business travel was cited by both parties as the primary cause of the
declines, which were principally reflected in decreased occupancies. Both FelCor
and MeriStar expect that the hotel industry will experience a RevPAR decline for
the full year 2001. If the current economic slowdown worsens significantly or
continues for a protracted period of time, the declines in occupancy could also
lead to declines in average daily room rates and could have a material adverse
effect on the funds from operations and earnings of FelCor, MeriStar and the
combined company.
Investing in hotel assets involves special risks. FelCor and MeriStar have
invested almost entirely in hotel-related assets, and the hotels are subject to
all of the risks common to the hotel industry. These risks could adversely
affect hotel occupancy and the rates that can be charged for hotel rooms, and
generally include:
- competition from other hotels;
- construction of more hotel rooms in a particular area than needed to meet
demand;
- increases in energy costs and other travel expenses that reduce business
and leisure travel;
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- adverse effects of declines in general and local economic activity;
- fluctuations in revenue caused by the seasonal nature of the hotel
industry;
- adverse effects of a downturn in the hotel industry; and
- risks generally associated with the ownership of hotels and real estate,
as discussed below.
The combined company will have increased concentration of hotels in the
upscale, full-service segment, which may increase its susceptibility to an
economic downturn. As a percentage of total rooms, FelCor currently has 18% of
its hotels in the upscale, full-service hotel segment, MeriStar currently has
65% of its hotels in this segment, and the combined company will have 38% of its
hotels in this segment. While FelCor generally believes that this segment is a
desirable segment in which to focus its hotel investments, in an economic
downturn, hotels in this segment, which generally demand higher room rates, may
be more susceptible to a decrease in revenues, as compared to hotels in other
segments that have lower room rates. This characteristic may result from hotels
in this segment generally targeting business and high-end leisure travelers. In
periods of economic difficulties, business and leisure travelers may seek to
reduce travel costs by limiting trips or seeking to reduce costs on the trips
that are taken, which could have a material adverse effect on the revenues and
results of operations of the combined company.
The combined company will have geographic concentration in three states
which may create risks of regional economic and weather conditions. FelCor
derived approximately 49% of its revenues for the twelve months ended March 31,
2001 from hotels located in three states: California, Florida and Texas. As a
result of the merger, on a pro forma basis, the revenue from these three states
will be reallocated to reduce the reliance on any one state, but collectively,
the revenue from these states will still account for approximately 50% of the
combined company's revenues. Therefore, following the merger, adverse economic
or weather conditions in these states will have a greater effect on the combined
company than similar conditions in other states.
FelCor and MeriStar could each face increased competition. Each of
FelCor's and MeriStar's hotels competes with other hotels in its geographic
area. A number of additional hotel rooms have been or may be built in a number
of the geographic areas in which FelCor and MeriStar hotels are located, which
could adversely affect the results of operations of these hotels. An oversupply
of hotel rooms could adversely affect both occupancy and rates in the markets in
which FelCor and MeriStar hotels are located. A significant increase in the
supply of midprice, upscale and upper upscale hotel rooms and suites, if demand
fails to increase proportionately, could have a severe adverse effect on the
business, financial condition and results of operations of FelCor and MeriStar.
Acquisition growth opportunities have decreased. There has been
substantial consolidation in, and capital allocated to, the U.S. lodging
industry since the early 1990's. This generally has resulted in higher prices
for hotels. In addition, current market prices of FelCor's and MeriStar's common
stock make their cost of equity capital relatively high. These conditions have
resulted in fewer attractive acquisition opportunities. An important part of
FelCor's and MeriStar's historical growth strategy has been the acquisition and,
in many instances, the renovation and repositioning of hotels at less than
replacement cost. Continued industry consolidation and competition for
acquisitions could adversely affect the growth prospects of the combined company
going forward. FelCor and MeriStar compete for hotel investment opportunities
with other companies, some of which have greater financial or other resources
than FelCor and MeriStar have. Competitors may have a lower cost of capital and
may be able to pay higher prices or assume greater risks than would be prudent
for FelCor and MeriStar to pay or assume.
FelCor and MeriStar are subject to possible adverse effects of franchise
and licensing agreement requirements. Substantially all FelCor and MeriStar
hotels are operated under existing franchise or license agreements with
nationally recognized hotel brands. Each license agreement requires that the
licensed hotel be maintained and operated in accordance with specific standards
and restrictions in order to maintain uniformity within the franchisor system.
Compliance with these standards could require a franchisee to incur significant
expenses or capital expenditures, which could adversely affect FelCor's and
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MeriStar's results of operations and ability to make payments on indebtedness.
Also, changes to these standards could conflict with a hotel's specific business
plan or limit a franchisee's ability to make improvements or modifications to a
hotel without the consent of the franchisor.
If a franchise license terminates due to FelCor's or MeriStar's failure to
make required improvements, FelCor or MeriStar may be liable to the franchisor
for a termination payment. These termination payments vary by franchise
agreement and hotel. The loss of a substantial number of franchise licenses and
the related termination payments could have a material adverse effect on
FelCor's or MeriStar's business because of the loss of associated name
recognition, marketing support and centralized reservation systems provided by
the franchisor. The franchise agreements could also expire or terminate, with
specified renewal rights, at various times. As a condition to renew, the
franchise agreements could involve a renewal application process that would
require substantial capital improvements, for which FelCor or MeriStar would be
responsible, to be made to the land or hotels.
As a condition to the merger, both FelCor and MeriStar must obtain the
consent of a number of MeriStar's franchisors, and obtaining those consents may
require additional expenditures or impose additional conditions. If required
consents are not obtained, the merger may not be completed. If the failure to
obtain one or more consents is waived and the merger completed, the related
franchises may be terminated, and FelCor may be liable to the franchisor for
termination payments. Assuming all of the MeriStar franchises were terminated on
June 30, 2001, FelCor and MeriStar estimate that the aggregate of these
termination payments, if required, would be in the range of $120 million to $130
million. The loss of a substantial number of franchises and the related
termination payments could have a material adverse effect on the combined
company's results of operations.
FelCor and MeriStar are subject to the additional risks of hotel
operations. Prior to January 1, 2001, substantially all of the hotels of FelCor
and MeriStar were leased to unaffiliated third parties under leases providing
for the payment of rent based, in part, upon revenues from the hotels.
Accordingly, operating risks to FelCor and MeriStar were essentially limited to
changes in hotel revenues and to the lessees' ability to pay the rent due under
the leases. On January 1, 2001, TRSs of MeriStar acquired the leaseholds of
substantially all of MeriStar's hotels, and a TRS of FelCor purchased the
leaseholds of 98 of its hotels. FelCor plans to acquire, effective July 1, 2001,
88 leases held by Bass. As a result of these acquisitions, FelCor and MeriStar
became subject to the risk of fluctuating hotel operating expenses, including
but not limited to:
- wage and benefit costs;
- repair and maintenance expenses;
- the costs of gas and electricity, which have increased significantly in
recent months;
- the costs of liability insurance; and
- other operating expenses.
These operating expenses are more difficult to predict and control than revenue,
resulting in an increased risk of volatility in FelCor's and MeriStar's results
of operations.
The lodging business is seasonal in nature. Generally, hotel revenues are
greater in the second and third calendar quarters than in the first and fourth
calendar quarters although this may not be true for hotels in major tourist
destinations. Revenues for hotels in tourist areas generally are substantially
greater during tourist season than other times of the year. Seasonal variations
in revenue at the hotels of both FelCor and MeriStar can be expected to cause
quarterly fluctuations in each party's revenues. Quarterly earnings also may be
adversely affected by events beyond the control of both FelCor and MeriStar,
such as extreme weather conditions, economic factors and other considerations
affecting travel.
FelCor and MeriStar lack control over the management and operations of
their hotels. FelCor and MeriStar are dependent on the ability of unaffiliated
third party managers to operate and manage their hotels. In order to maintain
REIT status, FelCor and MeriStar cannot operate their hotels or any
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subsequently acquired hotels. As a result, FelCor and MeriStar are unable to
directly implement strategic business decisions for the operation and marketing
of their hotels, such as decisions with respect to the setting of room rates,
food and beverage operations and similar matters.
FELCOR'S AND MERISTAR'S ABILITY TO GROW MAY BE LIMITED BY THEIR ABILITY TO
ATTRACT DEBT FINANCING.
Recently, FelCor and MeriStar have focused on their internal growth
strategies, which include the renovation, redevelopment and rebranding of their
hotels to achieve improved revenue performance. Each of FelCor and MeriStar may
not be able to fund growth solely from cash provided from operating activities
because it must distribute at least 90% of its taxable income each year to
maintain its status as a REIT. Consequently, FelCor and MeriStar rely upon the
availability of debt or equity capital to fund hotel acquisitions and
improvements and may be dependent upon its ability to attract debt financing
from public or institutional lenders. FelCor intends to continue to operate the
combined company as a REIT following the merger. FelCor may not be successful in
attracting sufficient debt financing to fund future growth at an acceptable
cost. In addition, FelCor currently has, and expects to continue following the
merger, a policy of limiting debt to not more than 55% of its investment in
hotel assets, at cost. This policy is a board policy only and not a requirement
contained in FelCor's organizational documents. Accordingly, the policy may be
modified or waived by the board, which it has done previously, increasing the
limitation from 40% in June 1998 to 50% in February 2000 and to its current 55%
in May 2001. Unless further waived or modified by its board of directors, this
limitation could also limit FelCor's ability to incur additional debt to fund
its continued growth. At March 31, 2001, on a pro forma basis, FelCor's
consolidated debt represented 50% of its investment in hotels at cost.
FELCOR AND MERISTAR ARE SUBJECT TO POTENTIAL TAX RISKS.
The federal income tax laws governing REITs are complex. Each of FelCor
and MeriStar has operated and, following the merger, FelCor intends to continue
to operate in a manner that is intended to qualify it as a REIT under federal
income tax laws. The REIT qualification requirements are extremely complicated,
and interpretations of the federal income tax laws governing qualification as a
REIT are limited. Accordingly, neither FelCor nor MeriStar can be certain that
it has been, and FelCor cannot be certain that it will continue to be,
successful in operating so as to qualify as a REIT. At any time, new laws,
interpretations or court decisions may change the federal tax laws or the
federal income tax consequences of qualification as a REIT.
Failure to make required distributions would subject FelCor to tax. Each
year, a REIT must pay out to its stockholders at least 90%, or 95% for taxable
years prior to 2001, of its taxable income, other than any net capital gain. To
the extent that a REIT satisfies the distribution requirement, but distributes
less than 100% of its taxable income, it will be subject to federal corporate
income tax on its undistributed taxable income. In addition, a REIT will be
subject to a 4% nondeductible excise tax if the actual amount it pays out to its
stockholders in a calendar year is less than the minimum amount specified in the
federal income tax laws. Each of FelCor and MeriStar has paid out, and FelCor
intends to continue to pay out, its income to its stockholders in a manner
intended to satisfy the distribution requirement and to avoid corporate income
tax and the 4% excise tax. FelCor's and MeriStar's only source of funds to make
those distributions comes from distributions to FelCor from FelCor Partnership
and to MeriStar from MeriStar Partnership. Accordingly, FelCor or MeriStar may
be required to borrow money or sell assets to pay out enough of its taxable
income to satisfy the distribution requirement and to avoid corporate income tax
and the 4% tax in a particular year.
Failure to qualify as a REIT would subject FelCor to federal income
tax. If FelCor fails to qualify as a REIT in any taxable year, FelCor would be
subject to federal income tax on its taxable income. FelCor might need to borrow
money or sell hotels in order to pay any such tax. FelCor's payment of income
tax would decrease the amount of its income available to be paid out to its
stockholders. In addition, FelCor would no longer be required to pay out most of
its taxable income to its stockholders. Unless its failure to qualify as a REIT
were excused under federal income tax laws, FelCor could not re-elect REIT
status until the fifth calendar year following the year in which it failed to
qualify. In addition,
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FelCor's or MeriStar's failure to qualify as a REIT in any taxable year prior to
or ending on completion of the merger could jeopardize FelCor's REIT status
after the merger and/or cause FelCor to be subject to federal income tax.
Failure to have distributed earnings and profits of Bristol Hotel Company
or CapStar Hotel Company in 1998 would cause FelCor or MeriStar to fail to
qualify as a REIT. At the end of any taxable year, a REIT may not have any
accumulated earnings and profits, described generally for federal income tax
purposes as cumulative undistributed net income, from a non-REIT corporation. In
connection with the merger of Bristol Hotel Company, or Bristol, with and into
FelCor in 1998, Arthur Andersen LLP prepared and provided to FelCor its
computation of Bristol's accumulated earnings and profits through the date of
the merger, and FelCor made a corresponding special one-time distribution to its
stockholders. In connection with the merger of CapStar Hotel Company, or
CapStar, with and into American General Hospitality Corporation, the predecessor
to MeriStar, in 1998, KPMG LLP prepared and provided to MeriStar its computation
of CapStar's accumulated earnings and profits through the date of the merger,
and the distribution of the stock of MeriStar Hotels & Resorts, Inc. by CapStar
prior to the CapStar merger was determined to be sufficient to reduce the
earnings and profits of CapStar to zero at the time of the CapStar merger.
However, the determination of accumulated earnings and profits for federal
income tax purposes is extremely complex and the computations of Arthur Andersen
LLP and KPMG LLP are not binding on the Internal Revenue Service. Should the
Internal Revenue Service successfully assert either that Bristol's accumulated
earnings and profits were greater than the amount so distributed by FelCor or
that CapStar's accumulated earnings and profits were greater than the amount so
distributed by CapStar, FelCor may fail to qualify as a REIT. Alternatively, the
Internal Revenue Service may permit FelCor to avoid losing its REIT status by
paying a deficiency dividend, on MeriStar's or its own behalf, to eliminate any
remaining accumulated earnings and profits of Bristol or CapStar. There can be
no assurance, however, that the Internal Revenue Service would not assert loss
of REIT status as the penalty for failing to distribute the accumulated earnings
and profits of Bristol or CapStar in 1998.
A sale of assets acquired from Bristol or CapStar within ten years after
the respective merger will result in corporate income tax. If FelCor sells any
asset that it acquired from Bristol within ten years after FelCor's merger with
Bristol, or FelCor sells any asset that MeriStar acquired from CapStar within
ten years after its merger with CapStar, and FelCor recognizes a taxable gain on
the sale, FelCor will be taxed at the highest corporate rate on an amount equal
to the lesser of:
- the amount of gain that FelCor recognizes at the time of the sale; or
- the amount of gain that FelCor or MeriStar, as appropriate, would have
recognized if it had sold the asset at the time that it acquired the
asset from Bristol or CapStar, as appropriate, for its then fair market
value.
The sales of the Bristol and CapStar hotels that have occurred to date have not
resulted in any material amount of tax liability. If FelCor is successful in
selling the remaining 15 hotels designated as assets held for sale, FelCor could
incur corporate income tax with respect to the related built-in gain, the amount
of which cannot yet be determined.
DEPARTURE OF KEY PERSONNEL, INCLUDING MR. CORCORAN, COULD ADVERSELY AFFECT
FELCOR'S FUTURE OPERATING RESULTS.
FELCOR AND MERISTAR ARE SUBJECT TO RISKS THAT MAY ADVERSELY AFFECT REAL ESTATE
OWNERSHIP.
General Risks. FelCor's and MeriStar's investments in hotels are subject
to the numerous risks generally associated with owning real estate, including
among others:
- adverse changes in general or local economic or real estate market
conditions;
- changes in zoning laws;
- changes in traffic patterns and neighborhood characteristics;
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- increases in assessed valuation and tax rates;
- increases in the cost of property insurance;
- governmental regulations and fiscal policies;
- the potential for uninsured or underinsured property losses;
- the impact of environmental laws and regulations; and
- other circumstances beyond their control.
Moreover, real estate investments are relatively illiquid, and FelCor and
MeriStar may not be able to vary their portfolios in response to changes in
economic and other conditions.
Compliance with environmental laws may adversely affect FelCor's and
MeriStar's financial condition. Owners of real estate are subject to numerous
federal, state, local and foreign environmental laws and regulations. Under
these laws and regulations, a current or former owner of real estate may be
liable for the costs of remediating hazardous substances found on its property,
whether or not it was responsible for their presence. In addition, if an owner
of real property arranges for the disposal of hazardous substances at another
site, it may also be liable for the costs of remediating the disposal site, even
if it did not own or operate the disposal site. This liability may be imposed
without regard to fault or the legality of a party's conduct and may, in some
circumstances, be joint and several. A property owner may also be liable to
third parties for personal injuries or property damage sustained as a result of
its release of hazardous or toxic substances, including asbestos-containing
materials, into the environment. Environmental laws and regulations may require
an owner to incur substantial expenses and limit the use of its properties.
FelCor or MeriStar could have substantial liability for a failure to comply with
applicable environmental laws and regulations, which may be enforced by the
government or, in some instances, by private parties. The existence of hazardous
substances on a property can also adversely affect the value of, and the owner's
ability to use, sell or borrow against, the property.
Future or amended laws or regulations, or more stringent interpretations or
enforcement of existing environmental requirements, may impose additional
material environmental liability. In addition, the environmental condition or
liability relating to the hotels of FelCor and MeriStar may be affected by new
information or changed circumstances, by the condition of properties in the
vicinity of those hotels, such as the presence of leaking underground storage
tanks, or by the actions of unrelated third parties.
Compliance with the Americans with Disabilities Act may adversely affect
FelCor's and MeriStar's financial condition. Under the Americans with
Disabilities Act of 1990, all public accommodations, including hotels, are
required to meet some federal requirements for access and use by disabled
persons. Both FelCor and MeriStar believe that their hotels substantially comply
with the requirements of the Americans with Disabilities Act. However, a
determination that the hotels are not in compliance with that Act could result
in liability for both governmental fines and damages to private parties. If
either FelCor or MeriStar were required to make unanticipated major
modifications to the hotels to comply with the requirements of the Americans
with Disabilities Act, it could adversely affect its ability to pay its
obligations.
THE MERGER MAY CAUSE DILUTION TO FELCOR'S EARNINGS PER SHARE.
The merger may have a dilutive effect on earnings per common share of
FelCor due to the additional shares of FelCor that will be issued in the merger,
the transaction and integration-related costs, increased interest expense and
other factors such as failure to realize the anticipated benefits from cost
savings and synergies expected from the merger. Any dilution in earnings per
share could adversely impact the market price of FelCor common stock.
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FELCOR'S CHARTER CONTAINS LIMITATIONS ON OWNERSHIP AND TRANSFER OF SHARES OF ITS
STOCK THAT COULD ADVERSELY AFFECT ATTEMPTED TRANSFERS OF FELCOR COMMON STOCK.
In order for FelCor to maintain its status as a REIT, no more than 50% in
value of its outstanding stock may be owned, actually or constructively under
the applicable tax rules, by five or fewer persons during the last half of any
taxable year. FelCor's charter prohibits, subject to some exceptions, any person
from owning more than 9.9%, as determined in accordance with the Internal
Revenue Code and the Exchange Act, of the number of outstanding shares of any
class of its capital stock. FelCor's charter also prohibits any transfer of its
capital stock that would result in a violation of the 9.9% ownership limit,
reduce the number of stockholders below 100 or otherwise result in FelCor
failing to qualify as a REIT. Any attempted transfer of shares in violation of
the charter prohibitions will be void, and the intended transferee will not
acquire any right in those shares. FelCor has the right to take any lawful
action that it believes necessary or advisable to ensure compliance with these
ownership and transfer restrictions and to preserve its status as a REIT,
including refusing to recognize any transfer of capital stock in violation of
its charter. MeriStar's charter contains substantially similar provisions.
SOME PROVISIONS IN FELCOR'S CHARTER AND BYLAWS AND MARYLAND LAW MAKE A TAKEOVER
OF FELCOR MORE DIFFICULT.
Ownership Limit. The ownership and transfer restrictions of FelCor's
charter may have the effect of discouraging or preventing a third party from
attempting to gain control of FelCor without the approval of the FelCor board of
directors. Accordingly, it is less likely that a change in control, even if
beneficial to stockholders, could be effected without the approval of the FelCor
board. MeriStar's charter contains substantially similar provisions.
Staggered Board. FelCor's board of directors is divided into three
classes. Directors in each are elected for terms of three years. As a result,
the ability of stockholders to effect a change in control of FelCor through the
election of new directors is limited by the inability of stockholders to elect a
majority of the FelCor board at any particular meeting. MeriStar's board of
directors is also subject to similar provisions.
Authority to Issue Additional Shares. Under the FelCor charter, the FelCor
board of directors may issue preferred stock without stockholder action. The
preferred stock may be issued, in one or more series, with the preferences,
qualifications and terms, designated by the FelCor board that may discourage,
delay or prevent a change in control of FelCor, even if the change is in the
best interests of stockholders. FelCor currently has outstanding 5,980,600
shares of its $1.95 Series A Cumulative, Convertible Preferred Stock and 57,500
shares of its 9% Series B Cumulative Redeemable Preferred Stock. The preferred
stock reduces the amount of dividends available, and has dividend, liquidation
and other rights superior, to the holders of FelCor's common stock. MeriStar's
charter also permits the issuance of preferred stock without stockholder
approval but prohibits the issuance of preferred stock for anti-takeover
purposes or preferred stock that has super-majority voting rights.
Maryland Anti-Takeover Statues. As a Maryland corporation, FelCor is
subject to various provisions under the Maryland General Corporation Law,
including the Maryland business combination statute. That statute has procedures
that must be followed in, and otherwise restricts, some kinds of takeovers and
business combinations. FelCor's charter currently exempts FelCor from the
operation of the Maryland share control statute. That statute may deny voting
rights to shares involved in an acquisition of one-tenth or more of the voting
stock of a Maryland corporation. To the extent these laws are applicable to
FelCor, they may have the effect of delaying or preventing a change in control
of FelCor even though beneficial to FelCor's stockholders. MeriStar has also
opted-out of the statute.
THERE ARE DIFFERENCES IN STOCKHOLDER RIGHTS OF FELCOR AND MERISTAR STOCKHOLDERS
THAT MAY BE DETRIMENTAL TO MERISTAR STOCKHOLDERS WHO RECEIVE FELCOR STOCK IN THE
MERGER.
As a result of the merger, MeriStar stockholders will no longer own shares
of MeriStar and will become stockholders of FelCor. Differences in the
provisions of the respective corporate charters and
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bylaws of FelCor and MeriStar result in differences in the rights of the
stockholders of the two corporations. The rights of FelCor stockholders may in
some cases be considered less favorable than the rights of MeriStar
stockholders. The material differences in stockholder rights that may be
considered less favorable to MeriStar stockholders are:
- FelCor has outstanding two series of preferred stock which have
preferences over common stock on dividends or liquidating distributions.
MeriStar has no outstanding preferred stock;
- MeriStar's board, but not FelCor's board, is prohibited by charter
provision from issuing preferred stock for anti-takeover purposes or with
super-majority voting rights; and
- Holders of more than 50% of FelCor's outstanding voting stock may vote to
remove a director for cause. MeriStar's charter permits removal of a
director with or without cause but requires a vote of 75% or more of the
outstanding voting stock.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
FelCor and MeriStar have each made forward-looking statements in this
document, and in documents that are incorporated by reference in this document,
that are subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of operations of
FelCor and MeriStar. Also, statements including the words "will," "should,"
"believes," "expects," "anticipates," "intends," "plans," "estimates," or
similar expressions are forward-looking statements. The sections in this
document which contain forward-looking statements include "Questions and Answers
About the Merger," "Summary," "Summary Unaudited Pro Forma Condensed Combined
Financial Data," "Risk Factors," "The Merger," and "Unaudited Pro Forma Combined
Financial Information." Many factors, some of which are discussed elsewhere in
this document and in the documents incorporated by reference in this document,
could affect the future financial results of FelCor and could cause actual
results to differ materially from those expressed in forward-looking statements
contained or incorporated by reference in this document. Important factors that
could cause actual results to differ materially from current expectations
reflected in these forward-looking statements include, among others, the factors
discussed under the caption "Risk Factors" beginning on page 27.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and stockholder values
of FelCor following completion of the merger may differ materially from those
expressed in these forward-looking statements. Many of the factors that will
determine these results and values are beyond the ability of FelCor and MeriStar
to control or predict. For these forward-looking statements, FelCor and MeriStar
claim the protection of the safe harbor for forward-looking statements contained
in Section 27A of the Securities Act and Section 21E of the Exchange Act.
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THE COMBINED COMPANY
GENERAL
As a result of the merger, MeriStar will be merged with and into FelCor,
which will be the surviving corporation. As a result of the partnership merger,
MeriStar Partnership will be merged with and into a wholly-owned subsidiary of
FelCor Partnership, with MeriStar Partnership surviving as a wholly-owned
subsidiary of FelCor Partnership. FelCor will continue to operate as a REIT.
FelCor Partnership will succeed to the ownership, through MeriStar Partnership
and its subsidiaries, of all of MeriStar's owned and leased hotels. See
"Unaudited Pro Forma Consolidated Financial Information."
The following table includes descriptive information about the properties
of FelCor, MeriStar and the combined company as of June 30, 2001.
NUMBER OF PROPERTIES
---------------------------------
COMBINED
FELCOR(1) MERISTAR COMPANY(1)
--------- -------- ----------
Hilton Brands:
Embassy Suites............................................ 59 3 62
Doubletree and Doubletree Guest Suites.................... 11 6 17
Hampton Inn............................................... 4 4
Hilton and Hilton Suites.................................. 1 23 24
Homewood Suites........................................... 1 1
Bass Brands:
Holiday Inn............................................... 39 9 48
Crowne Plaza and Crowne Plaza Suites...................... 18 5 23
Holiday Inn Select........................................ 10 5 15
Holiday Inn Express....................................... 2 2
Starwood Brands:
Sheraton and Sheraton Suites.............................. 10 11 21
Westin.................................................... 1 4 5
Four Points by Sheraton................................... 1 1
Marriott Brands:
Courtyard by Marriott..................................... 2 5 7
Marriott.................................................. 3 3
Fairfield Inn............................................. 5 5
Radisson Brands:
Radisson.................................................. 12 12
Other Brands................................................ 7 26 33
--- --- ---
Total Hotels...................................... 170 113 283
=== === ===
- ------------
(1) Excludes the 15 hotels designated as held for sale.
All of MeriStar's hotels, except for four hotels that are leased and
managed by Prime Hospitality, are managed by subsidiaries of MeriStar Hotels &
Resorts, which will continue to manage the hotels after completion of the
merger. These hotels are leased to taxable REIT subsidiaries of MeriStar, which
in turn have separate management agreements for each hotel with a subsidiary of
MeriStar Hotels & Resorts.
Of FelCor's hotels, 96 are leased to taxable REIT subsidiaries of FelCor
and 88 are leased to subsidiaries of Bass Hotels & Resorts. Effective July 1,
2001, FelCor acquired the leases from Bass and contributed them to its taxable
REIT subsidiaries. These subsidiaries will enter into long-term management
agreements with Bass subsidiaries to manage these hotels. Of the 96 hotels
currently leased to taxable REIT subsidiaries, 72 hotels are managed by
subsidiaries of Hilton Hotels Corporation,
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11 hotels are managed by subsidiaries of Starwood Hotels and Resorts Worldwide,
Inc., and eight hotels are managed by an affiliate of Interstate Hotels
Corporation.
RELATIONSHIP WITH MERISTAR HOTELS & RESORTS
The Intercompany Agreement. MeriStar and MeriStar Partnership are parties
to an intercompany agreement with MeriStar Hotels & Resorts. On completion of
the merger, FelCor will assume MeriStar's rights and obligations under the
agreement. The intercompany agreement provides that, for so long as the
agreement remains in effect, MeriStar Hotels & Resorts is prohibited from making
real property investments that a REIT could make unless:
- MeriStar is first given the opportunity, but elects not to pursue the
activities or investments;
- it is on land already owned or leased by MeriStar Hotels & Resorts or
subject to a lease or purchase option in favor of MeriStar Hotels &
Resorts;
- MeriStar Hotels & Resorts will operate the property under a brand name
owned by MeriStar Hotels & Resorts; or
- it is a minority investment made as part of a lease or management
agreement arrangement.
MeriStar has a right of first refusal with respect to any real property
investment to be sold by MeriStar Hotels & Resorts.
The intercompany agreement will generally grant MeriStar Hotels & Resorts a
right of first refusal with respect to any management opportunity at any FelCor
property that FelCor does not elect to have managed by the hotel brand owner.
This opportunity will be made available to MeriStar Hotels & Resorts only if
MeriStar determines that:
- consistent with MeriStar's status as a REIT, it must enter into a
management agreement with an unaffiliated third party with respect to the
property;
- MeriStar Hotels & Resorts is qualified to be the manager of that
property; and
- MeriStar decides not to have the property operated by the owner of a
hospitality brand under that brand.
Although 90% of FelCor's hotels are managed by hotel brand owners, the
intercompany agreement will limit FelCor's freedom to engage hotel management
companies to manage its hotels that are not managed by hotel brand owners.
Each party must cooperate with the other party to effect any securities
issuance of the other party by assisting in the preparation of any registration
statement or other document required in connection with the issuance.
The intercompany agreement will terminate on the earlier of August 3, 2008,
and the date of a change in ownership or control of MeriStar Hotels & Resorts.
Credit Facility. MeriStar is obligated to lend MeriStar Hotels & Resorts
up to $50 million for general corporate purposes under a revolving credit
agreement. On March 1, 2000, the revolving credit agreement was amended to
reduce the maximum borrowing limit from $75 million to $50 million, increase the
interest rate from 350 basis points over the 30-day London Interbank Offered
Rate to 650 basis points over the 30-day London Interbank Offered Rate and set
the maturity date of the loan to the 91st day following the maturity of MeriStar
Hotels & Resorts' senior credit facility, as amended, restated, refinanced or
renewed. As of March 31, 2001, there was $36 million outstanding under this
revolving credit agreement. Upon effectiveness of the merger, FelCor will
succeed to MeriStar's role as lender under this credit facility.
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FelCor, MeriStar and MeriStar Hotels & Resorts have agreed to amend,
effective when the merger is complete, the credit agreement to fix its maturity
at February 28, 2004, set the interest rate at 600 basis points over the 30-day
London Interbank Offered Rate and set the default rate of interest at 800 basis
points over the 30-day London Interbank Offered Rate. MeriStar has agreed to use
best efforts to obtain the consents of MeriStar Hotels & Resorts' senior lenders
to these amendments.
INDEBTEDNESS, LIQUIDITY AND FINANCIAL RESOURCES
Assuming the completion of the merger, at March 31, 2001, FelCor had
approximately $3.7 billion of pro forma total indebtedness, as compared to $1.8
billion in actual total indebtedness for FelCor alone and $1.7 billion in actual
total indebtedness for MeriStar alone as of March 31, 2001. The pro forma ratio
of EBITDA to interest paid for the three months ended March 31, 2001 would have
been 2.4 to 1.0, compared to 2.9 to 1.0 for FelCor alone and 2.6 to 1.0 for
MeriStar alone. Of FelCor's pro forma indebtedness at March 31, 2001, none was
at a floating rate of interest, after giving effect to interest rate swap
agreements currently in effect.
In June 2001, FelCor Partnership completed the sale of $600 million of its
unsecured senior notes to finance the merger. Approximately $316 million of the
proceeds of these notes has been escrowed and will be used to redeem a portion
of the notes at 101% of principal plus accrued interest if the merger is not
completed. In connection with the completion of the merger, FelCor Partnership
expects to assume approximately $500 million of existing MeriStar Partnership
senior notes, although FelCor may be required to purchase these senior notes
following the merger. In order to have funds available for this purchase, FelCor
has obtained a commitment from lenders for up to $500 million in a stock secured
term loan facility. FelCor also expects to obtain a new $300 million to $350
million mortgage loan and assume mortgage debt of MeriStar of approximately $380
million. In addition, FelCor has obtained a commitment to increase the
availability under its line of credit and extend the maturity of the facility
until 2004. No assurances can be given that FelCor will be successful in
effecting the above financing plans. See "Risk Factors -- FelCor may be unable
to complete financing plans for the merger."
MANAGEMENT
FelCor has agreed in the merger agreement that Paul W. Whetsell, current
Chairman, Chief Executive Officer and a director of MeriStar, and Steven D.
Jorns, current Vice Chairman and a director of MeriStar, will become members of
the FelCor board of directors at the effective time of the merger. By voting to
approve the merger agreement and the merger, FelCor stockholders will be voting
for the election of Mr. Whetsell as director with a term ending at the annual
meeting of stockholders in 2004 and Mr. Jorns as director with a term ending at
the annual meeting of stockholders in 2003. All of FelCor's current directors
will remain as directors of FelCor. Following the merger, the current executive
officers of FelCor will remain as executive officers of FelCor. Bruce G. Wiles,
the current President, Chief Investment Officer and a director of MeriStar, is
expected to become an executive officer of FelCor following the merger. No other
current executive officers of MeriStar are expected to become executive officers
of FelCor following the merger.
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THE SPECIAL MEETINGS
DATE, TIME, PLACE AND PURPOSE OF THE FELCOR SPECIAL MEETING
The special meeting of the FelCor stockholders is scheduled to be held on
, , 2001, at 9:00 a.m., Central time, at the Embassy
Suites -- DFW South hotel, 4650 W. Airport Frwy., Irving, Texas 75062. If
sufficient authority is received, it may be adjourned or postponed to another
date and/or place for proper purposes. The purpose of the meeting is to consider
and vote upon a proposal to approve the merger agreement and the merger of
MeriStar with and into FelCor, including the election of Paul W. Whetsell and
Steven D. Jorns as two new directors of FelCor. In addition, FelCor stockholders
will be asked to approve and adopt FelCor's 2001 Restricted Stock and Stock
Option Plan, or the FelCor 2001 Plan.
DATE, TIME, PLACE AND PURPOSE OF THE MERISTAR SPECIAL MEETING
The special meeting of the MeriStar stockholders is scheduled to be held on
, , 2001 at 10:00 a.m., Eastern time, at . If
sufficient authority is received, it may be adjourned or postponed to another
date and/or place for proper purposes. The purpose of the meeting is to consider
and vote upon a proposal to approve the merger agreement and the merger of
MeriStar with and into FelCor.
WHO CAN VOTE
You are entitled to vote your shares of FelCor common stock if the FelCor
stockholder records showed that you held your FelCor common stock as of the
close of business on , 2001. At the close of business on that date, a
total of shares of FelCor common stock were outstanding and entitled to
vote. Each share of FelCor common stock has one vote. The enclosed proxy card
shows the number of shares of FelCor common stock that you are entitled to vote.
You are entitled to vote your MeriStar common stock if the MeriStar
stockholder records showed that you held your MeriStar common stock as of the
close of business on , 2001. At the close of business on that date, a
total of shares of MeriStar common stock were outstanding and entitled to
vote. Each share of MeriStar common stock has one vote. The enclosed proxy card
shows the number of shares of MeriStar common stock that you are entitled to
vote.
HOW YOU CAN VOTE; VOTING BY PROXY HOLDERS
You may vote either by:
- completing the enclosed proxy card by signing and dating it and returning
it in the enclosed postage-paid envelope; or
- attending the special meeting of stockholders of the company in which you
hold common stock and voting your shares in person at the meeting.
If you hold your common stock in your name as a holder of record, you may
instruct the proxy holders how to vote your shares of common stock by signing,
dating and mailing the proxy card in the postage-paid envelope that we have
provided to you. The proxy holders will vote your common stock as provided by
those instructions. If you give us a signed proxy without giving specific voting
instructions, your common stock will be voted by the proxy holders in favor of
the proposal to approve the merger agreement and the merger, including the
election of Paul W. Whetsell and Steven D. Jorns to the FelCor board of
directors. If you are a FelCor stockholder and you give FelCor a signed proxy
without giving specific voting instructions, your FelCor common stock will be
voted by the proxy holders in favor of the proposal to approve and adopt the
FelCor 2001 Plan. If your shares of common stock are held by a broker, bank or
other nominee, you will receive instructions from your broker, bank or nominee
which you must follow to have your common stock voted.
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REQUIRED VOTE
Approval of the merger agreement and the merger requires the affirmative
vote of the holders of at least a majority of the shares of FelCor common stock
entitled to vote at the FelCor special meeting and outstanding on the record
date , , 2001. Approval of the FelCor 2001 Plan requires the
affirmative vote of at least a majority of the votes actually cast at the FelCor
special meeting. A total of shares of FelCor common stock, or % of the
FelCor common stock entitled to vote at the FelCor special meeting, were held as
of , 2001, by FelCor directors, executive officers and their
affiliates.
Approval of the merger agreement and the merger requires the affirmative
vote of the holders of at least a majority of the shares of MeriStar common
stock entitled to vote at the MeriStar special meeting and outstanding on the
record date , , 2001. A total of shares of MeriStar
common stock, or % of the shares of MeriStar common stock entitled to vote at
the MeriStar special meeting, were held by MeriStar directors, executive
officers and their affiliates as of , 2001.
VOTING ON OTHER MATTERS
Neither FelCor nor MeriStar is now aware of any matters to be presented at
the special meetings, except for those described in this joint proxy
statement/prospectus. If any other matters not described in this joint proxy
statement/prospectus are properly presented at the meetings, the proxy holders
will use their own discretion to determine how to vote your shares of FelCor or
MeriStar common stock. Please note, however, that if your shares of FelCor or
MeriStar common stock are voted against the merger agreement and the merger, the
proxy holders will not use their discretion to vote your shares in favor of any
adjournment or postponement of the special meeting. If either meeting is
adjourned or postponed, your shares of FelCor or MeriStar common stock may be
voted by the proxy holders on the adjourned or postponed meeting date as well,
unless you have revoked your proxy instructions before that date.
HOW YOU MAY REVOKE YOUR PROXY INSTRUCTIONS
To revoke your FelCor proxy instructions, you must:
- advise in writing, by mail or courier, FelCor's Secretary, Lawrence D.
Robinson, c/o FelCor Lodging Trust Incorporated, 545 E. John Carpenter
Frwy., Ste. 3200, Irving, Texas 75062, before your shares of FelCor
common stock have been voted by the proxy holders at the meeting;
- deliver to FelCor's Secretary, before the date of the meeting, a properly
executed later-dated proxy; or
- attend the meeting and vote your FelCor common stock in person.
To revoke your MeriStar proxy instructions, you must:
- advise in writing, by mail or courier, MeriStar's Secretary, Christopher
L. Bennett, c/o MeriStar Hospitality Corporation, 1010 Wisconsin Avenue,
N.W., Washington, D.C. 20007, before your MeriStar common stock has been
voted by the proxy holders at the meeting;
- deliver to MeriStar's Secretary, before the date of the meeting, a
properly executed later-dated proxy; or
- attend the meeting and vote your MeriStar common stock in person.
HOW VOTES ARE COUNTED
A quorum must be present in person or by proxy at the special meetings in
order to hold the vote on the proposal to approve the merger agreement and the
merger. A majority of the outstanding FelCor common stock entitled to vote
constitutes a quorum for the FelCor special meeting, and a majority of the
outstanding MeriStar common stock entitled to vote constitutes a quorum for the
MeriStar special
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meeting. If you have returned valid proxy instructions or attend the meeting in
person, your common stock will be counted for the purpose of determining whether
there is a quorum, even if you wish to abstain from voting on some or all
matters introduced at the meeting. If you hold your common stock through a
broker, bank or other nominee, the nominee may only vote the common stock which
it holds for you as provided by your instructions, unless the broker, bank or
other nominee has discretionary authority to vote on your behalf. Generally, a
broker, bank or other nominee would have discretionary authority to vote your
shares in favor of adoption of the FelCor 2001 Plan. If it has not received your
instructions by the 10th day before the meeting, however, the nominee may not
vote on the proposal to approve the merger agreement and the merger, which would
result in a "broker non-vote." Abstentions and broker non-votes will have the
same effect as a vote against the proposal to approve the merger agreement and
the merger.
COST OF THIS PROXY SOLICITATION
FelCor and MeriStar will each pay the cost of its proxy solicitation. In
addition to soliciting proxies by mail, FelCor has engaged Georgeson & Company
Inc. and MeriStar has engaged MacKenzie Partners, Inc., proxy solicitation
firms, to assist in obtaining proxies from their common stockholders on a timely
basis. FelCor will pay 's reasonable out of pocket expenses plus a
$ fee for these services, and MeriStar will pay
's reasonable out of pocket expenses plus a
$ fee for these services.
FelCor and MeriStar also expect that several of their employees will
solicit stockholders personally and by telephone. None of these employees will
receive any additional or special compensation for doing this.
ATTENDING THE FELCOR AND MERISTAR SPECIAL MEETINGS
If you are a holder of record of shares of common stock and you plan to
attend the special meeting, please indicate this when you vote. If you are a
beneficial owner of common stock held by a bank or broker, you will need proof
of ownership to be admitted to the meeting. If you want to attend the meeting
and vote in person your common stock held in street name, you will have to get a
proxy in your name from the registered holder.
LIST OF FELCOR COMMON STOCKHOLDERS
A list of FelCor common stockholders entitled to vote at the FelCor special
meeting will be available at the FelCor special meeting and for ten days before
the meeting between the hours of 8:45 a.m. and 4:30 p.m., Central Time, at its
corporate offices located at 545 E. John Carpenter Frwy., Ste. 3200, Irving,
Texas 75062. You may arrange to review this list by contacting Lawrence D.
Robinson, the Secretary of FelCor.
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THE MERGER
BACKGROUND OF THE MERGER
During the past two years, other than as described in this section, neither
FelCor nor MeriStar engaged in formal discussions regarding potential business
combinations with other companies or strategic alternatives to the proposed
merger between them. During this period, neither party received or made any
other firm offers regarding those types of transactions.
During the spring of 1999, FelCor's President and Chief Executive Officer,
Thomas J. Corcoran, Jr., and MeriStar's Chairman and Chief Executive Officer,
Paul W. Whetsell, had several informal discussions about the potential for a
merger or combination involving FelCor and MeriStar. FelCor's Chairman of the
Board, Donald J. McNamara, also had several conversations with Mr. Whetsell
during the same period regarding the same matters.
On June 4, 2000, Messrs. Corcoran and Whetsell had a dinner meeting in New
York City and discussed a possible merger transaction. They agreed that FelCor
and MeriStar should have discussions regarding that possibility and engage
investment bankers for the purpose of facilitating those discussions. On the
next day, Mr. Whetsell telephoned Mr. Corcoran to indicate that, although he was
interested in a potential transaction between MeriStar and FelCor, he wanted to
defer the discussions at that time.
On January 16, 2001, at another hotel investment conference, Messrs.
Whetsell and Corcoran had a dinner meeting in Los Angeles and discussed a
possible merger between MeriStar and FelCor.
On January 31, 2001, Messrs. Whetsell and Corcoran had an evening meeting
at the Atlantis Hotel in the Bahamas and briefly discussed a possible merger of
MeriStar and FelCor.
On February 7, 2001, in Scottsdale, Arizona, Messrs. Whetsell and Corcoran
had informal discussions regarding a potential merger transaction and how the
transaction might be structured.
On February 9, 2001, Messrs. Whetsell, Corcoran and McNamara had an
informal meeting in Dallas, Texas at which the merger issue again was briefly
discussed.
The meetings listed above were primarily social events at which a potential
business combination of FelCor and MeriStar was discussed in preliminary and
general terms. The primary topics addressed at these meetings were how the
combined company would operate after the merger, who would run the combined
company, whether any additional risks would exist for the combined company as
compared to each company on a standalone basis and whether the consideration
should be all stock or a combination of cash and stock. As a result of these
meetings, Messrs. Corcoran and Whetsell reached a general understanding that the
business combination made sense for both companies from an operational
standpoint because of potential economies of scale and cost savings. They also
determined that FelCor would be the surviving entity in the combination, that
FelCor's existing directors and officers would continue to manage the surviving
entity, and that the merger consideration, which could be FelCor stock or a
combination of FelCor stock and cash, must be accretive for the stockholders of
both companies. They also concluded that no deal between the companies could be
done that favored one company over the other company.
On March 1, 2001, in New York City, Messrs. Corcoran and Whetsell met with
representatives of FelCor's financial advisors and MeriStar's financial advisor
to discuss specifics of a potential merger transaction. FelCor and MeriStar
decided to enter into a confidentiality agreement relating to the merger
discussions and continue the discussions. A confidentiality agreement was signed
on March 7, 2001. In that confidentiality agreement, each company agreed to keep
confidential information provided by the other company and to use that
information only for purposes of considering a transaction between the two
companies. In addition, each company agreed that it would not seek, while the
agreement is in effect and for a period of one year after the date of the
agreement, to employ any executive officer or director of the other company, to
acquire any voting securities or assets of the other company, to propose any
business
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combination or acquisition relating to the other company or to control the
management or board of directors of the other company.
Over the course of the next several weeks, Messrs. Corcoran and Whetsell
had separate meetings and discussions with their own financial advisors,
reviewing and analyzing different pricing models for a potential merger and how
the transaction should be structured. Each company's management personnel
commenced property and market reviews of the other company's hotels.
On April 4, 2001, at a meeting in Chicago, Messrs. Corcoran and Whetsell
reached a tentative understanding regarding the merger consideration to be
received by MeriStar stockholders in the merger, including the stock exchange
ratio of 0.784 and the cash consideration per share of $4.60. This meeting was
the first meeting at which the total value and relative composition of the
merger consideration were discussed. Although discussed again at subsequent
meetings, the merger consideration discussed at this meeting became the final
agreed merger consideration without further negotiations. This merger
consideration was arrived at through arm's-length negotiations between Messrs.
Corcoran and Whetsell. Prior to this meeting, each of Mr. Corcoran and Mr.
Whetsell had separately consulted with their respective management teams and
financial advisors to review various pricing models for stock exchange ratios
and per share cash payments to assist the companies in determining a merger
consideration formula that would be acceptable to their respective companies. A
maximum of $300 million of additional debt, on a combined basis, was a limit
imposed by FelCor that limited the amount of cash consideration it was willing
to pay.
On April 10, 2001, Mr. Corcoran, Andrew J. Welch, FelCor's Senior Vice
President and Treasurer, Thomas L. Wiese, FelCor's Vice President of Finance and
Planning, Mr. Whetsell, John Emery, MeriStar's Chief Financial Officer, and
Bruce L. Riggins, MeriStar's Director of Finance, met with the financial
advisors for both FelCor and MeriStar in New York City to further discuss the
specifics of a merger, including financing requirements, operating synergies,
the continuing relationships and obligations between MeriStar and MeriStar
Hotels & Resorts and the status of, and plans for additional, due diligence.
On April 11, 2001, Lawrence D. Robinson, FelCor's Executive Vice President
and General Counsel, and representatives of FelCor's outside legal counsel,
Jenkens & Gilchrist, a Professional Corporation, and Hunton & Williams, and
FelCor's financial advisors met in New York City with representatives of
MeriStar's outside legal counsel, Paul, Weiss, Rifkind, Wharton & Garrison and
DeCampo, Diamond and Ash, and MeriStar's financial advisor to discuss and
resolve various issues relating to a potential transaction. At this meeting, the
parties reached general agreement regarding issues such as the structure of the
merger, the merger consideration, the existence of a termination provision
relating to the price of FelCor common stock, the number of MeriStar directors
to be added to FelCor's board and the restrictions on business operations of the
two companies pending completion of the merger. Various issues were left open,
including whether the merger would be subject to FelCor obtaining adequate
financing, the amount of any break-up fee, personnel issues, including the
treatment of MeriStar options and the payment of severance and bonus amounts,
and arrangements with MeriStar Hotels & Resorts, including the continuation of
the intercompany agreement, the assumption of loan obligations to MeriStar
Hotels & Resorts and the assumption of office leases.
Over the course of the next several weeks, both parties and their
representatives engaged in due diligence activities, including review of legal
documents relating to the other party's businesses and properties, site visits
to the other party's hotel properties, conversations with the other party's
management, review of the other party's tax issues, and other matters relating
to a potential merger. Based on those discussions, an initial draft of a merger
agreement was prepared by FelCor's legal counsel and sent to MeriStar and its
representatives on April 14, 2001.
During the period from April 14, 2001 to May 9, 2001, FelCor's and
MeriStar's legal counsel and management negotiated the terms of the merger
agreement.
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During the first two weeks of April 2001, Mr. Corcoran had separate
conversations with most of the members of the FelCor board of directors
regarding the status of discussions with MeriStar. On April 16, 2001, FelCor's
board of directors held a meeting at which the directors were informed of the
possible merger with MeriStar and related merger of FelCor Partnership and
MeriStar Partnership, and were given detailed information regarding MeriStar and
its hotels, including copies of MeriStar's latest public reports, the structure
and economics of the transactions, including the consideration payable to
stockholders of MeriStar and partners of MeriStar Partnership, and the
parameters of a merger agreement. The board authorized continued discussions and
negotiation of a definitive merger agreement. The board was not asked to approve
the merger at this meeting.
During early April, Mr. Whetsell had separate conversations with the
members of the MeriStar board of directors regarding the potential transaction
with FelCor. On April 16, 2001, MeriStar's board of directors held a meeting at
which the directors were informed of the possible merger and related merger of
FelCor Partnership and MeriStar Partnership, and were given detailed information
regarding FelCor and its properties, including the structure and economics of
the transactions, including the consideration payable to stockholders of
MeriStar and partners of MeriStar Partnership, and the parameters of the
proposed merger agreement. Representatives of Ballard Spahr Andrews & Ingersoll,
LLP, Maryland counsel to MeriStar, advised the directors of their duties in
connection with the merger. Representatives of Paul, Weiss, Rifkind, Wharton &
Garrison and MeriStar's financial advisor were also present at the meeting. The
board was not asked to approve the merger at this meeting. The board authorized
continued discussions with FelCor and negotiation of a definitive merger
agreement.
On April 24, 2001, MeriStar's board of directors met for a regularly
scheduled board meeting. During the meeting the board was updated on the status
of discussions with FelCor and discussed the open issues still being discussed
by the companies, including the financing contingency, the break-up fee amounts,
the treatment of units held by partners of MeriStar Partnership, including the
profits-only partnership units, personnel issues and agreements with MeriStar
Hotels & Resorts. The board authorized MeriStar to continue its discussions with
FelCor.
On May 2, 2001, the FelCor board of directors had a telephonic meeting at
which the directors were updated on the status of due diligence and discussions
with MeriStar.
On May 2, 2001, Messrs. Corcoran and Whetsell and John Emery, Chief
Operating Officer and a director of MeriStar, met in Washington, D.C. to resolve
various issues relating to the merger. At or shortly following this meeting, the
parties reached general agreement on the treatment of units held by partners of
MeriStar Partnership, including the profits-only partnership units, personnel
issues, including the treatment of MeriStar options and the payment of severance
and bonus amounts, and the agreements with MeriStar Hotels & Resorts, including
the continuation of the intercompany agreement, the assumption of loan
obligations to MeriStar Hotels & Resorts and the assumption of office leases.
On May 9, 2001, FelCor's board of directors met in Dallas, Texas. At the
meeting, representatives of DBAB and JPMorgan each reviewed their firm's
respective financial analyses regarding the proposed transaction and provided
their verbal fairness opinions. The directors were informed of developments in
the discussions and results of due diligence activities. Mr. Robinson and legal
counsel for FelCor presented a summary of the material terms of the merger
agreement and advised the directors of their legal duties in connection with the
merger. The FelCor board of directors, by unanimous vote, approved the merger
agreement and the transactions contemplated by the merger agreement, including
the merger of MeriStar with and into FelCor and the merger of MeriStar
Partnership with and into FelCor Partnership.
At the May 9, 2001 meeting of FelCor's board of directors, the directors
present unanimously recommended to FelCor stockholders that they vote in favor
of the merger proposal.
On May 9, 2001, MeriStar's board of directors met telephonically. The
directors were informed of developments in the discussions and results of the
due diligence activities. Messrs. Whetsell and Emery and legal counsel for
MeriStar presented a summary of the material terms of the merger agreement. Also
at this meeting, MeriStar's financial advisor delivered to the MeriStar board of
directors its oral opinion,
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which opinion was confirmed by delivery of a written opinion dated May 9, 2001,
to the effect that, as of that date and based on and subject to the matters
described in the opinion, the merger consideration was fair, from a financial
point of view, to the MeriStar common stockholders. The MeriStar board of
directors, by unanimous vote, approved the merger agreement and the transactions
contemplated by the merger agreement, including the merger of MeriStar with and
into FelCor and the merger of MeriStar Partnership with and into FelCor
Partnership.
At the May 9, 2001 meeting of MeriStar's board of directors, the directors
unanimously recommended to MeriStar stockholders that they vote in favor of the
merger proposal.
The parties executed the merger agreement on the evening of May 9, 2001 and
publicly announced the transaction on May 10, 2001 by issuing a joint press
release.
After the merger agreement had been signed, the parties, in consultation
with each other and their respective legal and tax advisors, decided to amend
the merger agreement. The amended merger agreement provides, among other things,
that a subsidiary of FelCor Partnership will merge with and into MeriStar
Partnership, with MeriStar Partnership surviving as a subsidiary of FelCor
Partnership. The revised structure of the partnership merger was designed to be
more tax-efficient for the combined company. On June 18, 2001, a first draft of
the amendment was circulated to MeriStar and its legal counsel by legal counsel
to FelCor, and negotiations proceeded after that date. By July 19, 2001, the
parties had negotiated the final form of the amendment.
FELCOR'S REASONS FOR THE MERGER; RECOMMENDATION OF THE FELCOR BOARD
The FelCor board of directors present at the May 9, 2001 meeting
unanimously approved the merger agreement and the merger. The FelCor board
believes that the terms of the merger agreement and the merger, including the
issuance of FelCor shares to MeriStar stockholders, are advisable and in the
best interests of FelCor and its stockholders. Accordingly, the FelCor board
recommends that FelCor stockholders approve the merger agreement and the merger,
including the election of Paul W. Whetsell and Steven D. Jorns to FelCor's board
of directors.
Positive Factors Considered by the FelCor Board
In making its determination with respect to the merger agreement and the
merger, the FelCor board considered the entirety of the terms of the merger
agreement and the historical and prospective information concerning FelCor's and
MeriStar's respective businesses, operations and financial performance,
including, among other things, the earnings prospects of FelCor and its debt
service and financial obligations, both before and after the merger. The board
also discussed with FelCor senior management, as well as its financial and legal
advisors, and considered a number of factors, including, among others, the
following potentially positive material factors resulting from or relating to
the merger:
- Geographic distribution of FelCor's hotels will increase from 35 states
to 39 states and FelCor's revenue base and room count will expand in key
geographic markets and in markets where it lacks a significant presence,
including East Coast markets such as Florida, where revenues from that
state, as a percentage of total revenues for the twelve months ended
March 31, 2001, will increase from 11.1% to 16.2%, New Jersey, where
revenues will increase from 3.3% to 4.4%, Virginia, where revenues will
increase from 1.3% to 2.8%, and Washington, D.C., where the revenues will
increase from none to 1.0%. The addition of MeriStar's portfolio will
also reduce FelCor's dependence upon any one region or market, including
Texas, where revenues, as a percentage of total revenues for the twelve
months ended March 31, 2001, will decrease from 18.7% to 15.4%.
- Brand diversification of FelCor will increase, with no single brand
representing more than approximately 25% of the portfolio after the
merger.
- FelCor's focus toward the upscale and full service business segments will
expand. MeriStar's portfolio includes 113 primarily upscale full service
hotels, a segment of the hotel industry which FelCor believes is less
likely to be impacted by new supply.
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- FelCor anticipates annual cost savings of approximately $5 million
through net decreases in corporate payroll, the closing and subletting of
the MeriStar offices in Washington, D.C. and the elimination of other
duplicate overhead costs.
- Active asset management across a larger number of hotel rooms should
increase opportunities to improve hotel level operations.
- Relationships with FelCor's existing brand owners, Hilton Hotels
Corporation, Bass plc, and Starwood Hotels and Resorts Worldwide, Inc.,
are expected to be enhanced and a new relationship with the Radisson
brand will be established. The hotels in the MeriStar portfolio should
further strengthen FelCor's relationship with its existing brand owners.
- The amount of cash payable in the merger is fixed and will not be
adjusted, which reduces the number of shares to be issued in the merger
at current market prices may benefit FelCor stockholders in the future.
- FelCor management and its advisors conducted a due diligence review of
MeriStar and its assets, and FelCor's management assessed the overall
quality of MeriStar's hotels.
- Letters from the rating agencies indicating that, based upon the
information provided to them regarding the proposed merger and FelCor's
financing plans, and subject to customary qualifications, they would
affirm FelCor's existing public debt ratings, with a stable outlook.
- The opinions, analyses and presentations of DBAB and JPMorgan described
under "-- Opinions of FelCor's Financial Advisors" below, including the
opinions of those firms that, as of the date of their opinions, and based
upon and limited by the matters stated in those opinions, the
consideration to be paid to MeriStar common stockholders by FelCor under
the merger agreement is fair, from a financial point of view, to FelCor.
Negative Factors Considered by the FelCor Board
The FelCor board of directors also considered the following potentially
negative material factors in connection with its determination:
- The debt of the combined company, on a pro forma basis at March 31, 2001,
as a percentage of investment in hotel assets, is 50%, will be greater
than FelCor's corresponding historical leverage at March 31, 2001 of
39.7%.
- The combined company will continue to have a concentration of hotels in
some markets, including California, Florida and Texas, each of which will
represent more than 10% of the combined company's revenues based on
revenues for the twelve months ended March 31, 2001, and collectively will
represent almost 50% of total revenues.
- Future capital plans, share repurchases and asset acquisitions may be
limited.
- The assumption of an aggregate of $877.8 million of MeriStar debt,
including $377.8 million in mortgage debt and $500.0 million in principal
amount of outstanding MeriStar senior notes may increase the risk of
refinancing.
- The satisfaction of an aggregate of $801.3 million of MeriStar debt,
including the repayment of $442.0 million outstanding at March 31, 2001
under MeriStar's revolving credit facilities and the purchase of $154.3
million in MeriStar convertible subordinated notes and $205.0 million in
MeriStar subordinated notes may further increase the risk of refinancings.
- Estimated costs of $59 million, as well as management time and effort,
will be incurred to effect the merger and related financings and
integrate FelCor and MeriStar.
- MeriStar's existing agreements limit the combined company's ability to
use a hotel manager other than MeriStar Hotels & Resorts to manage any
hotels not managed by hotel brand owners.
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- Potential conflicts of interest may arise from the continuing contractual
relationships with, and the payment of management and termination fees
to, MeriStar Hotels & Resorts, of which Mr. Whetsell will continue to
serve as Chief Executive Officer and a director and of which Mr. Jorns
will continue to serve as a director.
- The anticipated benefits of the merger may not be realized due to changes
in the hotel market and difficulties or costs in integrating the two
companies.
- Under some circumstances, FelCor may be required to pay termination fees
and expenses totaling up to $40 million. See "The Merger
Agreement -- Expenses and Termination Fees".
The above discussion of the potentially material factors considered by the
FelCor board of directors is not intended to be exhaustive, but does set forth
the principal positive and negative factors considered by the FelCor board of
directors. The FelCor directors present at the May 9, 2001 special meeting of
the board unanimously approved the merger agreement and the merger and
recommended approval by FelCor's stockholders in light of the various factors
described above and other factors that each member of the FelCor board of
directors felt were appropriate. In view of the wide variety of factors
considered by the FelCor board in connection with its evaluation of the merger
and the complexity of these matters, the FelCor board did not consider it
practical, and did not attempt, to quantify, rank or otherwise assign relative
weights to the specific factors it considered in reaching its decision. Rather,
the FelCor board made its recommendation based on the totality of information
presented to and the investigation conducted by it. In considering the factors
discussed above, individual directors may have given different weights to
different factors.
OPINIONS OF FELCOR'S FINANCIAL ADVISORS
Opinion of DBAB
As described in an engagement letter dated as of March 15, 2001, FelCor
engaged DBAB to act as financial advisor in the merger, and render an opinion as
to the fairness to FelCor, from a financial point of view, of the merger
consideration payable to the holders of MeriStar's common stock.
The DBAB opinion and the procedures and analyses described below are based
on the consideration of 0.784 of a share of FelCor common stock and $4.60 cash
consideration for each share of MeriStar common stock.
At the May 9, 2001 meeting of FelCor's board of directors, DBAB delivered
its oral opinion, subsequently confirmed in writing as of the same date, to
FelCor's board of directors to the effect that, as of the date of the opinion,
based upon and subject to the assumptions made, matters considered and limits of
the review undertaken by DBAB, the merger consideration payable to the holders
of MeriStar's common stock is fair, from a financial point of view, to FelCor.
The full text of DBAB's written opinion, dated May 9, 2001, which discusses
the assumptions made, matters considered and limits of the review undertaken by
DBAB in connection with its opinion is attached as Appendix B to this joint
proxy statement/prospectus and is incorporated by reference. FelCor stockholders
are urged to read DBAB's opinion in its entirety. The following summary
discusses the material terms of DBAB's opinion.
In connection with DBAB's role as financial advisor to FelCor, and in
arriving at its opinion, DBAB has reviewed publicly available financial
information and other information concerning FelCor and MeriStar and internal
analyses and other information furnished to it by FelCor and MeriStar. DBAB also
held discussions with the members of the senior managements of FelCor and
MeriStar regarding the businesses and prospects of their respective companies
and the joint prospects of a combined company. In addition, DBAB has:
- reviewed the reported prices and trading activity for the common stock of
both FelCor and MeriStar;
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- compared financial and stock market information for FelCor and MeriStar
with similar information for other selected companies whose securities
are publicly traded;
- reviewed the financial terms of some recent business combinations which
it deemed comparable in whole or in part;
- reviewed the terms of the merger agreement; and
- performed other studies and analyses and considered other factors as it
deemed appropriate.
In preparing its opinion, DBAB did not assume responsibility for the
independent verification of, and did not independently verify, any information,
whether publicly available or furnished to it, concerning FelCor and MeriStar,
including any financial information, forecasts or projections, considered in
connection with the rendering of its opinion. Accordingly, for purposes of its
opinion, DBAB assumed and relied upon the accuracy and completeness of all of
that information.
DBAB did not conduct a physical inspection of any of the properties or
assets, and did not prepare or obtain any independent evaluation or appraisal of
any of the properties, assets or liabilities of FelCor or MeriStar. DBAB has
assumed that the financial forecasts and projections, including the analyses and
forecasts of some of the cost savings, operating efficiencies, revenue effects
and financial synergies expected by FelCor and MeriStar to be achieved as a
result of the merger and the partnership merger, made available to DBAB and used
in its analysis have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of FelCor. DBAB
refers to these cost savings, operating efficiencies, revenue effects and
financial synergies collectively as synergies. In rendering its opinion, DBAB
expressed no view as to the reasonableness of those forecasts and projections or
the assumptions on which they are based.
The opinion of DBAB was based upon economic, market and other conditions as
in effect on, and the information made available to DBAB as of, the date of its
opinion. Although subsequent developments may affect its opinion, DBAB has no
obligation or current intention to update, revise or reaffirm it. If, however, a
material amendment to the merger agreement is entered into which modifies the
merger consideration, the FelCor board may at that time seek an updated opinion
from DBAB. In making this determination, the FelCor board would consult with its
legal and financial advisors and take into account, consistent with its
fiduciary duties, all relevant factors and circumstances existing at the time,
including general market, economic and business conditions.
In rendering its opinion, DBAB assumed that, in all respects material to
its analysis,
- the representations and warranties of FelCor, MeriStar, FelCor
Partnership and MeriStar Partnership contained in the merger agreement
are true and correct;
- FelCor, MeriStar, FelCor Partnership and MeriStar Partnership will each
perform all of the covenants and agreements to be performed by them under
the merger agreement;
- all conditions to the obligations of each of FelCor, MeriStar, FelCor
Partnership and MeriStar Partnership to complete the merger and the
partnership merger will be satisfied without any waiver of them;
- all material governmental, regulatory or other approvals and consents
required in connection with the completion of the merger and the
partnership merger will be obtained; and
- in connection with obtaining any necessary governmental, regulatory or
other approvals and consents, or any amendments modifications or waivers
to any agreements, instruments or orders to which either FelCor or
MeriStar is a party or is subject or by which it is bound, no
limitations, restrictions or conditions will be imposed or amendments,
modifications or waivers made that would have a material adverse effect
on FelCor or MeriStar or materially reduce the contemplated benefits of
the merger and the partnership merger to FelCor.
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Below is a summary of the material financial analyses performed by DBAB in
connection with its opinion and reviewed with FelCor's board of directors at its
meeting on May 9, 2001. These summaries of financial analyses include
information presented in a tabular format. In order to understand fully the
financial analyses used by DBAB, the tables must be read with the text of each
summary, because the tables alone are not a complete description of the
financial analyses.
Analysis of Selected Publicly Traded Companies. DBAB compared some of the
financial information and commonly used valuation measurements for MeriStar to
corresponding information and measurements for a group of four publicly traded
lodging REITs that DBAB deemed to be comparable to the business of MeriStar.
DBAB refers to these REITs, which are listed below, as the selected companies.
- FelCor Lodging Trust Incorporated
- Host Marriott Corporation
- Hospitality Properties Trust
- LaSalle Hotel Properties
DBAB compared, among other things, the ratios of:
- enterprise value to earnings before interest, income tax, depreciation
and amortization, or EBITDA; and
- price per share to funds from operations per share.
Enterprise value is common equity market value, assuming the conversion of
all limited partnership units convertible into common stock, adjusted by adding
the amount of any debt, preferred units, preferred stock, minority interest and
option proceeds, assuming exercise, and subtracting the amount of any cash and
cash equivalents, as most recently reported.
DBAB calculated the ratio of enterprise value to EBITDA based on EBITDA for
the last twelve-month period for which financial data for the relevant company
has been reported, referred to as the LTM period, and projected EBITDA for the
2001 fiscal year. DBAB calculated the ratio of price per share to funds from
operations per share based on projected funds from operations for the 2001 and
2002 fiscal years.
To calculate the trading multiples, DBAB used, for the selected companies,
publicly available historical financial information concerning historical
financial performance and funds from operations per share estimates reported by
First Call, and, for MeriStar, historical financial information and projections
provided by MeriStar's management. First Call is a data service that monitors
and publishes compilations of earnings estimates by selected research analysts
regarding companies of interest to institutional investors.
PRICE PER SHARE/FUNDS
FROM OPERATIONS
ENTERPRISE VALUE/EBITDA PER SHARE
----------------------- ---------------------------
2001 2001 2002
LTM (ESTIMATED) (ESTIMATED) (ESTIMATED)
------- ----------- ----------- -----------
Mean:................................ 8.2x 7.9x 6.0x 5.7x
Median:.............................. 8.2 7.8 6.2 5.9
Range:............................... 8.0-8.4 7.7-8.2 5.0-6.5 4.8-6.2
DBAB observed that the implied value for MeriStar's common stock based upon
the mean and median for these multiples of the selected companies ranged from
$20.25 to $24.85 per share and compared that range of values with the purchase
price implied in the merger of $22.09. In calculating the implied purchase price
for MeriStar common stock, DBAB assumed a FelCor share price of $22.31 per
share, based on the May 4, 2001 closing price.
None of the selected companies is identical to MeriStar. Accordingly, DBAB
believes the analysis of publicly traded comparable companies is not simply
mathematical. Rather, it involves complex
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considerations and qualitative judgments, reflected in DBAB's opinion,
concerning differences in financial and operating characteristics of the
selected companies and other factors that could affect the public trading value
of the selected companies.
Premiums Analysis. DBAB reviewed the financial terms, to the extent
publicly available, of 32 proposed, pending or completed merger and acquisition
transactions since January 1, 1998 involving REITs in various sectors within the
REIT industry. These transactions are referred to as the selected transactions.
The transactions reviewed were:
ANNOUNCEMENT DATE TARGET ACQUIROR
- ----------------- ------ --------
01/14/1998........... Price REIT Inc. Kimco Realty Corp.
02/25/1998........... FAC Realty Trust Inc. Prometheus Southeast Retail
03/09/1998........... Avalon Properties Inc. Bay Apartment Communities Inc.
03/16/1998........... American General Hospitality CapStar Hotel Co.
04/02/1998........... Security Capital Atlantic Inc. Security Capital Pacific Trust
05/14/1998........... New Plan Realty Trust Excel Realty Trust Inc.
05/29/1998........... Mid-America Realty Investments Bradley Real Estate Inc.
06/08/1998........... Capstone Capital Corp. Healthcare Realty Trust Inc.
07/08/1998........... Merry Land & Investment Co. Inc. Equity Residential Pptys.
Trust
08/05/1998........... Storage Trust Realty Public Storage Inc.
11/17/1998........... Meridian Industrial Trust Inc. ProLogis Trust
12/02/1998........... Irvine Apartment Communities Irvine Co.
12/09/1998........... Tower Realty Trust Inc. Investor Group
03/01/1999........... Weeks Corp. Duke Realty Investments Inc.
04/05/1999........... Sunstone Hotel Investors Inc. Investor Group
04/14/1999........... Berkshire Realty Co. Inc. Aptco LLC
05/13/1999........... Imperial Credit Commercial Mortgage Imperial Credit Industries
Inc.
06/16/1999........... TriNet Corporate Realty Trust Starwood Financial Trust
07/01/1999........... Lexford Residential Trust Equity Residential Pptys.
Trust
08/03/1999........... American Health Properties Inc. Health Care Property Investors
09/24/1999........... Walden Residential Properties Olympus Real Estate Corp.
12/13/1999........... Kranzco Realty Trust CV Reit Inc.
02/11/2000........... Cornerstone Properties Inc. Equity Office Properties Trust
05/15/2000........... Bradley Real Estate Inc. Heritage Property Invest.
Trust
07/17/2000........... Grove Property Trust Equity Residential Pptys.
Trust
08/22/2000........... Western Properties Trust Pan Pacific Retail Properties
09/26/2000........... Urban Shopping Centers Inc. Rodamco North America NV
11/02/2000........... American Industrial Properties Developers Diversified Realty
02/15/2001........... Westfield America Inc. Westfield America Trust
02/23/2001........... Spieker Properties Trust Equity Office Properties Trust
04/02/2001........... Franchise Finance GE Capital Corp.
05/03/2001........... Charles E. Smith Residential Archstone Communities Trust
DBAB calculated for each of the selected transactions the premium or
discount to the acquired company's per share market price one day prior to the
announcement of the transaction, seven days prior to the announcement of the
transaction and thirty days prior to the announcement of the transaction, in
each case represented by the acquisition price in the transaction. The following
table summarizes the results of this analysis.
1 DAY PRIOR 7 DAYS PRIOR 30 DAYS PRIOR
------------- ------------ -------------
Mean:...................................... 12.7% 15.8% 14.6%
Median:.................................... 11.7 14.3 14.3
Range:..................................... (12.6) - 41.5 (3.4) - 42.8 (12.9) - 41.3
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DBAB then calculated the implied value of MeriStar's common stock by
applying the range of premiums paid in the selected transactions to the closing
market prices of MeriStar's common stock one day, seven days and thirty days
prior to May 9, 2001. DBAB observed that the implied value for MeriStar's common
stock based upon the mean and median of premiums of the selected transactions
ranged from $22.43 to $24.24 per share, based upon MeriStar's common stock prior
to May 9, 2001, and compared that range of values to the purchase price implied
in the merger of $22.09.
All premiums for the selected transactions were based on public information
available at the time of announcement of that transaction, without taking into
account differing market and other conditions during the three-year period
during which the selected transactions occurred.
DBAB noted that none of the selected transactions was identical to the
merger. Because the reasons for, and circumstances surrounding, each of the
precedent transactions analyzed were so diverse, and due to the inherent
differences between MeriStar's operations and financial conditions and those of
the companies involved in the selected transactions, DBAB believes that a
comparable transaction analysis is not simply mathematical in nature. Rather,
this analysis involves complex considerations and qualitative judgments,
reflected in DBAB's opinion, concerning differences between the characteristics
of these prior transactions and the merger that could affect the value of the
subject companies and businesses and MeriStar.
Discounted Cash Flow Analysis. DBAB performed a discounted cash flow
analysis of MeriStar. DBAB calculated the discounted cash flow value as the sum
of the net present values of the estimated future cash flow that MeriStar will
generate for the years 2001 through 2005 plus MeriStar's value at the end of
that period, which is referred to as its terminal value. The estimated future
cash flows for the year 2001 are based on the financial projections for MeriStar
for the year 2001 that were prepared by MeriStar's management and revised by
FelCor's management. The estimated cash flows for the years 2002 through 2005
are based on the financial projections for those years, which are in turn based
upon growth rates provided by FelCor. The terminal values were calculated based
on projected EBITDA for 2005 and a range of multiples of enterprise value to
EBITDA ranging from 7.0x to 8.0x, based on the EBITDA multiples on DBAB's review
of the trading characteristics of the selected companies. DBAB used discount
rates ranging from 8.0% to 9.0%. DBAB used these discount rates based on its
analysis and judgment of the estimated weighted average cost of MeriStar's
capital.
DBAB observed that the implied value of MeriStar's common stock based upon
the discounted cash flow analysis ranged from $28.21 to $35.30 per share, and
compared that range of values to the purchase price implied in the merger of
$22.09.
Pro Forma Funds From Operations and Credit Impact Analysis. DBAB analyzed
some pro forma effects of the merger. Based on its analysis, DBAB computed the
resulting dilution or accretion to the combined company's funds from operations
per share for the 2002 and 2003 fiscal years, based on projections of funds from
operations provided by FelCor's management for FelCor and by MeriStar's
management as revised by FelCor's management for MeriStar, after taking into
account any potential cost savings and other synergies identified by FelCor's
management that MeriStar and FelCor could achieve if the merger was completed
and before non-recurring costs relating to the merger. This analysis assumed a
transaction closing date of September 1, 2001. DBAB noted that after taking into
account the potential cost savings and other synergies and before those
non-recurring costs, the merger would be 4.4% and 4.5% accretive to the combined
company's funds from operations for the 2002 and 2003 fiscal years,
respectively.
DBAB also considered the pro forma impact of the merger on some of FelCor's
leverage ratios. DBAB noted that while the ratios of total debt to EBITDA, total
debt to market capitalization, and total debt to gross investment in hotels, in
each case for the 2000 fiscal year, would be higher on a pro forma basis for the
combined company than for FelCor standing alone, those ratios are projected to
improve by 2002 or 2003, based on financial projections prepared by FelCor's
management for FelCor and by MeriStar's management as revised by FelCor's
management for MeriStar. DBAB also noted that the fixed charge coverage ratio
would be 2.4x for the 2000 fiscal year on a pro forma basis for the combined
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company as compared to 2.3x for FelCor standing alone, and that the ratio is
projected to improve through 2003.
Pro Forma Discounted Cash Flow Analysis. DBAB performed a discounted cash
flow analysis for both the combined company on a pro forma basis and FelCor on a
stand-alone basis. The analysis for the combined company was prepared by
combining stand-alone projections for FelCor that were prepared by FelCor's
management and projections for MeriStar that were prepared by MeriStar's
management and revised by FelCor's management. DBAB then applied the same
procedures described above under the caption "Discounted Cash Flow Analysis" and
applied the same enterprise value to EBITDA multiples, ranging from 7.0x to
8.0x, to the projected EBITDA for 2005. DBAB used discount rates ranging from
8.0% to 9.0% for the combined company on a pro forma basis and 8.5% to 9.5% for
FelCor on a stand-alone basis. DBAB used discount rates based on its analysis
and judgment of the weighted average costs of capital for FelCor on a
stand-alone basis and for the combined company on a pro forma basis,
respectively. For purposes of the analysis of the combined company, DBAB
included estimates of potential cost savings, as provided by FelCor's
management, and of transaction expenses. The analysis indicated that the equity
value of the combined company was between 3.2% and 4.7% higher than the equity
value of FelCor on a stand-alone basis.
General. The preceding summary describes all analyses and factors that
DBAB deemed material in its presentation to FelCor's board of directors and in
preparing its opinion but is not a comprehensive description of all analyses
performed and factors considered by DBAB in connection with preparing its
opinion. The preparation of a fairness opinion is a complex process involving
the application of subjective business judgment in determining the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances and, therefore, is not readily
susceptible to summary description. DBAB believes that its analyses must be
considered as a whole and that considering any portion of these analyses and of
the factors considered without considering all analyses and factors could create
a misleading view of the process underlying the opinion. In arriving at its
fairness determination, DBAB did not assign specific weights to any particular
analyses.
In conducting its analyses and arriving at its opinions, DBAB used a
variety of generally accepted valuation methods. The analyses were prepared
solely for the purposes of enabling DBAB to provide its opinion to FelCor's
board of directors as to the fairness to FelCor of the merger consideration
payable to the holders of MeriStar's common stock and do not purport to be
appraisals of or necessarily to reflect the prices at which businesses or
securities actually may be sold, which are inherently subject to uncertainty. In
connection with its analyses, DBAB made, and was provided by FelCor's management
with, numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond
FelCor's and MeriStar's control. Analyses based on estimates or forecasts of
future results are not necessarily indicative of actual past or future values or
results, which may be significantly more or less favorable than suggested by
these analyses. Because these analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of FelCor,
MeriStar or their respective advisors, none of FelCor, DBAB nor any other person
assumes responsibility if future results or actual values are materially
different from these forecasts or assumptions.
The terms of the merger were determined through negotiations between FelCor
and MeriStar and were approved by FelCor's board of directors. Although DBAB
provided advice to FelCor during the course of these negotiations, the decision
to enter into the merger was solely that of FelCor's board of directors. As
described above, DBAB's opinion and presentation to FelCor's board of directors
were only one of a number of factors taken into consideration by FelCor's board
of directors in making its determination to approve the merger. DBAB's opinion
was provided to FelCor's board of directors to assist it in connection with its
consideration of the merger and does not constitute a recommendation to any
holder of FelCor's common stock or MeriStar's common stock as to how to vote
with respect to the merger.
DBAB is an internationally recognized investment banking firm experienced
in providing advice in connection with mergers and acquisitions and related
transactions. DBAB is an affiliate of Deutsche Bank
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AG, and DBAB, Deutsche Bank AG and its affiliates are collectively referred to
as the DB Group. One or more members of the DB Group have, from time to time,
provided investment banking, commercial banking, including extension of credit,
and other financial services to FelCor and MeriStar or their affiliates for
which they may have received compensation. In addition, one or more members of
the DB Group have agreed to provide financing to FelCor in connection with the
merger. Bankers Trust Company, German American Capital Corporation and Deutsche
Banc Alex. Brown Inc., each members of the DB Group, have provided, or have
committed to provide, together with other institutions, an aggregate of
approximately $2.15 billion of financing in connection with the merger and
related transactions. The members of the DB Group will receive an aggregate of
approximately $7.0 million to $10.5 million in fees in connection with those
financing transactions. In the ordinary course of business, members of the DB
Group may actively trade in the securities and other instruments and obligations
of FelCor and MeriStar for their own account or the account of their customers,
and, accordingly, may at any time hold a long or short position in those
securities, instruments and obligations.
Fee Arrangements with DBAB. FelCor selected DBAB as financial advisor in
connection with the merger based on DBAB's qualifications, expertise, reputation
and experience in mergers and acquisitions. FelCor retained DBAB in an
engagement letter dated as of March 15, 2001. As compensation for DBAB's
services in connection with the merger, FelCor has paid DBAB a cash fee of $1.25
million and has agreed to pay an additional cash fee of $3.75 million if the
merger is completed. Regardless of whether the merger is completed, FelCor has
agreed to reimburse DBAB for reasonable fees and disbursements of DBAB's counsel
and DBAB's reasonable travel and other out-of-pocket expenses incurred in
connection with the merger or otherwise arising out of DBAB's engagement under
the engagement letter. DBAB has agreed to notify FelCor when those expenses
exceed $50,000. FelCor has also agreed to indemnify DBAB and related persons to
the full extent lawful against some liabilities, including some liabilities
under the federal securities laws arising out of its engagement or the merger.
Opinion of JPMorgan
Under an engagement letter effective as of March 15, 2001, FelCor engaged
JPMorgan to act as its financial advisor in the merger. FelCor requested
JPMorgan, in its role as a financial advisor, to evaluate the fairness to
FelCor, from a financial point of view, of the consideration to be paid by
FelCor to MeriStar stockholders in the merger. On May 9, 2001, JPMorgan
delivered its oral opinion, subsequently confirmed in writing as of the same
date, to the FelCor board of directors stating that, as of that date and based
upon and subject to qualifications discussed in the opinion, the consideration
paid by FelCor in the merger was fair, from a financial point of view, to
FelCor.
The JPMorgan opinion, the summary of the JPMorgan opinion and the
procedures and analyses described below are based on the consideration of 0.784
of a share of FelCor common stock and $4.60 in cash for each share of MeriStar
common stock outstanding on the date of the JPMorgan opinion.
The full text of the JPMorgan fairness opinion, which discusses the
assumptions made, factors considered and limitations upon the review undertaken
by JPMorgan in rendering its opinion, is included in this joint proxy
statement/prospectus as Appendix C. JPMorgan's written opinion was addressed to
the FelCor board of directors and was directed only to the fairness to FelCor,
from a financial point of view, of the consideration paid in the merger. The
opinion does not constitute a recommendation to any FelCor stockholder as to how
that stockholder should vote on the merger or any other matter. FelCor
stockholders are urged to read this opinion in its entirety. The following
summary discusses the material terms of JPMorgan's opinion.
In arriving at its opinion, JPMorgan, among other things:
- reviewed a draft of the merger agreement dated May 9, 2001;
- reviewed publicly available business and financial information concerning
FelCor and MeriStar and the industries in which they operate;
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- reviewed internal, non-public financial analyses and forecasts provided
to JPMorgan by the management of FelCor and MeriStar relating to their
respective businesses, including information regarding the estimated
amount and timing of the cost savings and related expenses and synergies
expected to result from the merger;
- compared the proposed financial terms of the merger with the publicly
available financial terms of other transactions involving companies
JPMorgan deemed relevant and the consideration received for those
companies;
- compared the financial and operating performance of FelCor and MeriStar
with publicly available information concerning other companies JPMorgan
deemed relevant;
- reviewed the current and historical market prices of FelCor common stock
and MeriStar common stock and publicly traded securities of other
companies; and
- performed and reviewed other financial studies and analyses and
considered other information as JPMorgan deemed appropriate for the
purposes of its opinion.
JPMorgan also held discussions with some members of the management of FelCor and
MeriStar with respect to some aspects of the merger. JPMorgan discussed with
FelCor the past and current business operations of FelCor and MeriStar, the
financial condition and future prospects and operations of FelCor and MeriStar,
the effects of the merger on the financial condition and future prospects of
FelCor and other matters believed necessary or appropriate to JPMorgan's
inquiry.
In rendering its opinion, JPMorgan relied upon and assumed, without
independent verification, the accuracy and completeness of all information that
was publicly available or that was furnished to it by FelCor and MeriStar or
otherwise reviewed by it, and JPMorgan did not assume any responsibility or
liability for any of the information. JPMorgan did not conduct a physical
inspection of any of the properties, assets or liabilities of FelCor or MeriStar
and did not conduct any valuation or appraisal of any assets or liabilities, nor
were any valuations or appraisals provided to it. In relying on financial
analyses and forecasts provided to it, including the estimated amount and timing
of the cost savings and related expenses and synergies expected to result from
the merger, JPMorgan assumed that they were reasonably prepared based on
assumptions reflecting the best currently available estimates and judgments by
management as to the expected future results of operations and financial
condition of FelCor and MeriStar to which the analyses or forecasts relate.
JPMorgan also assumed that:
- the merger will have the tax consequences described in discussions with,
and materials furnished to it by, the representatives of FelCor;
- the other transactions contemplated by the merger agreement will be
completed as described in the merger agreement;
- the definitive merger agreement would not differ in any material respects
from the draft merger agreement dated May 9, 2001 furnished to it; and
- all material governmental, regulatory or other consents and approvals
necessary for the completion of the merger will be obtained without any
adverse effect on FelCor or MeriStar or on the contemplated benefits of
the merger.
The projections furnished to JPMorgan for FelCor and MeriStar were prepared
by the managements of FelCor and MeriStar. FelCor and MeriStar do not publicly
disclose internal management projections of the type provided to JPMorgan in
connection with JPMorgan's analysis of the consideration paid in the merger.
Those projections were not prepared with a view toward public disclosure.
Accordingly, actual results could vary significantly from those set forth in the
projections.
JPMorgan's opinion, dated May 9, 2001, speaks only as of that date and was
necessarily based on economic, market and other conditions as in effect on, and
the information made available to JPMorgan as of, that date. Subsequent
developments may affect the opinion, and JPMorgan does not have any
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obligation or current intention to update, revise or reaffirm the opinion,
including at the time of the special meeting of the stockholders. If, however, a
material amendment to the merger agreement is entered into which modifies the
merger consideration, the FelCor board may at that time seek an updated opinion
from JPMorgan. In making this determination, the FelCor board would consult with
its legal and financial advisors and take into account, consistent with its
fiduciary duties, all relevant factors and circumstances existing at the time,
including general market, economic and business conditions. JPMorgan's opinion
was limited to the fairness, from a financial point of view, of the
consideration to be paid by FelCor in the merger. JPMorgan expressed no opinion
as to the underlying decision of FelCor to engage in the merger or the price at
which FelCor common stock will trade at any future time.
In accordance with customary investment banking practice, JPMorgan employed
generally accepted valuation methods in reaching its opinion. The following is a
summary of the material financial analyses utilized by JPMorgan in connection
with delivering its opinion. Some of the analyses include information presented
in a tabular format. To fully understand the financial analyses used by
JPMorgan, the tables must be read together with the text of each summary. The
tables alone do not constitute a complete description of the financial analyses.
Historical Stock Performance. JPMorgan reviewed the trading price of the
shares of MeriStar common stock. This stock performance review indicated that
for the period from May 4, 2000 to May 4, 2001 the high and low closing prices
for shares of MeriStar common stock were $18.38 and $22.81, respectively, as
compared to the implied offer price of $22.09, which is based on the May 4, 2001
closing share prices for FelCor and MeriStar.
Historical Exchange Ratio Analysis. JPMorgan reviewed the per share daily
closing market price movements of FelCor common stock and MeriStar common stock
for the one-year period ending May 4, 2001. JPMorgan then calculated the implied
historical exchange ratios during this period by dividing the daily closing
prices per share of MeriStar common stock by those of FelCor common stock and
the average of those historical trading ratios for the 30-day, 90-day and 1-year
periods ending May 4, 2001. The analysis resulted in the following average
historical trading ratios for the periods indicated, rounded to the nearest
hundredth.
PERIOD MEAN
- ------ -----
May 4, 2001................................................. 0.96x
30-day...................................................... 0.91x
90-day...................................................... 0.88x
1-year...................................................... 0.91x
The highest historical exchange ratio on any single day during the 1-year period
was approximately 1.09x, and the lowest historical exchange ratio on any single
day during this period was approximately 0.80x. Using the high and low exchange
ratios, JPMorgan derived equity values per share of $17.83 to $24.42, as
compared to the implied offer price of $22.09.
Public Comparable Companies Analysis. Using publicly available
information, JPMorgan compared financial and operating information and ratios
for MeriStar with corresponding financial and operating information and ratios
for nine comparable hotel REITs which are referred to as comparable companies.
The comparable companies include all hotel REITs with total market
capitalization greater than $300 million listed below:
- Boykin Lodging Company;
- Equity Inns Inc.;
- FelCor Lodging Trust Incorporated;
- Hospitality Properties Trust;
- Host Marriott Corporation;
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- Innkeepers USA Trust;
- LaSalle Hotel Properties;
- RFS Hotel Investors Inc.; and
- Winston Hotels Inc.
JPMorgan's analysis included a review of the following:
- equity market value, assuming the conversion of all of the operating
partnership's units;
- enterprise value, calculated by adding equity market value and total
debt, preferred units and preferred stock, and then subtracting cash;
- ratios of price per share to funds from operations per share; and
- ratios of enterprise value to earnings before interest expense,
depreciation and amortization, or EBITDA.
The analysis indicated that:
- the ratio of the per share market price of the comparable companies as of
May 4, 2001 to mean projected 2001 funds from operations per share,
reported by First Call, ranged from 4.7x to 6.5x, with a mean of 5.7x and
a median of 5.6x, compared to the implied transaction multiple of 5.3x
for MeriStar. First Call is a data service that monitors and publishes
compilations of earnings estimates by selected research analysts
regarding companies of interest to institutional investors. JPMorgan then
removed the high and low values, creating an adjusted high and low of
6.3x and 5.0x. JPMorgan then multiplied the adjusted high and low by
MeriStar management's projected 2001 funds from operations per share,
which yielded an implied valuation range of $20.85 to $26.27 per share,
as compared to the implied offer price of $22.09.
- the ratio of enterprise value to projected 2001 EBITDA, reported by
various equity research reports published in the first quarter of 2001,
ranged from 6.8x to 8.5x for calendar year 2001, with a mean of 7.8x and
a median of 7.9x, compared to the implied transaction multiple of 7.9x
for MeriStar. EBITDA projections for Boykin Lodging Company, RFS Hotel
Investors and Winston Hotels Inc. were unavailable. Consequently, these
companies were excluded from this particular analysis. JPMorgan removed
the high and low values of the range, creating an adjusted high and low
of 8.3x and 7.3x. JPMorgan then multiplied the adjusted high and low by
MeriStar management's projected 2001 EBITDA. After subtracting net debt,
JPMorgan calculated a valuation range of $18.20 to $25.17 per share, as
compared to the implied offer price of $22.09.
Precedent Transaction Multiples Analysis. JPMorgan reviewed publicly
available information, particularly purchase price and transaction value
multiples, regarding nine selected business combinations in the lodging industry
announced since January 1999 which were deemed relevant by JPMorgan. These
transactions are referred to as the comparable transactions. These comparable
transactions and the month in which each transaction was announced are as
follows:
- Nova Finance Company LLC acquisition of Sunburst Hospitality Corporation
(September 2000);
- Security Capital Group, Inc. acquisition of Homestead Village, Inc. (May
2000);
- NH Hotels SA acquisition of Grand Hotel Krasnapolsky NV (April 2000);
- Hilton Hotels Corp. acquisition of Promus Hotel Corp. (September 1999);
- Accor SA acquisition of Red Roof Inns, Inc. (July 1999);
- Humphrey Hospitality Trust, Inc. acquisition of Supertel Hospitality,
Inc. (June 1999);
- SHP Acquisition, LLC acquisition of Sunstone Hotel Investors, Inc. (April
1999);
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- W-Westmont Corp. acquisition of Unihost Corp. (March 1999); and
- Ladbroke Group Plc acquisition of Stakis Plc (February 1999).
The analysis indicated that the implied transaction values as a multiple of
projected 12-month forward EBITDA for the comparable transactions ranged from
approximately 6.4x to 10.2x, with a mean of 8.2x and a median of 8.1x, compared
to a multiple of approximately 7.9x implied by the merger. A range of 7.5x to
8.5x was derived by JPMorgan to approximate the range of transaction value
multiples during 1999 and 2000. From this range, a valuation range of $19.61 to
$26.63 per share was derived, as compared to the implied offer price of $22.09.
Precedent Transaction Premiums Paid Analysis. JPMorgan reviewed publicly
available information regarding 27 selected business combinations in the real
estate and lodging industries above a minimum transaction value of $1 billion,
announced between January 1996 and February 2001, and deemed relevant by
JPMorgan. These transactions and the month in which each transaction was
announced were as follows:
- Equity Office Properties Trust acquisition of Spieker Properties, Inc.
(February 2001);
- Security Capital Group, Inc. acquisition of Security Capital U.S. Realty
(September 2000);
- Rodamco North America NV acquisition of Urban Shopping Centers, Inc.
(September 2000);
- Mack-Cali Realty Corp. acquisition of Prentiss Properties Trust (June
2000);
- Heritage Property Investment Trust, Inc. acquisition of Bradley Real
Estate, Inc. (May 2000);
- Equity Office Properties Trust acquisition of Cornerstone Properties,
Inc. (February 2000);
- Olympus Real Estate Corp. acquisition of Walden Residential Properties,
Inc. (September 1999);
- Hilton Hotels Corp. acquisition of Promus Hotel Corp. (September 1999);
- Accor SA acquisition of Red Roof Inns, Inc. (July 1999);
- Berkshire Realty Holdings, L.P. acquisition of Berkshire Realty Co., Inc.
(March 1999);
- Duke Realty Investments, Inc. acquisition of Weeks Realty Corporation
(February 1999);
- TIC Acquisition LLC acquisition of Irvine Apartment Communities, Inc.
(December 1998);
- ProLogis Trust acquisition of Meridian Industrial Trust (November 1998);
- Equity Residential Properties Trust acquisition of Merry Land &
Investment Co., Inc. (July 1998);
- New Plan Realty Trust acquisition of Excel Realty Trust, Inc. (May 1998);
- CCA Prison Realty Trust acquisition of Corrections Corporation of America
(April 1998);
- Security Capital Pacific Trust acquisition of Security Capital Atlantic
(April 1998);
- FelCor Lodging Trust Incorporated acquisition of Bristol Hotel Company
(March 1998);
- CapStar Hotel Co. acquisition of American General Hospitality Corp.
(March 1998);
- Bay Apartment Communities, Inc. acquisition of Avalon Properties, Inc.
(March 1998);
- Meditrust Corp acquisition of La Quinta Inns, Inc. (January 1998);
- Patriot American Hospitality, Inc. acquisition of Interstate Hotels Corp.
(December 1997);
- Starwood Hotels & Resorts acquisition of ITT Corp. (October 1997);
- Equity Office Properties Trust acquisition of Beacon Properties Corp.
(September 1997);
- Equity Residential Properties Trust acquisition of Wellsford Residential
Property Trust (January 1997);
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- Horsham Corporation acquisition of Trizec Corporation, Ltd.(September
1996); and
- Simon Property Group, Inc. acquisition of DeBartolo Realty Corp. (March
1996).
The analysis indicated that:
- offer prices as a percentage premium to the closing prices of the target
companies' stock the day prior to the announcement of the transactions
ranged from approximately -2% to 40%, with a mean and median of
approximately 14%, compared to an approximate 3% premium for the merger
price to the closing price per share of MeriStar common stock on May 4,
2001.
- the percentage premium to the average closing prices of the target
companies' stock the week prior to the announcement of the transaction
ranged from approximately -6% to 43%, with a mean and median of
approximately 16%, compared to an approximately 5% premium for the
MeriStar merger price to the average closing price per share of MeriStar
common stock for the week ending on May 4, 2001.
- the percentage premium to the average closing prices of the target
companies' stock the month prior to the announcement of the transaction
ranged from approximately -8% to 52%, with a mean of approximately 19%
and a median of approximately 18%, compared to an approximately 11%
premium for the MeriStar merger price to the average closing price per
share of FelCor common stock for the month ending on May 4, 2001.
From this range of mean and median transaction premiums, JPMorgan derived a
transaction premium range of 10% to 20%, which when applied to the May 4, 2001
closing MeriStar share price of $21.50, gives a valuation per share of $23.65 to
$25.80, as compared to the implied offer price of $22.09.
Net Asset Value Analysis. JPMorgan performed a net asset value analysis
for MeriStar using financial forecasts for MeriStar based on management
projections. JPMorgan calculated a net asset value for MeriStar assuming 2001
property-level net operating income capitalization rates ranging from 10.5% to
11.5%. After making necessary balance sheet adjustments, JPMorgan derived net
asset value per share for MeriStar of $21.16 to $26.58 per share, as compared to
the implied offer price of $22.09.
Discounted Cash Flow Analysis. JPMorgan performed a discounted cash flow
analysis for MeriStar using financial forecasts provided by MeriStar. JPMorgan
calculated the net present values of 4.7 years of unlevered cash flows from May
2001 through December 2005 plus an estimated terminal value. The unlevered cash
flows were discounted using a rate of 14.0%, which is JPMorgan's estimate of
MeriStar's weighted average cost of capital. A range of terminal values for
MeriStar was calculated by multiplying projected 2006 EBITDA by a range of
enterprise value to EBITDA multiples of 7.5x to 8.5x. Based upon the assumptions
set forth above, JPMorgan calculated a range of equity values of $22.48 to
$26.89 per share, as compared to the implied offer price of $22.09.
General. The summary set forth above does not purport to be a complete
description of the analyses or data presented by JPMorgan. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. JPMorgan's opinion was not based on any
single factor or analysis, nor did JPMorgan attribute particular weight to any
particular individual factor or analysis over others. Rather, JPMorgan believes
that the totality of factors considered and analyses performed by it in
connection with its opinion collectively supported its determination expressed
in its opinion, that the summary set forth above and its analyses must be
considered as a whole and that selecting portions, without considering all of
its analyses, could create an incomplete view of the processes underlying its
analyses and opinion. JPMorgan based its analyses on assumptions that it deemed
reasonable, including assumptions concerning general business and economic
conditions and industry-specific factors. The other principal assumptions upon
which JPMorgan based its analyses are set forth above under the description of
each analysis. JPMorgan's analyses are not necessarily indicative of actual
values or actual future results that might be achieved. These values or results
may be higher or lower than
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those indicated. JPMorgan's analyses are not and do not purport to be appraisals
or otherwise reflective of the prices at which businesses actually could be
bought or sold.
None of the public companies used in the public companies analysis
described above is identical to FelCor or MeriStar. None of the precedent
transactions used in the precedent transactions analysis described above is
identical to the merger. Accordingly, an analysis of publicly traded comparable
companies and transactions is not mathematical. Rather the analysis involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the comparable companies and other factors that
could affect the public trading value of the comparable companies.
As a part of its investment banking business, JPMorgan and its affiliates
are continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, investments for passive and control
purposes, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. JPMorgan was selected to advise FelCor with respect to the
merger and deliver an opinion to the FelCor board of directors with respect to
the consideration per share paid in the merger on the basis of this experience
and its familiarity with FelCor.
In the past, JPMorgan and its affiliates have arranged and/or provided
financing to FelCor, and they may be expected to continue to provide financing
as well as financial advice in the future. JPMorgan and its affiliate, The Chase
Manhattan Bank, have provided or committed to provide or underwrite, together
with other institutions, an aggregate of approximately $2.15 billion of
financing in connection with the merger and related transactions and expect to
receive between $5.7 million and $7.7 million in fees in connection with the
merger and those financing transactions, of which fees of $3 million to $5
million are contingent on the closing of the merger.
In addition, in the ordinary course of their businesses, JPMorgan and its
affiliates may actively trade the debt and equity securities of FelCor or
MeriStar for their own accounts or for the accounts of customers. Accordingly,
they may at any time hold long or short positions in those securities.
MERISTAR'S REASONS FOR THE MERGER; RECOMMENDATION OF THE MERISTAR BOARD
The board of directors of MeriStar has determined that the merger agreement
and the transactions contemplated by it are advisable and in the best interests
of MeriStar and its stockholders and has unanimously approved the merger
agreement and the merger. Accordingly, the board of directors of MeriStar
unanimously recommends that the stockholders of MeriStar vote for the approval
and adoption of the merger agreement and the merger.
In reaching the above determination, the MeriStar board gave significant
consideration to a variety of factors, including those described below. In view
of the wide variety of factors bearing on its decision, the MeriStar board did
not consider it practicable to, nor did it attempt to, quantify or assign
relative specific weight to the factors it considered in reaching its decision.
In addition, individual directors may have given different weight to different
factors. The MeriStar board received the advice of its senior management, as
well as its legal and financial advisors, throughout its consideration of the
merger agreement. The MeriStar board does not intend the following discussion of
the information and factors to be exhaustive but believes the discussion
includes the material factors it considered.
In making its determination with respect to the merger agreement, the
merger and the other transactions contemplated by the merger agreement, the
MeriStar board considered the entirety of the terms of the merger agreement,
including the fixed exchange ratio, the cash consideration of $4.60 per share,
the representations and warranties of the parties, the provisions relating to
its ability to consider third party proposals, the ability for the parties to
terminate the merger agreement if FelCor's stock price falls below a specified
level, the termination fee provisions, the provisions relating to merger
financing and the ability to terminate the merger agreement if economically
prudent senior unsecured note financing were not available, the covenants of the
parties pending the closing of the merger and the provisions relating to the
treatment of MeriStar Partnership.
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In making its determination, the MeriStar board also considered the
following potentially positive material factors:
- Strong Strategic Fit; Enhanced Visibility to Investors in the Hospitality
REIT Sector. The MeriStar board noted that a significant portion of the
merger consideration was payable in FelCor common stock, rather than
cash, and that following the merger, MeriStar stockholders would own
approximately 39.5% of the combined company. The MeriStar board believed
that the combined company's diverse asset portfolio, expanded stockholder
base and increased public float would make the combined company an
attractive continuing vehicle for investors. Based on FelCor's closing
stock price as of May 9, 2001 of $22.10 and MeriStar's closing stock
price as of May 9, 2001 of $21.45, the combined company would have a
post-merger equity market capitalization of approximately $2.2 billion,
versus approximately $1.1 billion for MeriStar on a stand-alone basis.
The total capitalization of the combined company would be $6.3 billion,
versus $2.7 billion for MeriStar alone. The combined company would be the
largest hospitality REIT in terms of number of hotels and number of
rooms.
- Significant Premium over Average Trading Price. The MeriStar board
considered that the consideration to be paid to MeriStar stockholders in
the merger represented, as of May 9, 2001, a 9% premium over MeriStar's
average closing price over the 20 trading days prior to that date and a
17% premium over MeriStar's average closing price in the 20 trading days
prior to April 16, 2001, the date of the first meeting of the MeriStar
board relating to the merger.
- Opportunity to Leverage Increased Scale and Purchasing Power. The
MeriStar board considered that the merger would create the largest
multi-branded, independent hotel portfolio in the United States. The
combined company, on a pro forma basis after disposition of some
non-strategic hotels, would have 283 hotels with approximately 75,000
rooms. The MeriStar board recognized that the increased scale of the
combined company would likely enable it to exercise increased bargaining
power in negotiations with suppliers of energy, capital equipment, labor
and other products.
- Enhanced Negotiating Leverage with Franchisors. The MeriStar board also
recognized that the combined company would be one of the largest
franchisees of several major brands, including Embassy Suites, Crowne
Plaza, Holiday Inn, Doubletree, Hilton and Sheraton, giving the combined
company enhanced leverage in negotiations with these brands.
- Opportunity for Revenue Growth. The MeriStar board believed that the
merger creates the opportunity for greater revenue growth than MeriStar
was likely to experience on a stand-alone basis because of the larger
pool of assets and the potential for revenue growth stemming from
economies of scale.
- Improved Access to Financing. The MeriStar board considered that the
larger size of the combined company could result in easier access to
additional financing.
- Treatment of Employees. The MeriStar board considered the arrangements
under the merger agreement relating to the treatment of MeriStar
employees who do not continue as FelCor employees.
- Potential Cost Savings. The MeriStar board took into account that by
consolidating corporate headquarters and administration, the combined
company should realize annual savings of approximately $5 million in
general and administrative expenses from reductions in personnel, closing
and subletting MeriStar's corporate offices and the elimination of other
duplicate overhead costs.
- Relationship with MeriStar Hotels & Resorts. The MeriStar board
considered that MeriStar Hotels & Resorts would continue as manager of
105 of the hotels of the combined company and that the "paper clip"
arrangement between MeriStar and MeriStar Hotels & Resorts would no
longer be in place. The MeriStar board also recognized that the
intercompany agreement would
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continue in effect and considered the terms of the amended credit
facility offered to MeriStar Hotels & Resorts.
- Opinion of MeriStar's Financial Advisor. The MeriStar board also
considered the opinion dated May 9, 2001 of Salomon Smith Barney,
MeriStar's financial advisor, as to the fairness, from a financial point
of view and as of that date, of the merger consideration to be received
by the MeriStar common stockholders.
In making its determination, the MeriStar board also considered the
following potentially negative material factors:
- Integration Issues. The MeriStar board noted the risks inherent in
integrating two companies of the size of MeriStar and FelCor.
- Increased Concentration in Some Markets. The MeriStar board realized
that the combined company would have a larger presence in some markets
than was desirable but also recognized that FelCor had in place plans to
sell some non-strategic hotels in these markets in order to address this
potential issue. The combined company would continue to have
concentrations of hotels in some markets, including California, Florida
and Texas, each of which will represent more than 10% of the combined
company's revenues based on revenues for the twelve months ended March
31, 2001, and collectively will represent almost 50% of total revenues.
- FelCor Management Issues. The MeriStar board considered the need for
FelCor to recruit and hire a chief financial officer but also took
account of the fact that FelCor was in the process of a search for a
qualified individual.
OPINION OF MERISTAR'S FINANCIAL ADVISOR
MeriStar retained Salomon Smith Barney to act as its exclusive financial
advisor in connection with the proposed merger and the other transactions
contemplated by the merger agreement, referred to as the transaction. In
connection with its engagement, MeriStar requested that Salomon Smith Barney
evaluate the fairness, from a financial point of view, of the merger
consideration. On May 9, 2001, at a meeting of the MeriStar board held to
evaluate the proposed transaction, Salomon Smith Barney delivered to the
MeriStar board of directors an oral opinion, which opinion was confirmed by
delivery of a written opinion dated May 9, 2001, to the effect that, as of that
date and based on and subject to the matters described in its opinion, the
merger consideration was fair, from a financial point of view, to the MeriStar
common stockholders.
In arriving at its opinion, Salomon Smith Barney:
- reviewed the merger agreement;
- held discussions with senior officers, directors and other
representatives and advisors of MeriStar and with senior officers and
other representatives and advisors of FelCor concerning the businesses,
operations and prospects of MeriStar and FelCor;
- examined publicly available business and financial information relating
to MeriStar and FelCor;
- examined financial forecasts and other information and data for MeriStar
and FelCor which were provided to or otherwise discussed with Salomon
Smith Barney by the managements of MeriStar and FelCor, including
information relating to the potential strategic implications and
operational benefits anticipated by the managements of MeriStar and
FelCor to result from the transaction;
- reviewed the financial terms of the transaction as described in the
merger agreement in relation to, among other things, current and
historical market prices and trading volumes of MeriStar common stock and
FelCor common stock, the historical and projected operating data of
MeriStar and FelCor, and the financial condition and capitalization of
MeriStar and FelCor;
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- analyzed financial, stock market and other publicly available information
relating to the businesses of other companies whose operations Salomon
Smith Barney considered relevant in evaluating those of MeriStar and
FelCor; and
- conducted other analyses and examinations and considered other financial,
economic and market criteria as Salomon Smith Barney deemed appropriate
in arriving at its opinion.
In rendering its opinion, Salomon Smith Barney assumed and relied, without
independent verification, on the accuracy and completeness of all financial and
other information and data that it reviewed or considered. With respect to
financial forecasts and other information and data, the managements of MeriStar
and FelCor advised Salomon Smith Barney that the forecasts and other information
and data were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the managements of MeriStar and FelCor as
to the future financial performance of MeriStar and FelCor and the potential
strategic implications and operational benefits anticipated to result from the
transaction.
Salomon Smith Barney assumed, with MeriStar's consent, that the transaction
would be completed in accordance with its terms, without waiver, modification or
amendment of any material term, condition or agreement. Salomon Smith Barney
also assumed, with MeriStar's consent, that the merger will be treated as a
reorganization for federal income tax purposes. Salomon Smith Barney further
assumed, with MeriStar's consent, that MeriStar and FelCor were organized and
have operated for federal income tax purposes in conformity with the
requirements for qualification as a REIT, and that the transaction will not
adversely affect the REIT status or operations of MeriStar or FelCor. Salomon
Smith Barney did not express any opinion as to what the value of the FelCor
common stock actually will be when issued in the transaction or the prices at
which the FelCor common stock will trade or otherwise be transferable at any
time. Salomon Smith Barney did not make and was not provided with an independent
evaluation or appraisal of the assets or liabilities, contingent or otherwise,
of MeriStar or FelCor. Salomon Smith Barney did not make any physical inspection
of the properties or assets of MeriStar or FelCor.
In connection with its engagement, Salomon Smith Barney was not requested
to, and did not, solicit third party indications of interest in the possible
acquisition of all or a part of MeriStar. Salomon Smith Barney expressed no view
as to, and its opinion does not address, the relative merits of the transaction
as compared to any alternative business strategies that might exist for MeriStar
or the effect of any other transaction in which MeriStar might engage. Salomon
Smith Barney's opinion was necessarily based on information available to Salomon
Smith Barney, and financial, stock market and other conditions and circumstances
existing and disclosed to Salomon Smith Barney, as of the date of its opinion.
Although Salomon Smith Barney evaluated the merger consideration from a
financial point of view, Salomon Smith Barney was not asked to and did not
recommend the specific consideration payable in the transaction, which was
determined through negotiations between MeriStar and FelCor. MeriStar imposed no
other instructions or limitations on Salomon Smith Barney with respect to the
investigations made or procedures followed by Salomon Smith Barney in rendering
its opinion.
THE FULL TEXT OF SALOMON SMITH BARNEY'S WRITTEN OPINION DATED MAY 9, 2001,
WHICH DESCRIBES THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED
AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AS APPENDIX D AND IS INCORPORATED INTO THIS JOINT PROXY
STATEMENT/PROSPECTUS BY REFERENCE. SALOMON SMITH BARNEY'S OPINION IS DIRECTED TO
THE MERISTAR BOARD OF DIRECTORS AND RELATES ONLY TO THE FAIRNESS OF THE MERGER
CONSIDERATION FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT
OF THE TRANSACTION OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER WITH RESPECT TO ANY MATTERS RELATING TO THE
PROPOSED TRANSACTION.
In preparing its opinion, Salomon Smith Barney performed a variety of
financial and comparative analyses, including those described below. The summary
of these analyses is not a complete description of the analyses underlying
Salomon Smith Barney's opinion. The preparation of a fairness opinion is a
complex analytical process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances.
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Therefore, a fairness opinion is not readily susceptible to summary description.
Salomon Smith Barney's opinion was not based on any single factor or analysis,
nor did Salomon Smith Barney attribute particular weight to individual factors
or analyses. Rather, Salomon Smith Barney believed that the totality of the
factors considered and analyses performed by Salomon Smith Barney in connection
with its opinion operated collectively to support its determination as to the
fairness of the merger consideration from a financial point of view.
Accordingly, Salomon Smith Barney believes that its analyses must be considered
as a whole and that selecting portions of its analyses and factors or focusing
on information presented in tabular format, without considering all analyses and
factors or the narrative description of the analyses, could create a misleading
or incomplete view of the processes underlying its analyses and opinion.
In its analyses, Salomon Smith Barney considered industry performance,
general business, economic, market and financial conditions and other matters
existing as of the date of its opinion, many of which are beyond the control of
MeriStar and FelCor. No company or business used in those analyses as a
comparison is identical to MeriStar, FelCor or the proposed transaction, and an
evaluation of those analyses is not entirely mathematical. Rather, the analyses
involve complex considerations and judgments concerning financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the companies or business segments analyzed.
The estimates contained in Salomon Smith Barney's analyses and the
valuation ranges resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by its analyses. In
addition, analyses relating to the value of businesses or securities do not
necessarily purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, Salomon Smith
Barney's analyses and estimates are inherently subject to substantial
uncertainty.
Salomon Smith Barney's opinion and analyses were only one of many factors
considered by the MeriStar board of directors in its evaluation of the
transaction and should not be viewed as determinative of the views of the
MeriStar board of directors or management with respect to the merger
consideration or the proposed transaction. Salomon Smith Barney's opinion to the
board of directors is dated May 9, 2001, the date of the merger agreement.
Salomon Smith Barney does not have any obligation or current intention to
update, revise or reaffirm its opinion, including at the time of the special
meeting of the stockholders. If, however, a material amendment to the merger
agreement is entered into which modifies the merger consideration, the MeriStar
board of directors may at that time seek an updated opinion from Salomon Smith
Barney. In making this determination, the board of directors would consult with
its legal and financial advisors and take into account, consistent with its
fiduciary duties, all relevant factors and circumstances existing at the time,
including general market, economic and business conditions.
The following is a summary of the material financial analyses performed by
Salomon Smith Barney in connection with the rendering of its opinion dated May
9, 2001. THE FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE INFORMATION PRESENTED
IN TABULAR FORMAT. IN ORDER TO FULLY UNDERSTAND SALOMON SMITH BARNEY'S FINANCIAL
ANALYSES, THE TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH SUMMARY. THE
TABLES ALONE DO NOT CONSTITUTE A COMPLETE DESCRIPTION OF THE FINANCIAL ANALYSES.
CONSIDERING THE DATA IN THE TABLES BELOW WITHOUT CONSIDERING THE FULL NARRATIVE
DESCRIPTION OF THE FINANCIAL ANALYSES, INCLUDING THE METHODOLOGIES AND
ASSUMPTIONS UNDERLYING THE ANALYSES, COULD CREATE A MISLEADING OR INCOMPLETE
VIEW OF SALOMON SMITH BARNEY'S FINANCIAL ANALYSES.
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Selected Companies Analyses
MeriStar. Using publicly available information, Salomon Smith Barney
reviewed the market values and trading multiples of MeriStar and the following
seven publicly traded companies in the lodging REIT industry:
Primary Group Companies
- Boykin Lodging Company
- LaSalle Hotel Properties
- Host Marriott Corporation
Secondary Group Companies
- Equity Inns, Inc.
- Innkeepers USA Trust
- RFS Hotel Investors, Inc.
- Winston Hotels, Inc.
For purposes of this analysis, Salomon Smith Barney focused on companies in
the lodging REIT industry which operate upscale, full service hotels, as do
MeriStar and FelCor. These companies are referred to above as primary group
companies. All multiples were based on closing stock prices on May 7, 2001.
Estimated financial data for the selected companies were based on publicly
available research analysts' estimates. Estimated financial data for MeriStar
were based on internal estimates of the management of MeriStar.
Salomon Smith Barney compared enterprise values as a multiple of earnings
before interest, taxes, depreciation and amortization, or EBITDA, for the latest
12 months and estimated calendar years 2001 and 2002. Salomon Smith Barney also
compared equity values as a multiple of funds from operations, or FFO, for the
latest 12 months and estimated calendar years 2001 and 2002. Salomon Smith
Barney then applied a range of selected multiples of latest 12 months and
estimated calendar years 2001 and 2002 EBITDA and FFO derived from the primary
group companies to corresponding financial data of MeriStar. This analysis
indicated the following implied per share equity reference range for MeriStar,
as compared to the implied value of the merger consideration based on the cash
consideration and, in the case of the stock portion of the merger consideration,
the exchange ratio and the closing price of FelCor common stock on May 7, 2001:
IMPLIED PER SHARE IMPLIED PER SHARE
EQUITY REFERENCE RANGE FOR MERISTAR MERGER CONSIDERATION
- ----------------------------------- --------------------
$18.00-$24.00 $21.97
FelCor. Salomon Smith Barney also reviewed the market values and trading
multiples of FelCor and the selected companies described above. For purposes of
this analysis, Salomon Smith Barney focused on the primary group companies. All
multiples were based on closing stock prices on May 7, 2001. Estimated financial
data for the selected companies were based on publicly available research
analysts' estimates. Estimated financial data for FelCor were based on internal
estimates of the management of FelCor.
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Salomon Smith Barney compared enterprise values as a multiple of EBITDA for
the latest 12 months and estimated calendar years 2001 and 2002. Salomon Smith
Barney also compared equity values as a multiple of FFO for the latest 12 months
and estimated calendar years 2001 and 2002. Salomon Smith Barney then applied a
range of selected multiples of latest 12 months and estimated calendar years
2001 and 2002 EBITDA and FFO derived from the primary group companies to
corresponding financial data of FelCor. This analysis indicated the following
implied per share equity reference range for FelCor, as compared to the closing
price of FelCor common stock on May 7, 2001:
IMPLIED PER SHARE PER SHARE CLOSING PRICE
EQUITY REFERENCE RANGE FOR FELCOR OF FELCOR COMMON STOCK
- --------------------------------- -----------------------
$19.00-$25.00 $22.16
Net Asset Valuation Analyses
MeriStar. Salomon Smith Barney performed a net asset valuation analysis of
MeriStar's assets based on internal estimates of MeriStar's management. The
gross estimated value of MeriStar's assets was estimated by capitalizing
MeriStar's calendar year 2000 net operating income utilizing capitalization
rates of 10.00% to 11.75% depending on the type of assets analyzed. This
analysis indicated the following implied per share equity reference range for
MeriStar, as compared to the implied value of the merger consideration based on
the cash consideration and, in the case of the stock portion of the merger
consideration, the exchange ratio and the closing price of FelCor common stock
on May 7, 2001:
IMPLIED PER SHARE IMPLIED PER SHARE
EQUITY REFERENCE RANGE FOR MERISTAR MERGER CONSIDERATION
- ----------------------------------- --------------------
$21.00-$25.50 $21.97
FelCor. Salomon Smith Barney also performed a net asset valuation analysis
of FelCor's assets based on internal estimates of FelCor's management. The gross
estimated value of FelCor's assets was estimated by capitalizing FelCor's
calendar year 2000 net operating income utilizing capitalization rates of 10.25%
to 12.50% depending on the type of assets analyzed. This analysis indicated the
following implied per share equity reference range for FelCor, as compared to
the closing price of FelCor common stock on May 7, 2001:
IMPLIED PER SHARE PER SHARE CLOSING PRICE
EQUITY REFERENCE RANGE FOR FELCOR OF FELCOR COMMON STOCK
- --------------------------------- -----------------------
$23.00-$27.50 $22.16
Premiums Paid Analysis
Salomon Smith Barney reviewed the premiums paid in 23 selected transactions
in which the target company was a lodging company or REIT. Salomon Smith Barney
then applied a range of selected premiums derived from these transactions based
on the closing stock prices of the target company one day, one week, one month
and three months prior to public announcement of the transaction to the closing
prices of MeriStar common stock over corresponding periods, as well as six
months and 12 months, prior to May 7, 2001. This analysis resulted in the
following implied per share equity reference range for MeriStar, as compared to
the implied value of the merger consideration based on the cash consideration
and, in the case of the stock portion of the merger consideration, the exchange
ratio and the closing price of FelCor common stock on May 7, 2001:
IMPLIED PER SHARE IMPLIED PER SHARE
EQUITY REFERENCE RANGE FOR MERISTAR MERGER CONSIDERATION
- ----------------------------------- --------------------
$20.50-$23.50 $21.97
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Implied Merger Consideration Analysis
Salomon Smith Barney computed an implied value of the merger consideration
by applying the merger consideration to the results of the selected companies
and net asset valuation analyses of FelCor described above. This analysis
indicated the following range of implied values of the merger consideration, as
compared to the implied value of the merger consideration based on the cash
consideration and, in the case of the stock portion of the merger consideration,
the exchange ratio and the closing price of FelCor common stock on May 7, 2001:
IMPLIED PER SHARE MERGER
CONSIDERATION BASED ON FELCOR
SELECTED COMPANIES AND NET ASSET IMPLIED PER SHARE
VALUATION ANALYSES MERGER CONSIDERATION
-------------------------------- --------------------
$19.50-$26.16 $21.97
Other Factors
In rendering its opinion, Salomon Smith Barney also reviewed and considered
other factors, including:
- historical trading prices and trading volumes for MeriStar common stock
and FelCor common stock;
- the relationship between movements in MeriStar common stock, movements in
FelCor common stock, and movements in the common stock of selected
lodging companies and REITs;
- the potential impact on the merger consideration of varying trading
prices of FelCor common stock;
- selected analysts' reports on MeriStar and FelCor; and
- a stockholder and cross-ownership stockholder profile of MeriStar and
FelCor.
Miscellaneous
Under the terms of its engagement, MeriStar has agreed to pay Salomon Smith
Barney for its financial advisory services an aggregate fee of $6.0 million upon
completion of the transaction. MeriStar also has agreed to reimburse Salomon
Smith Barney for reasonable travel and other expenses incurred by Salomon Smith
Barney in performing its services, including the reasonable fees and expenses of
its legal counsel, and to indemnify Salomon Smith Barney and related persons
against liabilities, including liabilities under the federal securities laws,
arising out of its engagement.
In the ordinary course of business, Salomon Smith Barney and its affiliates
may actively trade or hold the securities of MeriStar and FelCor for their own
account or for the account of customers and, accordingly, may at any time hold a
long or short position in those securities. Salomon Smith Barney and its
affiliates in the past have provided, and are currently providing, services to
MeriStar and its affiliates unrelated to the proposed transaction, for which
services Salomon Smith Barney and its affiliates have received, and will
receive, compensation. Salomon Smith Barney and its affiliates also in the past
have provided services to FelCor unrelated to the proposed transaction, for
which services Salomon Smith Barney and its affiliates have received
compensation. In addition, Salomon Smith Barney and its affiliates, including
Citigroup Inc. and its affiliates, may maintain other relationships with
MeriStar, FelCor and their affiliates.
Salomon Smith Barney is an internationally recognized investment banking
firm and was selected by MeriStar based on its experience, expertise and
familiarity with MeriStar and its business. Salomon Smith Barney regularly
engages in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER AND PARTNERSHIP MERGER
General
In considering the recommendations of the respective boards of directors of
FelCor and MeriStar, you should be aware that members of the boards and
management of each of FelCor and MeriStar may have interests in the merger that
are different from, or in addition to, your interests as a stockholder resulting
in potential conflicts of interest. Members of the boards and management of each
of FelCor and MeriStar will receive material benefits as a result of the merger
that are not available to other stockholders. The boards of each company
recognized these interests and determined that these interests neither supported
nor detracted from the fairness of the merger.
Interests of FelCor's Directors and Officers
Some of FelCor's officers and directors have interests in the merger that
are different from, or in addition to, your interests generally and that may
create a potential conflict of interest.
Richard O. Jacobson, a director of FelCor, Thomas J. Corcoran, Jr.,
President, Chief Executive Officer and a director of FelCor, and Thomas L.
Wiese, a Vice President of FelCor, beneficially own, respectively, 36,537,
54,578 and 2,045 common units of limited partnership interest in MeriStar
Partnership. As a result of the partnership merger, each of these units will be
exchanged for $4.60 in cash and 0.784 of a common unit of limited partnership
interest in FelCor Partnership. The implied value of these common units based on
this merger consideration and a closing price of $22.30 per share of FelCor
common stock on July 17, 2001 would be $806,000, $1.2 million and $45,000,
respectively.
Interests of MeriStar's Directors and Officers
Some of MeriStar's officers and directors and significant stockholders have
interests in the merger that are different from, or in addition to, your
interests generally and that may create a potential conflict of interest.
Positions with FelCor after the Merger. Mr. Paul W. Whetsell, currently
Chairman of the Board, director and Chief Executive Officer of MeriStar, along
with Steven D. Jorns, currently Vice Chairman of the Board and a director, will
become directors of FelCor as a result of the merger. Mr. Bruce G. Wiles, a
director and the President and Chief Investment Officer of MeriStar has been
offered employment by FelCor.
Severance Payments and Vesting of Stock Options. MeriStar has pre-existing
employment agreements with Messrs. Whetsell, Jorns, Emery and Wiles, which
entitle each to payments and other benefits in the event his or her employment
is terminated.
Under Mr. Whetsell's April 2000 employment agreement, if he is terminated
by MeriStar without cause or voluntarily terminates his employment with good
reason within 24 months following a change in control of MeriStar, he will
receive a lump sum payment equal to 3.5 times the sum of his then annual base
salary plus his bonus for the preceding year. In addition, under those
circumstances, all of his unvested stock options and restricted stock awards
will immediately vest and be exercisable for one year, and his health benefits
under his employment agreement will continue for a period equal to two and a
half years. In the event that any accelerated vesting of his rights with respect
to stock options, restricted stock or any other payment, benefit or compensation
results in the imposition of an excise tax payable by him under Section 4999 of
the Internal Revenue Code, or any successor or other provision with respect to
"excess parachute payments" within the meaning of Section 280G(b) of the
Internal Revenue Code, MeriStar will make a cash payment to Mr. Whetsell in an
amount which, after paying all federal, state and local income and excise taxes
for which he may be liable on account of this cash payment, will allow him to
retain an amount equal to the excise tax. The merger is a change in control of
MeriStar under Mr. Whetsell's employment agreement, and the severance payments
under that agreement will become due, since Mr. Whetsell will not be employed by
FelCor after the merger. Accordingly, FelCor expects to pay him a total of
approximately $1,767,500 in severance and approximately $4.1 million in tax
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reimbursement payments after the merger. Estimates of tax reimbursement payments
are based on a value of $23.00 per share of FelCor common stock. In addition,
Mr. Whetsell owns 125,000 unvested shares of restricted stock, unvested options
to purchase 284,580 shares of MeriStar common stock and 342,917 unvested
profits-only units, all of which will vest as a result of the merger.
Under Mr. Emery's April 2000 employment agreement, if he is terminated by
MeriStar without cause or voluntarily terminates his employment with good reason
within 24 months following a change in control of MeriStar, he will receive a
lump sum payment equal to three times the sum of his then annual base salary
plus his bonus for the preceding year. In addition, under those circumstances,
all of his unvested stock options and restricted stock awards will immediately
vest and be exercisable for one year, and his health benefits will continue for
two years or until he receives successor health benefits from another employer.
In the event that any accelerated vesting of his rights with respect to stock
options, restricted stock or any other payment, benefit or compensation results
in the imposition of an excise tax payable by him under Section 4999 of the
Internal Revenue Code, or any successor or other provision with respect to
"excess parachute payments" within the meaning of Section 280G(b) of the
Internal Revenue Code, MeriStar will make a cash payment to Mr. Emery in an
amount which, after paying all federal, state and local income and excise taxes
for which he may be liable on account of this cash payment, will allow him to
retain an amount equal to the excise tax. The merger is a change in control of
MeriStar under Mr. Emery's employment agreement, and the severance payments
under that agreement will become due, since Mr. Emery will not be employed by
FelCor after the merger. Estimates of tax reimbursement payments are based on a
value of $23.00 per share of FelCor common stock. Accordingly, FelCor expects to
pay him a total of approximately $1,350,000 in severance and approximately $2.2
million in tax reimbursement payments after the merger. In addition, Mr. Emery
owns 67,334 unvested shares of restricted stock, unvested options to purchase
156,978 shares of MeriStar common stock and 221,459 unvested profits-only units,
all of which will vest as a result of the merger.
The terms of Mr. Jorns' June 1998 employment agreement are substantially
similar to those of Mr. Emery's agreement, except that Mr. Jorns does not have
the right to receive payment for any excise taxes due on account of any "excess
parachute payments," and his unvested profits-only units will not vest as a
result of the merger. Mr. Jorns will not be employed by FelCor after the merger,
so FelCor expects to pay him a total of approximately $405,000 in severance
after the merger. Mr. Jorns is not entitled to any tax reimbursement payments
after the merger. In addition, Mr. Jorns owns unvested options to purchase 8,333
shares of MeriStar common stock, all of which will vest as a result of the
merger.
Under Mr. Wiles' August 1998 employment agreement, if he is terminated by
MeriStar without cause or voluntarily terminates his employment with good reason
within 18 months following a change in control of MeriStar he will receive his
current annual base salary, payable on his regular payroll dates, for a period
of one year, plus his bonus for the preceding year, plus a lump sum equal to the
sum of his then annual base salary and his bonus for the preceding year. In
addition, all of his unrestricted stock options and restricted stock awards will
immediately vest and be exercisable for one year, and his benefits will continue
for one year or until he receives successor health benefits from another
employer. The merger is a change in control of MeriStar under Mr. Wiles'
employment agreement. If Mr. Wiles does not accept employment with FelCor prior
to closing of the merger, FelCor expects to pay him a total of approximately
$980,600 in severance and approximately $550,000 in tax reimbursement payments
after the merger. In addition, Mr. Wiles owns 50,667 unvested shares of
restricted stock and unvested options to purchase 116,666 shares of MeriStar
common stock, all of which will vest as a result of the merger. Mr. Wiles will
be required to waive the accelerated vesting of these options if he accepts
employment with FelCor after the merger.
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The following table sets forth the approximate values of unvested
restricted stock, unvested options and unvested profits-only partnership units
of Messrs. Whetsell, Emery, Jorns and Wiles:
VALUE OF UNVESTED
VALUE OF UNVESTED VALUE OF UNVESTED PROFITS-ONLY PARTNERSHIP
RESTRICTED STOCK(1) OPTIONS(2) UNITS(3)
------------------- ----------------- ------------------------
Paul W. Whetsell......................... $2.7 million $895,000 $7.6 million
John Emery............................... $1.5 million $637,000 $4.9 million
Steven D. Jorns.......................... -- $ 14,900 --
Bruce G. Wiles........................... $1.1 million $613,000 --
- ---------------
(1)The value of unvested restricted stock that will vest as a result of the
merger is based on the closing price of $21.98 per share of MeriStar common
stock on July 17, 2001.
(2)The value of unvested options that will vest as a result of the merger is
based on the difference between the closing price of $21.98 per share of
MeriStar common stock on July 17, 2001 and the exercise price per share, if
positive.
(3)Because each common unit in FelCor Partnership is redeemable for a share of
FelCor common stock, the value of each unvested profits-only partnership unit
that will vest as a result of the merger is based on 0.784 times the closing
price of $22.30 per share of FelCor common stock on July 17, 2001, plus
$4.60.
Approximately 40 other employees of MeriStar will be eligible for severance
payments upon the closing of the merger if they perform their duties in good
faith through the closing date and are not employed by FelCor or MeriStar Hotels
& Resorts with substantially similar duties and compensation. The aggregate
amount of the severance payments to these employees is limited to $2.05 million.
FelCor will not be required to make tax reimbursement payments to these
employees.
In addition, under the terms of MeriStar's incentive plan and non-employee
directors' incentive plan, the merger will cause all of the options and
restricted stock issued under those plans to vest. All options will be assumed
by FelCor and continue as options to purchase FelCor common stock. The number of
shares of FelCor common stock for which each option may be exercised will equal
the number of MeriStar common shares purchasable under the option before the
merger multiplied by 0.784. The exercise price per share of each option will be
reduced to an amount equal to the exercise price prior to the merger less $4.60,
divided by 0.784. Any MeriStar employee who is employed by FelCor after the
closing of the merger will be required to waive change-of-control vesting of his
or her options.
Indemnification. FelCor has agreed, from and after the effective time of
the merger, to indemnify the present and former directors and officers of
MeriStar for actions on or prior to the effective time of the merger and has
agreed to maintain directors' and officers' liability insurance for these
individuals in place for six years following completion of the merger. For
further details regarding these arrangements, see "The Merger
Agreement -- Indemnification and Insurance."
REGULATORY APPROVALS
No material federal or state regulatory requirements must be complied with
or approvals must be obtained by FelCor, FelCor Partnership, MeriStar or
MeriStar Partnership in connection with either the merger or the partnership
merger.
ACCOUNTING TREATMENT
FelCor will treat the merger as a purchase of MeriStar for financial
accounting purposes. This means that FelCor will record the assets acquired and
the liabilities assumed at their estimated fair values at the time the merger is
completed.
RESTRICTIONS ON RESALES BY AFFILIATES
The FelCor common stock to be issued to MeriStar stockholders in the merger
will be freely transferable under the Securities Act, except for shares issued
to any person who may be deemed to be an "affiliate" of MeriStar within the
meaning of Rule 145 under the Securities Act or who will become an
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"affiliate" of FelCor within the meaning of Rule 144 under the Securities Act
after the merger. Shares of FelCor common stock received by persons who are
deemed to be MeriStar affiliates or who become FelCor affiliates may be resold
by these persons only in transactions permitted by the limited resale provisions
of Rule 145 or as otherwise permitted under the Securities Act. Persons who may
be deemed to be affiliates of MeriStar generally include individuals or entities
that, directly or indirectly through one or more intermediaries, control, are
controlled by or are under common control with MeriStar and may include
officers, directors and principal stockholders of MeriStar. All MeriStar
stockholders who may be deemed to be affiliates of MeriStar will be so advised
before the completion of the merger.
Under the merger agreement, MeriStar will use best efforts to obtain an
affiliate agreement from each affiliate of MeriStar before the completion of the
merger by which each MeriStar affiliate will agree not to sell, transfer, pledge
or otherwise dispose of any of the FelCor common stock received in the merger
except under an effective registration statement or exemption from registration
under the Securities Act or in compliance with Rule 145. Rule 145 requires that,
for specified periods, sales be made in compliance with the volume limitations,
manner of sale provisions and current information requirements of Rule 144 under
the Securities Act.
Under the affiliate agreements, FelCor has the right to place legends on
the certificates evidencing FelCor common stock issued to MeriStar affiliates in
the merger summarizing the foregoing restrictions until a sale, transfer, pledge
or other disposition of the FelCor common stock represented by these
certificates has been registered under the Securities Act or is made in
compliance with Rule 145 under the Securities Act.
Persons who are not affiliates of MeriStar generally may sell their FelCor
common stock without restrictions.
NO APPRAISAL RIGHTS
MeriStar and FelCor are organized under Maryland law. Under the Maryland
General Corporation Law, MeriStar common stockholders and FelCor common
stockholders have no rights to dissent and receive the appraised value of their
shares in the merger.
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the Agreement and
Plan of Merger among FelCor, FelCor Partnership, MeriStar and MeriStar
Partnership, dated May 9, 2001, as amended. A copy of the merger agreement is
attached as Appendix A and is incorporated into this joint proxy statement/
prospectus by reference. You should read the merger agreement carefully and in
its entirety for a more complete understanding of its terms.
GENERAL
The merger agreement provides that MeriStar will merge with and into
FelCor, with FelCor being the surviving corporation. The merger between FelCor
and MeriStar is subject to the receipt of the requisite approvals of the FelCor
stockholders and the MeriStar stockholders and the satisfaction or waiver of the
other conditions to the merger. The surviving corporation will continue to be
organized under the laws of the State of Maryland and will continue to do
business under the name "FelCor Lodging Trust Incorporated." FelCor's charter
and bylaws as currently in effect will be those of the surviving corporation.
The merger between FelCor and MeriStar will be effective at 9:00 a.m.,
Eastern Time, on the business day immediately after the closing, or the time the
State Department of Assessments and Taxation of Maryland accepts the articles of
merger for record.
The merger agreement also provides that a wholly-owned subsidiary of FelCor
Partnership will be merged with and into MeriStar Partnership. MeriStar
Partnership will continue to be organized under the laws of the State of
Delaware and will do business under the name "FelCor Hospitality Operating
Partnership, L.P."
No vote or consent of the limited partners of either FelCor Partnership or
MeriStar Partnership is required or being sought. FelCor, as the general partner
of FelCor Partnership, and MeriStar, as the general partner of MeriStar
Partnership, have taken all actions necessary under their respective partnership
agreements to approve the partnership merger. The partnership merger will not
occur unless the merger occurs. The partnership merger will be effective at the
time a certificate of merger is filed with the Secretary of State of the State
of Delaware. This filing will occur promptly following the effectiveness of the
merger between FelCor and MeriStar.
Unless agreed otherwise, the closing will occur at 10:00 a.m., Central
Time, on the third business day after the date on which the satisfaction or
waiver of the conditions set forth in the merger agreement is completed.
TREATMENT OF MERISTAR COMMON STOCK AND FELCOR STOCK IN THE MERGER
At the effective time of the merger, for each share of MeriStar common
stock, MeriStar stockholders will receive 0.784 of a share of FelCor common
stock and $4.60 in cash. No fractional shares will be issued. FelCor will make
cash payments instead of issuing fractional shares.
Each share of FelCor common stock, Series A Preferred Stock and Series B
Preferred Stock that was issued and outstanding prior to the merger will
continue to represent the same number of shares of FelCor stock after the
effective time of the merger.
TREATMENT OF MERISTAR PARTNERSHIP UNITS IN THE PARTNERSHIP MERGER
In the partnership merger, holders of MeriStar Partnership units of limited
partnership interest, other than Class C and D preferred units, profits-only
partnership units and units held by FelCor and its subsidiaries, will receive,
for each MeriStar Partnership unit issued and outstanding immediately before the
partnership merger, $4.60 in cash and 0.784 of a FelCor Partnership common unit.
Cash will be paid
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instead of issuing fractional units. The MeriStar Partnership preferred units
and profits-only units of limited partnership interest will be exchanged as
follows:
- each Class C preferred unit in MeriStar Partnership will be exchanged for
$4.60 in cash and 0.784 of a Series C preferred unit in FelCor
Partnership;
- each Class D preferred unit in MeriStar Partnership will be exchanged for
one Series D preferred unit in FelCor Partnership; and
- each profits-only partnership unit in MeriStar Partnership, other than
unvested units, will be exchanged for $4.60 in cash and 0.784 of a common
unit in FelCor Partnership, and any unvested units will be cancelled.
After the completion of the partnership merger, the former MeriStar
Partnership unitholders will have the right to redeem the FelCor Partnership
units issued to them in the partnership merger in accordance with the terms and
limitations of the partnership agreement of FelCor Partnership. Upon redemption
of these units, these unitholders would receive FelCor common stock on a
one-for-one basis or their cash equivalent, at the election of FelCor.
DIVIDENDS PRIOR TO CLOSING
The merger agreement permits each of FelCor and MeriStar to pay dividends
in the ordinary and normal course of business, with record and payment dates
that are consistent with its past practice, not to exceed the last dividend paid
by it. See "Comparative Per Share Market Prices and Dividend Information."
In addition, each of FelCor and MeriStar will authorize a partial quarterly
dividend, with the record date being the closing of the merger, covering the
period between the last regular quarterly dividend until the closing date. The
partial dividend may not be paid without FelCor's consent if the closing date of
the merger occurs within 15 days after the record date for a regularly-scheduled
dividend by FelCor. The amount of the partial dividend will be based on a
proportionate fraction of the last quarterly dividend of the party making the
partial dividend. The partial dividend is payable within 30 days after the
closing of the merger.
MeriStar must also declare a final dividend in order to comply with the
distribution requirement in Section 857(a)(1) of the Internal Revenue Code. This
dividend would have the same record and payment dates as any partial quarterly
dividend paid by MeriStar. The record and payment dates for any partial
quarterly dividend or additional dividend paid by MeriStar may be accelerated,
by the mutual agreement of FelCor and MeriStar.
All other dividend payments by FelCor and MeriStar are prohibited by the
merger agreement.
EXCHANGE OF STOCK CERTIFICATES
Exchange Agent
In connection with the merger, all MeriStar stock certificates will be
canceled. As soon as practicable after the closing of the merger, FelCor is
required to deposit with an exchange agent common stock certificates and cash in
the amount required by the merger agreement. FelCor expects to make this deposit
within five business days after the effective date of the merger. Following the
merger, FelCor will cause the exchange agent to mail to each record holder of
MeriStar common stock a letter of transmittal with instructions on how to
exchange MeriStar common stock certificates for the cash merger consideration
and certificates representing shares of FelCor common stock. Upon surrender by a
MeriStar stockholder of its MeriStar stock certificates to the exchange agent,
the MeriStar stockholder will be entitled to receive a certificate representing
that number of whole shares of FelCor common stock and a cash payment, which may
include an amount instead of a fractional share, if any, plus dividends, if any,
to which the
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stockholder is entitled in the merger. MERISTAR STOCKHOLDERS SHOULD NOT ENCLOSE
STOCK CERTIFICATES WITH THEIR PROXY CARDS.
Fractional Shares
The exchange agent will pay each MeriStar stockholder for each fraction of
a share of FelCor common stock to which it would be entitled an amount in cash
equal to its pro rata share of the net proceeds from the sale of all of the
fractional shares or, at FelCor's option, an amount equal to the product of the
fraction of a share times the average closing price of FelCor common stock on
the NYSE for the ten consecutive trading days ending two trading days prior to
the date of determination.
Lost Stock Certificates
If MeriStar stock certificates have been lost, stolen or destroyed,
MeriStar stockholders will only be entitled to obtain shares of FelCor common
stock and associated cash payments by providing an affidavit of loss and, if
required, posting a bond in an amount sufficient to protect FelCor against
claims related to the lost, stolen or destroyed MeriStar certificates.
REPRESENTATIONS AND WARRANTIES
FelCor, together with FelCor Partnership, and MeriStar, together with
MeriStar Partnership, have made customary representations and warranties to each
other in the merger agreement, relating, among other things, to:
- their organization, the organization of their subsidiaries, their charter
documents, their good standing and similar corporate matters;
- their capital structure;
- their authority to deliver and execute the merger agreement, its legal
force and effect and the absence of conflicts between the agreement and
their charter documents, the material contracts they entered into, and
the laws applicable to them;
- governmental filings and consents in relation to the merger agreement;
- the absence of changes or events that have had material adverse effects,
including the unavailability to FelCor of senior unsecured note financing
for the merger that is deemed to be economically prudent;
- the disclosure of changes or events that have had material adverse
effects in SEC filings and schedules to the merger agreement;
- litigation issues;
- real estate, property, insurance, franchise and property management
issues;
- expected capital budgets;
- employee benefit plans and labor matters;
- tax matters, including qualification as a REIT, "golden parachute"
payments and qualification of the merger as a reorganization under the
Internal Revenue Code;
- payments to employees, officers and directors;
- brokers' fees and expenses;
- material contracts and debt instruments;
- environmental matters;
- compliance with laws;
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- opinions of financial advisors;
- inapplicability of the Maryland Business Combination Act and the Maryland
Control Share Acquisition Act;
- information supplied for inclusion in the merger proxy statement and
registration statement;
- the absence of any requirement to be registered under the Investment
Company Act of 1940; and
- votes required to approve the merger.
MeriStar and MeriStar Partnership have made additional representations and
warranties to FelCor and FelCor Partnership relating to:
- registration rights relating to MeriStar securities; and
- related-party agreements.
None of the representations and warranties made in the merger agreement
will survive the closing of the merger.
TREATMENT OF MERISTAR EMPLOYEES, STOCK-BASED COMPENSATION AND OTHER BENEFIT
PLANS
FelCor has agreed that, after the effective time of the merger, it will pay
severance and bonuses to approximately 40 legal, clerical, administrative and
accounting employees of MeriStar and MeriStar Partnership, subject to an
aggregate limitation of $2.05 million for persons not entitled to severance
payments under separate employment agreements, unless the employee does not
continue in good faith to perform his or her duties through the closing date or
is employed by FelCor or by MeriStar Hotels & Resorts with substantially the
same compensation and duties as he or she had as of May 9, 2001. The severance
payments to be paid to employees under their employment agreements are described
above under "Interests of Certain Persons in the Merger and Partnership
Merger -- Interests of MeriStar's Directors and Officers."
At the effective time of the merger, each option to purchase shares of
MeriStar common stock will become an option to purchase FelCor common stock. The
number of shares purchasable under the new FelCor stock option will be the
number of shares purchasable under the MeriStar option times 0.784. The exercise
price per share of the option will be the exercise price per share of MeriStar
common stock under the MeriStar option minus $4.60, divided by 0.784. Generally,
the completion of the merger will cause all unvested MeriStar stock options to
vest and become exercisable. Employees retained by FelCor will be required to
waive that vesting of their options. The options held by MeriStar employees who
do not continue in the employ of the combined company generally will expire 90
days after the completion of the merger.
Each employee of MeriStar that is retained by FelCor will be eligible to
participate in each FelCor benefit plan that FelCor, in its sole discretion,
determines to be similar to a plan of MeriStar in which the retained former
MeriStar employee participated prior to the merger, and at the level of
similarly situated employees of FelCor. FelCor may also determine that a
retained former MeriStar employee should remain a participant in an existing
MeriStar plan after the effective time of the merger. Generally, each retained
former MeriStar employee will receive credit for his or her service with
MeriStar for purposes of eligibility and vesting under FelCor plans in which
they are designated as eligible to participate. FelCor may impose conditions
that it, in its sole discretion, will reasonably determine are necessary or
appropriate to insure a retained former MeriStar employee does not receive a
duplication of benefits. FelCor has the right to direct MeriStar to terminate
its employee stock purchase plan and any other benefit plans, effective as of
the effective time of the merger.
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CERTAIN COVENANTS
Interim Operations
Under the merger agreement, FelCor and MeriStar have formed an interim
transactions committee composed of one representative of FelCor and one
representative of MeriStar. The parties have agreed that between the time the
merger agreement was executed until the effective time of the merger, except
for:
- transactions provided in the merger agreement or a disclosure schedule to
the merger agreement;
- transactions that are consented to by the other party; or
- transactions approved by the interim transactions committee,
each party and its subsidiaries will:
- conduct its business in the ordinary course and in the same manner as
past practice;
- preserve its business organization and goodwill intact and use its
reasonable efforts to keep its employees;
- not acquire or construct any additional real property;
- not encumber assets or incur indebtedness, except under its revolving
credit facility as in effect on the date the merger agreement was
executed;
- not amend its charter or bylaws, the partnership agreement or the
organizational documents of any subsidiary;
- make no change in the equity interests of itself or its subsidiaries,
other than
- the exercise of options set forth in a schedule to the merger agreement,
- the exchange or redemption of outstanding units of its operating
partnership under existing agreements governing those exchanges and
redemptions, or
- the conversion of outstanding convertible notes, if any;
- not grant rights, options or warrants to acquire equity interests in
itself or its subsidiaries;
- not authorize or pay a dividend or other payments related to common stock
or partnership units except for the dividends described above under the
caption "Dividends Prior to Closing";
- not sell, lease, subject to liens or transfer any material properties
except for leases of rental units and other properties entered into in
the ordinary course of business;
- not make or authorize any material expenditures, including capital
expenditures, individually, in excess of $500,000, or in the aggregate,
in excess of $1,000,000, except as disclosed in its current budget and
schedule attached to the merger agreement;
- not settle any stockholder derivative or class action suit in connection
with the transactions contemplated by the merger agreement;
- not enter into or amend any capital expenditures or employment,
compensation or severance agreements with any director, officer, employee
or affiliate;
- confer with the other party regularly on any material transactions or
material operational matters;
- promptly notify the other party of any material change in its business,
results of operations, financial condition or prospects;
- continue to maintain its accounting records in accordance with GAAP and
not change in any material manner, any methods of accounting, other than
actions in the ordinary course of business and consistent with past
practice or as required under applicable law or GAAP;
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- not make or rescind any material tax election that would have a material
adverse effect on it, unless otherwise required by law or necessary to
maintain status as a REIT or partnership;
- not change the ownership of any subsidiary; and
- promptly notify the other party of any suit or similar action against it
or one of its subsidiaries, where there is a reasonable possibility of a
material adverse effect.
MeriStar and its subsidiaries have also agreed to:
- not adopt any new employee benefit plan or amend any existing plans,
except as required by law or as would not be more favorable to
participants;
- continue to maintain all material properties in a manner consistent with
past practices;
- maintain all licenses and permits material to the business of any
MeriStar property or as required by any governmental entity administering
relevant laws;
- not make any loans, advances, capital contributions or other investments
in any other entity except for investments in wholly-owned subsidiaries
which currently exist or expense advances to employees in the ordinary
course of business in accordance with past practice or as otherwise
permitted by the merger agreement; and
- not permit any change to any existing material contract in a manner
adverse to FelCor without the approval of FelCor or the interim
transactions committee.
Non-Solicitation of Specified Acquisition Proposals
Each of FelCor and MeriStar is subject to substantially identical
non-solicitation provisions in the merger agreement.
Each party and its subsidiaries and their respective directors, officers
and other representatives may not solicit, enter into, or participate in any
negotiations with or provide any nonpublic information to a third party related
to, any specified acquisition proposal, which is:
- a merger, consolidation, share exchange, business combination or other
similar transaction involving it or its subsidiaries; or
- a direct or indirect acquisition of more than a 10% equity interest in
any voting securities of the party or more than 10% of the consolidated
assets of the party.
Each party may furnish information to, and engage in discussions with, any
third party who delivers an unsolicited specified acquisition proposal if a
disinterested majority of its board of directors determines in good faith after
receipt of advice from outside counsel:
- that furnishing the information and engaging in the discussions is
required by the duties of the board of directors under Maryland law; and
- that the third party making the specified acquisition proposal has the
ability to complete a superior proposal.
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The board of directors of each party may not withdraw or modify its
recommendation of the merger to the stockholders unless that party receives a
superior proposal. In order for a specified acquisition proposal to be a
superior proposal for purposes of the merger agreement:
- a majority of the party's disinterested directors must determine in good
faith, after consultation with an independent financial advisor, and
taking into account all relevant factors, that the proposal is more
favorable to that party and its stockholders; and
- financing for the proposal, to the extent required, is already fully
committed, or a majority of the party's disinterested directors
determines in good faith, after consultation with an independent
financial advisor, that the proposal is reasonably capable of being
financed.
Each party must advise the other orally and in writing of any specified
acquisition proposal or any inquiry that could reasonably be expected to lead to
a specified acquisition proposal. Each party must give the other one day's
advance notice of any information provided to the third party making the
proposal, and at least three days' advance notice of any agreement to be entered
into with any third party making the proposal.
Other Covenants
Each of FelCor and MeriStar has agreed, among other things, to:
- afford the other party and its representatives access to its properties,
books and records;
- furnish copies of public filings to the other party;
- file all necessary documentation with governmental authorities and
self-regulatory organizations that may be necessary or appropriate to
complete the transactions contemplated by the merger agreement;
- cooperate with the other party with respect to public disclosures and
news releases with respect to the merger agreement and the transactions
contemplated by the merger agreement;
- not take any actions that would or are reasonably likely to adversely
affect the qualification of the merger as a reorganization under Section
368(a)(1)(A) of the Internal Revenue Code and use all reasonable efforts
to achieve that qualification;
- file, as soon as is practicable, an exchange offer registration statement
with respect to its outstanding debt securities issued in early 2001, to
use commercially reasonable efforts to have the registration statements
declared effective and to use commercially reasonable efforts to complete
the related exchange offer;
- cooperate in the preparation of documents relating to transfer taxes;
- continue to comply with the terms of the existing confidentiality
agreement, dated March 7, 2001;
- continue in the ordinary and normal course of business to pursue the
completion of existing capital expenditure projects in accordance with
budgets provided to the other party; and
- not take, and use commercially reasonable efforts to cause its
subsidiaries not to take, actions that would cause any of its
representations and warranties to be untrue in any material respect or to
cause any of the conditions to the merger not to be satisfied, except as
described above under the caption "Non-Solicitation of Competing
Transactions."
FelCor has agreed to:
- file all reports required to be filed by it under the Exchange Act to
permit sales under Rule 145(d)(1) under the Securities Act of stock
received by MeriStar affiliates in the merger;
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- deliver to MeriStar, prior to July 12, 2001,
- a commitment for financing of at least $500 million for a term not less
than seven years and on other terms reasonably acceptable to FelCor and
MeriStar, or
- evidence that holders of a majority in aggregate outstanding principal
amount of the holders of MeriStar's 9% senior notes due 2008 and 9 1/8%
senior notes due 2011 have waived their right to tender their notes as a
result of the completion of the merger;
- file, as soon as practicable after the date of the merger agreement, a
shelf registration statement on Form S-3 covering resales of its common
stock that may be issued to former holders of MeriStar Partnership units
upon redemption of their FelCor Partnership units and to use its
reasonable best efforts to have the registration statement declared
effective and remain effective until all of that common stock is eligible
to be sold under Rule 144(k) under the Securities Act or has been
otherwise sold;
- pay, prior to or at the effective time of the merger, the applicable
MeriStar lenders the amount necessary to discharge and terminate the
MeriStar senior secured credit facility, which as of March 31, 2001, was
$442.0 million in principal amount, plus accrued interest;
- use commercially reasonable efforts to cause the shares of common stock
to be issued in the merger to be listed, prior to the effective time of
the merger, on the NYSE, subject to official notice of issuance; and
- assume all outstanding debt that MeriStar has issued under indentures
qualified under the Trust Indenture Act of 1939, which, if none of this
debt is tendered in the repurchase offer that FelCor will make after
completion of the merger, would include $154.3 million in principal
amount of convertible subordinated notes and $205.0 million in principal
amount of subordinated notes.
In addition, FelCor Partnership has also agreed to:
- assume all outstanding debt that MeriStar Partnership has issued under
indentures qualified under the Trust Indenture Act, which, if none of
this debt is tendered in the repurchase offer that FelCor or FelCor
Partnership will make after completion of the merger, would include $500
million in principal amount of MeriStar Partnership's senior notes; and
- use the traditional method contained in the Treasury Regulations under
Section 704(c) of the Internal Revenue Code with respect to all
properties contributed to FelCor Partnership by MeriStar Partnership in
the merger.
MeriStar has agreed to:
- provide to FelCor, prior to the effective time of the merger, a list of
all of its "affiliates," as used in Rule 145(c) and (d) under the
Securities Act, and to use its best efforts to cause those persons to
deliver to FelCor, prior to the effective time of the merger, an
agreement restricting the transfer of the shares of FelCor common stock
that person receives in the merger;
- cause the directors, managers and officers of each of its subsidiaries to
resign from their positions as of the effective time of the merger;
- use reasonable commercial efforts to provide information to potential
sources of financing to FelCor and to cooperate with FelCor in obtaining
that financing;
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- deliver to FelCor, on or before the date the merger is scheduled to
close, a fully executed agreement with MeriStar Hotels & Resorts, in form
reasonably satisfactory to FelCor, amending the revolving credit
agreement between MeriStar Partnership and MeriStar Hotels & Resorts as
specified in a schedule to the merger agreement and use its best efforts
to obtain consent to the amendment; and
- request and obtain an estoppel certificate regarding the status of the
management agreements between MeriStar and MeriStar Hotels & Resorts.
In addition, MeriStar Partnership has agreed to complete promptly the audit
of its financial statements for the 1998, 1999 and 2000 fiscal years.
Indemnification and Insurance
After the merger is completed, FelCor has agreed to preserve all rights to
indemnification existing as of the date of the merger agreement in favor of any
directors or officers of MeriStar or its subsidiaries.
Additionally, FelCor has agreed to extend for six years after the closing
of the merger the liability insurance maintained by MeriStar for its directors
and officers. FelCor will also continue in effect any indemnification agreements
between MeriStar or its subsidiaries and any party, which were existing as of
the date of the merger agreement.
CONDITIONS TO THE MERGER
Conditions to FelCor's and MeriStar's Obligations to Complete the Merger
The respective obligations of FelCor and MeriStar to complete the
transactions contemplated by the merger agreement are subject to the
satisfaction or waiver of the following conditions prior to the effective time
of the merger:
- all the proposals described in this joint proxy statement/prospectus
shall have been approved by the requisite stockholder votes;
- the shares of FelCor common stock to be issued in the merger shall have
been authorized for listing on the NYSE, subject to official notice of
issuance;
- FelCor and MeriStar shall have received an opinion from Hunton & Williams
and Paul, Weiss, Rifkind, Wharton & Garrison as to the REIT status of
FelCor and MeriStar, respectively, and the partnership status of FelCor
Partnership and MeriStar Partnership, respectively;
- FelCor and MeriStar, respectively, shall have received an opinion from
Jenkens & Gilchrist, a Professional Corporation, and Paul, Weiss,
Rifkind, Wharton & Garrison, respectively, as to the qualification of the
merger as a reorganization under the Internal Revenue Code;
- no federal legislative or regulatory change shall have been enacted that
would cause FelCor or MeriStar to cease to qualify as a REIT for federal
income tax purposes;
- the registration statement of which this joint proxy statement/prospectus
is a part shall have been declared effective under the Securities Act, no
stop order suspending the effectiveness of the registration statement
shall have been issued, and no proceedings for that purpose shall have
been initiated or be threatened by the SEC; and
- FelCor shall have received all necessary "blue sky" authorizations for
the issuance of the FelCor common stock in the merger.
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Additional Conditions to FelCor's Obligations to Complete the Merger
The obligations of FelCor to effect the merger and complete the
transactions contemplated by the merger agreement are also subject to the
satisfaction or waiver by FelCor of the following conditions at or prior to the
effective time of the merger:
- all of MeriStar's representations and warranties shall be true and
correct in all material respects;
- MeriStar shall have complied in all material respects with its
obligations under the merger agreement;
- MeriStar shall not have experienced a material adverse change;
- all non-governmental consents and waivers under MeriStar's material
agreements that are required to complete the merger shall have been
obtained, except as would not have a material adverse effect on FelCor or
MeriStar;
- FelCor shall have received an executed copy of an affiliate agreement
from each person deemed to be an "affiliate" of MeriStar under Rule 145
of the Securities Act; and
- MeriStar shall have fully performed all its obligations under the merger
agreement relating to its agreement to amend its revolving credit
agreement with MeriStar Hotels & Resorts.
Additional Conditions to MeriStar's Obligation to Complete the Merger
The obligations of MeriStar to effect the merger and complete the
transactions contemplated by the merger agreement are also subject to the
satisfaction or waiver by MeriStar of the following conditions at or prior to
the effective time of the merger:
- all of FelCor's representations and warranties shall be true and correct
in all material respects;
- FelCor shall have complied in all material respects with its obligations
under the merger agreement;
- FelCor shall not have experienced a material adverse change; and
- all non-governmental consents and waivers under FelCor's material
agreements that are required to complete the merger shall have been
obtained, except as would not have a material adverse effect on MeriStar
or FelCor.
Waiver of Conditions
FelCor or MeriStar could decide to complete the merger even though one or
more conditions were not satisfied. All of the conditions of the merger can be
waived except for the following conditions:
- the requirements that FelCor and MeriStar common stockholders approve the
merger;
- the requirement that there be no court order or law preventing the
closing of the merger or the partnership merger; and
- the requirements for receipt of tax opinions regarding the REIT status of
MeriStar and FelCor and the qualification of the merger as a
reorganization under the Internal Revenue Code.
The first two conditions above may not be waived under applicable law. The
parties have agreed not to waive the receipt of the required tax opinions.
Whether any of the other conditions would be waived would depend on the
facts and circumstances as determined by the reasonable business judgment of the
board of directors of FelCor or MeriStar. If FelCor or MeriStar waived
compliance with one or more of the other conditions and the condition was deemed
material to a vote of FelCor and/or MeriStar common stockholders, FelCor and/or
MeriStar would have to resolicit stockholder approval, as applicable, before
closing the merger.
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If, prior to the special meetings, either FelCor or MeriStar waives
compliance with any of the material conditions set forth in the merger agreement
or if the parties elect to amend the merger agreement in any material fashion,
each party will promptly file with the SEC a current report on Form 8-K
describing the nature of the waiver or the amendment and issue a press release
doing the same.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated by mutual written consent of FelCor
and MeriStar.
In addition, either FelCor or MeriStar may terminate the merger agreement
if:
- the proposals described in this joint proxy statement/prospectus are not
approved by the required vote of stockholders of MeriStar or the required
vote of stockholders of FelCor;
- the merger has not occurred on or before October 31, 2001, except that
the right to terminate the merger agreement will not be available to the
party whose failure to fulfill any obligation under the merger agreement
is the cause of the delay;
- any order, injunction or decree preventing the merger has been entered by
any court or governmental entity and is final and nonappealable; or
- the average closing price of FelCor common stock on the NYSE for any ten
consecutive trading days is less than $18.40 per share.
FelCor may terminate the merger agreement if:
- MeriStar's board of directors:
- withdraws or modifies its approval or recommendation of the merger or
the merger agreement to its stockholders in a manner adverse to FelCor
in connection with a specified acquisition proposal,
- approves or recommends a specified acquisition proposal, or
- resolves to do any of the above;
- prior to MeriStar's stockholders meeting, MeriStar enters into an
agreement, other than a confidentiality agreement, with respect to a
specified acquisition proposal;
- prior to MeriStar's stockholders meeting, FelCor's board of directors
withdraws or modifies its approval or recommendation of the merger or the
merger agreement in connection with, or approves or recommends, a
superior acquisition proposal and pays the required termination fee; or
- MeriStar breaches any representation, warranty, covenant, obligation or
agreement in the merger agreement, so that the related condition to
closing could not be satisfied by October 31, 2001.
MeriStar may terminate the merger agreement if:
- FelCor's board of directors:
- withdraws or modifies its approval or recommendation of the merger or
the merger agreement to its stockholders in a manner adverse to MeriStar
in connection with a specified acquisition proposal,
- approves or recommends a specified acquisition proposal, or
- resolves to do any of the above;
- prior to FelCor's stockholders meeting, FelCor enters into an agreement,
other than a confidentiality agreement, with respect to a specified
acquisition proposal;
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- prior to FelCor's stockholders meeting, MeriStar's board of directors
withdraws or modifies its approval or recommendation of the merger or the
merger agreement in connection with, or approves or recommends, a
superior acquisition proposal and pays the required termination fee; or
- FelCor breaches any representation, warranty, covenant, obligation or
agreement in the merger agreement, so that the related condition to
closing could not be satisfied by October 31, 2001.
EXPENSES AND TERMINATION FEES
Payment of Expenses of the Merger Generally
Except as otherwise stated in the merger agreement, all expenses incurred
in the merger will be paid by the party incurring the expenses.
Payments from MeriStar to FelCor upon Termination
MeriStar will be required to pay FelCor a $35 million termination fee and
up to $5 million in out-of-pocket expenses of FelCor if the merger agreement is
terminated:
- by FelCor because MeriStar's board of directors:
- withdrew or modified its approval or recommendation of the merger or the
merger agreement to its stockholders in a manner adverse to FelCor in
connection with a specified acquisition proposal,
- approved or recommended a specified acquisition proposal, or
- resolved to do any of the above;
- by FelCor because MeriStar entered into an agreement, other than a
confidentiality agreement, with respect to a specified acquisition
proposal;
- by MeriStar because MeriStar's board of directors withdrew or modified
its approval or recommendation of the merger or the merger agreement in
connection with, or approved or recommended, a superior acquisition
proposal; or
- by FelCor because MeriStar breached any representation, warranty,
covenant, obligation or agreement set forth in the merger agreement, so
that the related condition to closing could not be satisfied by October
31, 2001.
If the merger agreement is terminated because the stockholders of MeriStar
fail to give all necessary approvals, MeriStar must pay FelCor up to $5 million
of FelCor's out-of-pocket transaction expenses.
Payments from FelCor to MeriStar Upon Termination
FelCor will be required to pay MeriStar a $35 million termination fee and
up to $5 million in out-of-pocket expenses of MeriStar if the merger agreement
is terminated:
- by MeriStar because FelCor's board of directors:
- withdrew or modified its approval or recommendation of the merger or the
merger agreement to its stockholders in a manner adverse to MeriStar in
connection with a specified acquisition proposal,
- approved or recommended a specified acquisition proposal, or
- resolved to do any of the above;
- by MeriStar because FelCor entered into an agreement, other than a
confidentiality agreement, with respect to a specified acquisition
proposal;
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- by FelCor because FelCor's board of directors withdrew or modified its
approval or recommendation of the merger or the merger agreement in
connection with, or approved or recommended, a superior acquisition
proposal; or
- by MeriStar because FelCor breached any representation, warranty,
covenant, obligation or agreement set forth in the merger agreement, so
that the related condition to closing could not be satisfied by October
31, 2001.
If the merger agreement is terminated because the stockholders of FelCor
fail to give all necessary approvals, FelCor must pay MeriStar up to $5 million
of MeriStar's out-of-pocket transaction expenses.
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COMPARATIVE PER SHARE MARKET PRICES AND DIVIDEND INFORMATION
MARKET INFORMATION
FelCor and MeriStar common stock are each listed on the New York Stock
Exchange. FelCor's ticker symbol on that exchange is "FCH" and MeriStar's ticker
symbol on that exchange is "MHX." The following table shows, for the periods
indicated, the high and low sales prices per share of FelCor common stock and
the high and low closing prices per share of MeriStar common stock as reported
on the New York Stock Exchange composite tape, and the cash dividends paid per
share.
FELCOR COMMON STOCK MERISTAR COMMON STOCK
-------------------------------- --------------------------------
CASH CASH
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
---- --- --------- ---- --- ---------
1998
First Quarter.................. $38 5/16 $34 15/16 $0.55
Second Quarter................. 37 5/16 31 3/16 0.55
Third Quarter.................. 32 1/4 20 0.55 $21 3/8 $14 9/16
Fourth Quarter................. 24 3/16 18 3/16 0.895(1) 20 1/4 12 15/16 $0.318(2)
1999
First Quarter.................. $24 11/16 $21 5/8 $0.55 $19 3/8 $16 1/6 $0.505
Second Quarter................. 26 1/8 20 0.55 24 1/16 18 7/16 0.505
Third Quarter.................. 21 5/8 16 11/16 0.55 22 5/16 15 1/4 0.505
Fourth Quarter................. 18 3/8 16 1/4 0.55 16 3/4 14 3/4 0.505
2000
First Quarter.................. $18 3/4 $16 1/2 $0.55 $17 7/16 $15 1/16 $0.505
Second Quarter................. 22 1/16 17 11/16 0.55 21 1/64 17 5/8 0.505
Third Quarter.................. 23 3/4 19 11/16 0.55 22 13/16 20 1/4 0.505
Fourth Quarter................. 24 1/2 21 1/2 0.55 20 5/8 18 3/8 0.505
2001
First Quarter.................. $24.94 $22.14 $0.55 $22.00 $19.08 $0.505
Second Quarter................. 24.75 20.90 0.55 23.75 18.50 0.505
Third Quarter (through
)......................
- ---------------
(1) Includes a special one-time dividend of $0.345 per share, representing
accumulated earnings and profits of Bristol prior to its merger in July 1998
with FelCor.
(2) No dividends were declared prior to August 3, 1998, the date of the merger
between CapStar Hotel Company and American General Hospitality Corporation,
which created MeriStar.
On May 9, 2001, the last full trading day prior to the public announcement
of the proposed merger, the last reported closing price was $22.10 for FelCor
common stock and $21.45 for MeriStar common stock. On , 2001, the
last reported closing price was $ for FelCor common stock and $ for
MeriStar common stock. WE URGE YOU TO OBTAIN CURRENT MARKET QUOTATIONS FOR
FELCOR AND MERISTAR COMMON STOCK BEFORE MAKING ANY DECISION ON THE MERGER.
Following the merger, FelCor common stock will be traded on the New York
Stock Exchange under the ticker symbol "FCH."
DIVIDEND INFORMATION
The dividends described above represent approximately a 0% return of
capital in 2000 for both FelCor and MeriStar and an approximate 7.2% return of
capital for FelCor and a 0% return of capital for MeriStar in 1999. In order to
maintain its qualification as a REIT, each year, each of FelCor and MeriStar
must distribute dividends to its stockholders in an aggregate amount equal to at
least 90%, or 95% prior to January 1, 2001, of its taxable income, which does
not include net capital gains. For the years ended December 31, 2000 and
December 31, 1999, FelCor had annual dividends totaling $2.20 per
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common share, of which only $2.09 and $1.84 per share, respectively, were
required to satisfy the then applicable 95% REIT distribution test in the
respective years. For the years ended December 31, 2000 and December 31, 1999,
MeriStar had annual dividends totaling $2.02 per common share, of which only
$1.40 and $0.64 per share, respectively, were required to satisfy the then
applicable 95% REIT distribution tests in the respective years. Under some
circumstances FelCor or MeriStar may be required to make distributions in excess
of cash available for distribution in order to meet the REIT distribution
requirement. In that event, FelCor or MeriStar presently would expect to borrow
funds, or to sell assets for cash, to the extent necessary to obtain cash
sufficient to make the dividends required to retain its qualification as a REIT
for federal income tax purposes.
Each of MeriStar and FelCor currently anticipates that it will maintain at
least the current dividend rate for the immediate future, unless actual results
of operations, economic conditions or other factors differ from its current
expectations. Future dividends, if any, paid by either company will be at the
discretion of its board of directors and will depend on its actual cash flow,
its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Internal Revenue Code and any
other facts as its board of directors deems relevant.
The merger agreement permits FelCor and MeriStar to pay, prior to the
closing of the merger, regular quarterly cash dividends to their stockholders.
The merger agreement requires both FelCor and MeriStar to declare a partial
quarterly dividend with a record date on the closing date of the merger unless
the merger closes within 15 days after the record date for a regularly scheduled
dividend. The respective dividends will be a fraction of each company's latest
regular quarterly dividends based on the number of days since the last dividend
record date. In addition, MeriStar is required to declare an additional special
dividend, having the same record date, if necessary to satisfy the REIT tax
requirements to distribute 90% of its taxable income for its shortened tax year
ending with the completion of the merger. The record and payment dates of any
partial quarterly or additional dividends paid by MeriStar may be accelerated by
the mutual agreement of FelCor and MeriStar.
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The following unaudited Pro Forma Combined Statements of Operations for the
three months ended March 31, 2001 and the year ended December 31, 2000 are based
in part upon the Consolidated Statements of Operations of FelCor, DJONT
Operations, L.L.C., or DJONT, Bristol Hotels & Resorts Tenant Companies, or
Bristol Tenant, and MeriStar for the three months ended March 31, 2001 and the
year ended December 31, 2000 incorporated by reference, except for the
consolidated statement of operations of Bristol Tenant for the three months
ended March 31, 2001 which was provided by Bristol Tenant.
The Pro Forma Combined Statements of Operations for the three months ended
March 31, 2001 and the year ended December 31, 2000 assumes that all the
following occurred on January 1 of the fiscal period presented:
- FelCor's acquisition of DJONT, effective January 1, 2001, for 416,667
units of limited partnership interest in FelCor Partnership valued at
approximately $10 million;
- FelCor's acquisition of 12 leases held by Bass, effective January 1,
2001, for 413,585 shares of FelCor common stock valued at approximately
$10 million;
- FelCor's acquisition of the remaining 88 leases held by Bass, effective
July 1, 2001, and the recording of a lease termination expense of
approximately $125 million in the third quarter of 2001 and a
corresponding liability of approximately $125 million that will be
amortized over the term of the management agreements with respect to
these hotels;
- the assignment of the leases from MeriStar Hotels & Resorts, Inc. to
taxable REIT subsidiaries, or TRSs, of MeriStar; and
- the completion of the MeriStar merger and related financings and the
application of the net proceeds.
In the opinion of FelCor's management, all material adjustments necessary
to reflect the effects of the preceding transactions have been made. The
unaudited Pro Forma Combined Statement of Operations is presented for
illustrative purposes only and is not necessarily indicative of what the actual
results of operations would have been had the MeriStar merger and the other
transactions described above occurred on the indicated dates, nor do they
purport to represent FelCor's results of operations for future periods.
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FELCOR LODGING TRUST INCORPORATED
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
FELCOR MERISTAR MERGER
POST RMA HISTORICAL ADJUSTMENTS PRO FORMA
(A) (B) (C) TOTAL
-------- ---------- ----------- ---------
Revenues:
Room and suite revenue................................ $322,929 $200,380 $523,309
Food and beverage revenue............................. 62,592 71,291 133,883
Other operating departments........................... 15,973 22,471 38,444
Percentage lease revenue.............................. 5,384 5,384
Retail space rental and other revenue................. 6,092 3,158 9,250
-------- -------- --------
Total revenues.......................................... 407,586 302,684 710,270
-------- -------- --------
Expenses:
Hotel operating expenses:
Room................................................ 69,583 45,722 115,305
Food and beverage expenses.......................... 47,577 51,404 98,981
Other operating departments......................... 15,542 12,507 28,049
Management and incentive fees......................... 13,510 7,327 20,837
Other property operating costs........................ 104,682 77,929 182,611
Property taxes, insurance, and other.................. 44,182 18,387 62,569
Corporate expenses.................................... 2,884 2,359 5,243
Depreciation.......................................... 39,808 28,374 $(5,936)(D) 62,246
-------- -------- ------- --------
Total operating expenses................................ 337,768 244,009 (5,936) 575,841
-------- -------- ------- --------
Operating income........................................ 69,818 58,675 5,936 134,429
-------- -------- ------- --------
Interest expense, net................................... 41,740 31,552 4,779(E) 78,071
Swap termination costs.................................. 9,297 9,297
Writedown of investments................................ 2,112 2,112
Other................................................... 771 512 1,283
-------- -------- ------- --------
Income before equity in income from unconsolidated
entities, minority interests, and gain (loss) on sale
of assets............................................. 27,307 15,202 1,157 43,666
Equity in income from unconsolidated entities........... 2,150 2,150
Minority interests...................................... (5,252) (1,104) (135)(F) (6,491)
Gain (loss) on sale of assets, net...................... 2,473 (1,059) 1,414
-------- -------- ------- --------
Net income before extraordinary items................... 26,678 13,039 1,022 40,739
Preferred distributions................................. (6,150) (2,625)(G) (8,775)
-------- -------- ------- --------
Net income before extraordinary items applicable to
common shareholders................................... $20,528 $ 13,039 $(1,603) $ 31,964
======== ======== ======= ========
Basic per share data:
Net income before extraordinary items applicable to
common shareholders................................. $ .39 $ 0.37
======== ========
Weighted average shares outstanding................... 52,595 34,861(H) 87,456
======== ======= ========
Diluted per share data:
Net income before extraordinary items applicable to
common shareholders................................. $ .39 $ 0.36
======== ========
Weighted average shares outstanding................... 53,062 35,752(H) 88,814
======== ======= ========
See notes to pro forma combined statements of operations.
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FELCOR LODGING TRUST INCORPORATED
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
FELCOR MERISTAR MERGER
POST RMA POST RMA ADJUSTMENTS PRO FORMA
(I) (J) (C) TOTAL
---------- ---------- ----------- ----------
Revenues:
Room and suite revenue........................... $1,309,300 $ 782,288 $2,091,588
Food and beverage revenue........................ 261,551 290,792 552,343
Other operating departments...................... 82,969 84,660 167,629
Percentage lease revenue......................... 20,925 20,925
Retail space rental and other revenue............ 8,102 18,517 26,619
---------- ---------- ----------
Total revenues..................................... 1,661,922 1,197,182 2,859,104
---------- ---------- ----------
Expenses:
Hotel operating expenses:
Room.......................................... 316,204 184,791 500,995
Food and beverage expenses.................... 193,851 209,962 403,813
Other operating departments................... 36,250 48,263 84,513
Management and incentive fees.................... 60,653 28,943 89,596
Other property operating costs................... 432,808 302,347 735,155
Property taxes, insurance, and other............. 162,530 72,310 234,840
Corporate expenses................................. 12,256 9,445 21,701
Depreciation....................................... 161,836 107,362 $ (17,612)(D) 251,586
---------- ---------- ----------- ----------
Total operating expenses........................... 1,376,388 963,423 (17,612) 2,322,199
---------- ---------- ----------
Operating income................................... 285,534 233,759 17,612 536,905
---------- ---------- ----------
Interest expense, net.............................. 167,330 122,109 17,095(E) 306,534
Loss on assets held for sale....................... 63,000 63,000
Other.............................................. 5,001 2,028 7,029
---------- ---------- ----------- ----------
Income before equity in income from unconsolidated
entities, minority interests, and gain on sale of
assets........................................... 50,203 109,622 517 160,342
Equity in income from unconsolidated entities...... 12,170 12,170
Minority interests................................. (7,644) (10,240) (1,049)(F) (18,933)
Gains on sale of assets............................ 4,388 3,425 7,813
---------- ---------- ----------- ----------
Net income before extraordinary items.............. 59,117 102,807 (532) 161,392
Preferred distributions............................ (24,682) (10,500)(G) (35,182)
---------- ---------- ----------- ----------
Net income before extraordinary items applicable to
common shareholders.............................. $ 34,435 $ 102,807 $ (11,032) $ 126,210
========== ========== =========== ==========
Basic per share data:
Net income before extraordinary items applicable
to common shareholders........................ $ .62 $ 1.40
========== ==========
Weighted average shares outstanding........... 55,264 34,861(H) 90,125
========== =========== ==========
Diluted per share data:
Net income before extraordinary items applicable
to common shareholders........................ $ .62 $ 1.38
========== ==========
Weighted average shares outstanding........... 55,519 35,752(H) 91,271
========== =========== ==========
See notes to pro forma combined statements of operations.
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NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001,
AND THE YEAR ENDED DECEMBER 31, 2000
(UNAUDITED)
(A) Represents FelCor's historical results of operations, excluding
extraordinary items plus the pro forma effect of FelCor's acquisition of 88
hotel leases from Bass as if the acquisition occurred on January 1, 2001.
The computation is as follows:
FELCOR
FELCOR BRISTOL PRO FORMA POST RMA
HISTORICAL(1) TENANT(2) ADJUSTMENTS TOTAL
------------- --------- ----------- --------
Revenues:
Room and suite revenue............................. $192,227 $130,702 $322,929
Food and beverage revenue.......................... 27,652 34,940 62,592
Other operating departments........................ 11,612 4,361 15,973
Percentage lease revenue........................... 51,531 $(51,531)(3)
Retail space rental and other revenue.............. 2,722 3,370 6,092
-------- -------- -------- --------
Total revenues....................................... 285,744 173,373 (51,531) 407,586
-------- -------- -------- --------
Expenses:
Hotel operating expenses:
Room............................................. 38,230 31,353 69,583
Food and beverage expenses....................... 20,104 27,473 47,577
Other operating departments...................... 11,921 3,621 15,542
Management and incentive fees...................... 7,098 6,412(4) 13,510
Other property operating costs..................... 63,379 47,016 (5,713)(5) 104,682
Percentage lease expense........................... 57,221 (57,221)(3)
Property taxes, insurance, and other............... 37,978 6,204 44,182
Corporate expenses................................. 2,884 2,884
Depreciation....................................... 39,808 39,808
Lease termination costs............................ 36,226 (36,226)(6)
-------- -------- -------- --------
Total operating expenses............................. 257,628 172,888 (92,748) 337,768
-------- -------- -------- --------
Operating income..................................... 28,116 485 41,217 69,818
-------- -------- -------- --------
Interest expense, net................................ 39,356 2,384(7) 41,740
Other................................................ 639 132 771
-------- -------- -------- --------
Income (loss) before equity in income from
unconsolidated entities, minority interests, and
gain on sale of assets............................. (11,879) 353 38,833 27,307
-------- -------- -------- --------
Equity in income from unconsolidated entities........ 2,150 2,150
Minority interests................................... 450 (5,702)(8) (5,252)
Gain on sale of assets, net.......................... 2,473 2,473
-------- -------- -------- --------
Net income (loss) before extraordinary items......... (6,806) 353 33,131 26,678
Preferred distributions.............................. (6,150) (6,150)
-------- -------- -------- --------
Net income (loss) before extraordinary items
applicable to common shareholders.................. $(12,956) $ 353 $ 33,131 $ 20,528
======== ======== ======== ========
Basic per share data:
Net income (loss) before extraordinary items
applicable to common shareholders................ $ (0.25) $ 0.39
======== ========
Weighted average shares outstanding................ 52,595 52,595
======== ========
Diluted per share data:
Net income (loss) before extraordinary items
applicable to common shareholders................ $ (0.25) $ 0.39
======== ========
Weighted average shares outstanding................ 52,595 467(9) 53,062
======== ======== ========
- ---------------
(1)Represents the historical results of operations of FelCor for the three
months ended March 31, 2001, excluding extraordinary items. Effective January
1, 2001, with the enactment of the REIT Modernization Act, FelCor had
completed transactions that resulted in its newly formed taxable
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NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
subsidiaries acquiring leases for 96 hotels that were previously leased to
either DJONT or Bass plc ("Bass"), accordingly, the revenues and expenses
associated with these hotels are included in FelCor's historical consolidated
statement of operations for the three month period ended March 31, 2001.
(2)Represents the historical results of operations of FelCor hotels leased to
Bristol Tenant for the three months ended March 31, 2001, excluding
extraordinary items.
(3)Represents the elimination of historical percentage lease revenue and expense
between FelCor and Bristol Tenant. The difference between percentage lease
revenue and percentage lease expense generally relates to percentage lease
revenue that was deferred by FelCor under SAB 101.
(4)Represents the adjustment required to record the management fees at their
contractual rates less the portion of management fees classified as lease
termination costs. In the negotiation for the acquisition of the 88 leases
and the new long-term management contract, FelCor was able to effectively
finance the lease acquisition cost over the term of the management agreement,
by paying above market management fees. FelCor valued the lease termination
cost by comparing the management fees under the contract with similar
management contracts and the actual lease termination provision under the
leases. FelCor attributed $125 million to lease termination cost. The $125
million represents the net present value of the above market portion of the
management fees over the life of the management contracts. FelCor will
expense the $125 million on July 1, 2001 and record a related lease
termination liability. The liability will be reduced over the life of the
management contracts as cash payments are made to Bristol Tenant. For the
three months ended March 31, 2001, on a pro forma basis, FelCor would have
paid $10.3 million in cash to Bristol Tenant under the management contracts,
of which $6.4 million would be recorded as management fee expense, $2.4
million would be recorded as interest expense, and $1.5 million would reduce
the lease termination liability. The expense related to the $125 million
lease termination cost is not reflected in this pro forma income statement.
(5)Represents the elimination of historical franchise fees. These agreements
have been replaced with management contracts.
(6)Represents the elimination of lease termination costs associated with the
acquisition of DJONT and Bass leases.
(7)Represents the interest component of the lease termination liability.
(8)Represents the adjustment to record FelCor's minority interest holders share
of the revenues and expenses of the Bristol Tenant lessee and the proforma
adjustments.
(9)Represents the dilutive effect of historical FelCor stock options, which were
antidilutive on a historical basis but dilutive on a pro forma basis.
(B) Represents MeriStar's historical results of operations, excluding
extraordinary items. Effective January 1, 2001, because of the enactment of
the REIT Modernization Act, taxable REIT subsidiaries of MeriStar were
assigned the leases on 106 hotels that had previously been held by MeriStar
Hotels & Resorts, Inc. and entered into management contracts with MeriStar
Hotels & Resorts to manage these hotels. Accordingly, the related hotel
revenues, expenses and management fees are included in MeriStar's
historical results of operations for the three month period ended March 31,
2001. Certain reclassifications have been made to conform to the
presentation of FelCor's statements of operations.
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NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
(C) On May 10, 2001, FelCor and MeriStar announced that they had signed a
merger agreement, under which MeriStar will merge with and into FelCor, a
wholly-owned subsidiary of FelCor Partnership will merge with and into
MeriStar Partnership, and the limited partners of MeriStar Partnership,
other than FelCor and its subsidiaries, will exchange their interests in
MeriStar Partnership for interests in FelCor Partnership and, where
applicable, cash. Under the merger agreement, each holder of MeriStar
common stock will receive, for each share of MeriStar common stock, $4.60
in cash plus 0.784 of a share of FelCor common stock. Each holder of common
units and profits-only partnership units in MeriStar Partnership, other
than FelCor and its subsidiaries will receive, for each common unit and
profits-only unit, $4.60 in cash plus 0.784 of a common unit of FelCor
Partnership. Each holder of Class C preferred units in MeriStar Partnership
will receive, for each unit, $4.60 in cash plus 0.784 of a Series C
preferred unit in FelCor Partnership. Each holder of Class D preferred
units in MeriStar Partnership will receive, for each unit, one Series D
preferred unit in FelCor Partnership. Amounts represent adjustments to
record the merger and related transactions as if the merger had occurred on
January 1 of the fiscal period presented. FelCor common shares and common
units are valued at $22.10, the closing share price on the date of the
announcement. The calculation of the merger acquisition cost is as follows
(in thousands, except share and unit data):
Issuance of 34.861 million shares of FelCor common stock in
exchange for 44.5 million shares of MeriStar common
stock..................................................... $ 770,436
Issuance of 2.769 million FelCor Partnership common units in
exchange for 3.5 million MeriStar Partnership common and
profits-only units........................................ 61,202
Issuance of 755,954 FelCor Partnership Series C preferred
units in exchange for 964,227 MeriStar Partnership Class C
preferred units........................................... 16,707
Payment of $4.60 per share of MeriStar common stock and per
MeriStar Partnership common, Class C preferred and
profits-only units........................................ 225,227
Issuance of 392,157 FelCor Partnership Series D preferred
units in exchange for a like number of MeriStar
Partnership Class D preferred units....................... 8,690
Issuance of 3.6 million FelCor stock options based on a
0.784 exchange ratio in exchange for MeriStar stock
options, assuming all MeriStar option holders are not
retained by FelCor........................................ 10,600
Assumption of MeriStar's liabilities........................ 1,887,451
Transaction costs........................................... 39,600
----------
Total merger acquisition cost............................... $3,019,913
==========
The following is a calculation of estimated transaction costs (in
thousands):
Severance and excise tax payments........................... $ 15,000
Financial advisory fees..................................... 12,000
Consent payments in connection with debt agreements......... 4,600
Legal fees.................................................. 3,000
Accounting fees............................................. 1,000
Mailing and filing fees..................................... 1,000
Other....................................................... 3,000
----------
Transaction costs................................. $ 39,600
==========
98
106
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
(D) Represents the reduction in historical depreciation associated with the
allocation of FelCor's purchase price of MeriStar, offset by additional
depreciation on $8.3 million of furniture, fixtures, and equipment acquired
from Bass. The allocation of basis to the assets acquired from MeriStar is
as follows (in thousands):
Total merger acquisition cost............................... $3,019,913
Less: non-real estate assets acquired at historical cost
(which approximates fair value)........................... 201,198
----------
Allocation to investment in hotels.......................... $2,818,715
==========
The basis is anticipated to be allocated $281.9 million to land, $2,395.9
million to buildings and improvements, and $140.9 million to furniture,
fixtures, and equipment. The depreciable lives assigned to buildings and
improvements are forty years and five years for furniture, fixtures, and
equipment. The adjustment is calculated as follows (in thousands):
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, 2000 MARCH 31, 2001
------------------ --------------------------
Buildings and improvements acquired from
MeriStar..................................... $ 59,898 $ 14,974
Furniture, fixtures, and equipment acquired
from MeriStar................................ 28,186 7,048
--------- --------
88,084 22,022
Historical MeriStar depreciation............... (107,362) (28,374)
--------- --------
(19,278) (6,352)
Furniture, fixtures, and equipment acquired
from Bass.................................... 1,666 416
--------- --------
Net adjustment................................. $ (17,612) $ (5,936)
========= ========
(E) Represents the net adjustment to historical interest expense for the
increase in interest expense related to new borrowings resulting from
merger related transactions offset by reductions in historical interest
expense related to borrowings that will be repaid with the proceeds of the
new borrowings as follows (in thousands):
INTEREST FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
RATE DECEMBER 31, 2000 MARCH 31, 2001
-------- ------------------ --------------------------
Increases:
New senior notes of $600,000...... 8.50%(1) $ 50,575 $12,645
New mortgage debt of $350,000..... 5.75%(2) 20,125 5,031
New line of credit borrowings of
$362,709....................... 6.75%(3) 24,483 6,120
Amortization of deferred financing
costs of new borrowings of
$19,700 over lives of 1-10
years.......................... 6,126 1,531
-------- -------
Total increases................... 101,309 25,327
-------- -------
99
107
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
INTEREST FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
RATE DECEMBER 31, 2000 MARCH 31, 2001
-------- ------------------ --------------------------
Reductions:
FelCor $248,900 line of credit
repaid......................... 7.66%(3) 19,066 4,766
FelCor $61,744 mortgage debt
repaid......................... (4) 5,340 1,203
MeriStar $202,526 subordinated
notes repaid................... (5) 17,640 4,410
MeriStar $154,300 convertible
notes repaid................... 7,329 1,832
MeriStar $247,000 line of credit
repaid......................... (6) 19,735 4,656
MeriStar $195,000 term loans
repaid......................... (6) 16,655 3,831
Historical interest capitalized by
MeriStar....................... (6,136) (1,473)
Historical amortization of
MeriStar deferred financing
costs.......................... 4,585 1,323
-------- -------
Total reductions.................. 84,214 20,548
-------- -------
Net adjustment...................... $ 17,095 $ 4,779
======== =======
(1)Represents contractual fixed rate on notes issued in May 2001.
(2)Represents estimated fixed rate to be committed by lender.
(3)Represents contractual variable rate of LIBOR plus up to 200 basis points.
(4)Represents the weighted average historical rates which were 8.80% and 7.86%
for the periods ended December 31, 2000 and March 31, 2001, respectively.
(5)Represents contractual fixed rates of 8.71% on subordinated notes with a
principal balance of $202.5 million and 4.75% on convertible notes with a
principal balance of $154.3 million.
(6)Represents the historical weighted average interest rates for the periods
presented are as follows:
2000 2001
----- -----
Line of credit....................................... 7.99% 7.54%
$121 million term loan............................... 8.45% 7.74%
$74 million term loan................................ 8.69% 8.05%
FelCor expects to assume approximately $500 million of MeriStar
Partnership's senior notes and approximately $377 million of mortgage debt
of MeriStar's subsidiaries in connection with the merger.
(F) Represents adjustment necessary to record impact of merger related
transactions on minority interests.
(G) Represents dividends on $100 million of cumulative redeemable preferred
stock at an anticipated dividend rate of 10.5%.
(H) Represents the impact of additional shares issued in the merger on a basic
and diluted basis and the dilutive effect of FelCor stock options issued to
MeriStar option holders as follows (in thousands):
Basic
Shares issued to MeriStar stockholders.................... 34,861
------
Adjustment to weighted average shares-basic............... 34,861
Diluted
Dilutive effect of options issued to MeriStar
optionholders.......................................... 891
------
Adjustment to weighted average shares-diluted............... 35,752
======
100
108
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
(I) Represents FelCor's historical results of operations, excluding
extraordinary items, plus the pro forma effect of FelCor's acquisitions of
DJONT and 100 hotel leases from Bass as if the acquisition occurred on
January 1, 2000. The computation is as follows:
BRISTOL
FELCOR DJONT BRISTOL TENANT BRISTOL
HISTORICAL OPERATIONS, LLC TENANT PREDECESSOR TOTAL ELIMINATIONS PROFORMA
(1) (2) (3) (4) HISTORICAL (5) ADJUSTMENTS
---------- --------------- -------- ----------- ---------- ------------ -----------
Revenues:
Room and suite revenue........ $709,802 $461,978 $143,952 $1,315,732 $ (6,432)
Food and beverage revenue..... 112,594 115,176 36,645 264,415 (2,864)
Other operating departments... 51,695 27,657 4,000 83,352 (383)
Percentage lease revenue...... $536,907 536,907 $(536,907)(6)
Retail space rental and other
revenue..................... 3,057 5,045 8,102
-------- -------- -------- -------- ---------- -------- ---------
Total revenues................. 539,964 879,136 604,811 184,597 2,208,508 (9,679) (536,907)
-------- -------- -------- -------- ---------- -------- ---------
Expenses:
Hotel operating expenses:
Room........................ 173,496 111,496 32,970 317,962 (1,758)
Food and beverage expenses.. 84,542 84,817 26,454 195,813 (1,962)
Other operating
departments............... 21,314 11,216 3,842 36,372 (122)
Management and incentive fees.. 24,766 16,770 5,589 47,125 (76) 13,604(7)
Other property operating
costs......................... 232,839 176,480 53,318 462,637 (6,284) (23,545)(8)
Percentage lease expense....... 274,653 199,338 62,916 536,907 (536,907)(6)
Property taxes, insurance, and
other......................... 89,257 73,273 162,530
Corporate expenses............. 12,256 12,256
Depreciation................... 160,745 572 345 175 161,837 (1)
-------- -------- -------- -------- ---------- -------- ---------
Total operating expenses....... 262,258 885,455 600,462 185,264 1,933,439 (10,203) (546,848)
-------- -------- -------- -------- ---------- -------- ---------
Operating income (loss)........ 277,706 (6,319) 4,349 (667) 275,069 524 9,941
-------- -------- -------- -------- ---------- -------- ---------
Interest expense, net.......... 156,712 618 (133) (35) 157,162 168 10,000(9)
Loss on assets held for sale... 63,000 63,000
Other.......................... 3,376 1,625 5,001
-------- -------- -------- -------- ---------- -------- ---------
Income (loss) before equity in
income from unconsolidated
entities, minority interests,
and gain on sale of assets.... 54,618 (8,562) 4,482 (632) 49,906 356 (59)
-------- -------- -------- -------- ---------- -------- ---------
Equity in income from
unconsolidated entities....... 14,820 593 15,413 (3,243)(10)
Minority interests............. (8,262) (3,243) (11,505) 3,861(11)
Gain on sale of assets......... 4,388 4,388
Income tax expense (benefit)... 2,798 (267) 2,531 (2,531)(12)
-------- -------- -------- -------- ---------- -------- ---------
Net income (loss) before
extraordinary items........... 65,564 (11,212) 1,684 (365) 55,671 356 3,090
Preferred distributions........ (24,682) (24,682)
-------- -------- -------- -------- ---------- -------- ---------
Net income (loss) before
extraordinary items applicable
to common shareholders........ $ 40,882 $(11,212) $ 1,684 $ (365) $ 30,989 $ 356 $ 3,090
======== ======== ======== ======== ========== ======== =========
Basic per share data:
Net income (loss) before
extraordinary items
applicable to common
shareholders................ $ 0.74
========
Weighted average shares
outstanding................. 55,264
========
Diluted per share data:
Net income (loss) before
extraordinary items
applicable to common
shareholders................ $ 0.74
========
Weighted average shares
outstanding................. 55,519
========
FELCOR
POST RMA
TOTAL
----------
Revenues:
Room and suite revenue......... $1,309,300
Food and beverage revenue...... 261,551
Other operating departments.... 82,969
Percentage lease revenue.......
Retail space rental and other
revenue...................... 8,102
----------
Total revenues.................. 1,661,922
----------
Expenses:
Hotel operating expenses:
Room......................... 316,204
Food and beverage expenses... 193,851
Other operating
departments................ 36,250
Management and incentive fees... 60,653
Other property operating
costs.......................... 432,808
Percentage lease expense........
Property taxes, insurance, and
other.......................... 162,530
Corporate expenses.............. 12,256
Depreciation.................... 161,836
----------
Total operating expenses........ 1,376,388
----------
Operating income (loss)......... 285,534
----------
Interest expense, net........... 167,330
Loss on assets held for sale.... 63,000
Other........................... 5,001
----------
Income (loss) before equity in
income from unconsolidated
entities, minority interests,
and gain on sale of assets..... 50,203
----------
Equity in income from
unconsolidated entities........ 12,170
Minority interests.............. (7,644)
Gain on sale of assets.......... 4,388
Income tax expense (benefit)....
----------
Net income (loss) before
extraordinary items............ 59,117
Preferred distributions......... (24,682)
----------
Net income (loss) before
extraordinary items applicable
to common shareholders......... $ 34,435
==========
Basic per share data:
Net income (loss) before
extraordinary items
applicable to common
shareholders................. $ 0.62
==========
Weighted average shares
outstanding.................. 55,264
==========
Diluted per share data:
Net income (loss) before
extraordinary items
applicable to common
shareholders................. $ 0.62
==========
Weighted average shares
outstanding.................. 55,519
==========
101
109
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
- ---------------
(1)Represents the historical results of operations of FelCor for the year ended
December 31, 2000. Certain amounts have been reclassified to conform to the
March 31, 2001 presentation with no effect on previously reported net
income.
(2)Represents the historical results of operations of DJONT for the year ended
December 31, 2000. Certain amounts have been reclassified to conform to the
March 31, 2001 presentation with no effect on previously reported net
income.
(3)Represents the historical results of operations of Bristol Tenant for the
nine months ended December 31, 2000. Certain amounts have been reclassified
to conform to the March 31, 2001 presentation with no effect on previously
reported net income.
(4)Represents the historical results of operations of Bristol Tenant
Predecessor for the three months ended March 31, 2000. Certain amounts have
been reclassified to conform to the March 31, 2001 presentation with no
effect on previously reported net income.
(5)Represents adjustment to eliminate historical amounts related to (i) a hotel
leased by Bristol Tenant not owned by FelCor and (ii) a hotel owned by
FelCor but sold in December 2000.
(6)Represents the elimination of historical percentage lease revenues and
expenses between FelCor and the lessees.
(7)Represents the adjustment required to record the management fees to Bristol
Tenant at their contractual rates less the portion of fees classified as
lease termination costs. In the negotiation for the acquisition of the 88
leases and the new long-term management contract, FelCor was able to
effectively finance the lease acquisition cost over the term of the long
term management agreement, by paying above market management fees. FelCor
valued the lease termination cost by comparing the management fees under the
contract with similar long term management contracts and the actual lease
termination provision under the leases. FelCor attributed $125 million to
lease termination cost. The $125 million represents the net present value of
the above market portion of the management fees over the life of the
management contracts. FelCor will expense the $125 million on July 1, 2001
and record a related lease termination liability. The liability will be
reduced over the life of the management contracts as cash payments are made
to Bristol Tenant. For the three months ended March 31, 2001, on a pro forma
basis, FelCor would have paid $51.7 million in cash to Bristol Tenant under
the management contracts, of which $35.9 million would be recorded as
management fee expense, $10 million would be recorded as interest expense,
and $5.8 million would reduce the lease termination liability. The expense
related to $125 million lease termination cost is not reflected in this pro
forma income statement.
(8)Represents the elimination of historical franchise fees paid to Bristol
Tenant. These agreements have been replaced with management contracts.
(9)Represents the interest component of the lease termination liability.
(10)Represents the elimination of FelCor's equity in income of DJONT's
consolidated subsidiary.
(11)Represents adjustment of $618 to record the minority interest holders share
of the revenues and expenses of the lessees plus the elimination of the
DJONT minority interest of $3,243 represented by FelCor's ownership
discussed in (10) above.
(12)Represents the elimination of the historical tax provisions of the Bristol
Tenant lessees due to the pro forma taxable loss of the TRSs. No benefit has
been recorded for deferred taxes related to these losses due to the
uncertainty of their recoverability.
102
110
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
(J) Represents MeriStar's historical results of operations, excluding
extraordinary items, plus the pro forma effect of MeriStar's acquisition of
106 hotel leases from MeriStar Hotels and Resorts, Inc. as if the
acquisitions occurred on January 1, 2000. The computation is as follows:
MERISTAR
HISTORICAL PRO FORMA MERISTAR
(1) ADJUSTMENTS POST RMA
---------- ----------- ----------
Revenues:
Room and suite revenue............................. $ 782,288(2) $ 782,288
Food and beverage revenue.......................... 290,792(2) 290,792
Other operating departments........................ 84,660(2) 84,660
Percentage lease revenue........................... $ 385,141 (364,216)(3) 20,925
Retail space rental and other revenue.............. 15,637 2,880(4) 18,517
--------- --------- ----------
Total revenues............................. 400,778 796,404 1,197,182
--------- --------- ----------
Expenses:
Hotel operating expenses:
Rooms........................................... 184,791(2) 184,791
Food and beverage expenses...................... 209,962(2) 209,962
Other operating departments..................... 48,263(2) 48,263
Management and incentive fees...................... 28,943(5) 28,943
Other property operating costs..................... 2,731 299,616(6) 302,347
Property taxes, insurance and other................ 47,481 24,829(2) 72,310
Corporate expenses................................. 9,445 9,445
Depreciation....................................... 107,362 107,362
--------- --------- ----------
Total operating expenses................... 167,019 796,404 963,423
--------- --------- ----------
Operating income..................................... 233,759 233,759
--------- --------- ----------
Interest expense, net................................ 122,109 122,109
Other................................................ 2,028 2,028
--------- --------- ----------
Income before minority interest and gain on sale of
assets............................................. 109,622 109,622
Minority interests................................... (10,240) (10,240)
Gain on sale of assets............................... 3,425 3,425
--------- --------- ----------
Net income before extraordinary items applicable to
common shareholders................................ $ 102,807 $ $ 102,807
========= ========= ==========
(1)Represents MeriStar's historical results of operations, excluding
extraordinary items. Certain reclassifications have been made to conform to
the presentation of FelCor's statement of operations.
(2)Represents the historical hotel revenues and expenses of the 106 hotels
formerly leased to MeriStar Hotels & Resorts, Inc.
(3)Represents the elimination of historical percentage lease revenue received
from MeriStar Hotels & Resorts.
(4)Represents historical other hotel revenue of the 106 hotels formerly leased
to MeriStar Hotels & Resorts.
(5)Represents the contractual management fee which will be paid to MeriStar
Hotels & Resorts under the new management agreements. The base management fee
under the agreements is 2.5% of hotel revenues.
Until January 1, 2001, MeriStar Hotels & Resorts leased substantially all of
its hotels from MeriStar. Under these leases, MeriStar Hotels & Resorts
assumed all of the operating risks and rewards of these hotels and paid
MeriStar a percentage of revenue at each hotel under the lease agreements.
Therefore, for financial statement purposes through December 31, 2000,
MeriStar Hotels & Resorts recorded all of the operating revenues and
expenses of the hotels in its statements of operations, and
103
111
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
MeriStar recorded lease revenue earned under the lease agreements in its
statements of operations. Effective January 1, 2001, MeriStar Hotels &
Resorts assigned the hotel leases to newly created, wholly owned, taxable
REIT subsidiaries of MeriStar and MeriStar's taxable REIT subsidiaries in
turn, entered into management agreements with MeriStar Hotels & Resorts to
manage these hotels. As a result of this change in structure, MeriStar's
wholly owned taxable REIT subsidiaries have assumed the operating risks and
rewards of the hotels and now pay MeriStar Hotels & Resorts a management fee
to manage the hotels for them. For consolidated financial statement
purposes, effective January 1, 2001, MeriStar now records all of the
revenues and expenses of the hotels in its statement of operations,
including a management fee paid to MeriStar Hotels & Resorts. The terms of
the management agreements are designed to substantially mirror the economics
of the former leases.
(6)Represents historical other undistributed operating costs of the 106 hotels
formerly leased to MeriStar Hotels.
104
112
PRO FORMA COMBINED BALANCE SHEET
The following unaudited Pro Forma Combined Balance Sheet as of March 31,
2001 is based in part upon the Consolidated Balance Sheets of FelCor, DJONT, and
MeriStar incorporated by reference, and the consolidated balance sheet of
Bristol Tenant which was provided to us by Bristol Tenant.
The Pro Forma Combined Balance Sheet assumes all of the following occurred
on March 31, 2001:
- FelCor's acquisition of the remaining 88 leases held by Bass, effective
July 1, 2001, and the recording of a lease termination expense of
approximately $125 million in the third quarter of 2001 and a
corresponding liability of approximately $125 million that will be
amortized over the term of the management agreements with respect to
these hotels; and
- the completion of the MeriStar merger and related financings and the
application of the net proceeds.
In the opinion of FelCor's management, all material adjustments necessary
to reflect the effects of the foregoing transactions have been made. The
unaudited Pro Forma Combined Balance Sheet is presented for illustrative
purposes only and is not necessarily indicative of what the actual financial
position would have been had the MeriStar merger and the other transactions
described above occurred on March 31, 2001, nor does it purport to represent the
future financial position of FelCor.
105
113
FELCOR LODGING TRUST INCORPORATED
PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2001
(UNAUDITED, IN THOUSANDS)
FELCOR BASS MERISTAR
HISTORICAL ACQUISITION FELCOR HISTORICAL MERGER PRO FORMA
(A) (B) POST RMA (C) ADJUSTMENTS(D) TOTAL
---------- ----------- ---------- ---------- -------------- ----------
ASSETS
Net investment in hotels........... $3,734,891 $ 8,328 $3,743,219 $2,878,442 $ (59,727)(E) $6,561,934
Investment in unconsolidated
entities......................... 150,960 150,960 41,714 192,674
Assets held for sale............... 58,733 58,733 58,733
Cash and cash equivalents.......... 60,743 15,832 76,575 18,982 95,557
Restricted cash.................... 18,221 18,221
Due from MeriStar Hotels &
Resorts.......................... 10,709 10,709
Note receivable from MeriStar
Hotels & Resorts................. 36,000 36,000
Accounts receivable................ 47,857 34,003 81,860 57,311 139,171
Prepaid expenses................... 11,731 2,996 14,727 18,221 32,948
Deferred expenses, net............. 23,873 23,873 22,211 (2,585)(F) 43,499
Other assets....................... 8,016 5,171 13,187 40 13,227
---------- --------- ---------- ---------- --------- ----------
Total assets............... $4,096,804 $ 66,330 $4,163,134 $3,101,851 $ (62,312) $7,202,673
========== ========= ========== ========== ========= ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Debt............................... $1,812,690 $1,812,690 $1,674,978 $ 198,253(G) $3,685,921
Distributions payable.............. 34,196 34,196 24,142 58,338
Accrued expenses and other......... 144,900 $ 40,932 185,832 185,633 371,465
Deferred rent...................... 5,254 (5,254)
Due to manager..................... 25,398 25,398 25,398
Lease termination liability........ 125,000 125,000 125,000
Minority interest in Operating
Partnership...................... 255,577 255,577 95,083 (33,210)(H) 317,450
Minority interest in other
partnerships..................... 49,949 49,949 2,698 52,647
---------- --------- ---------- ---------- --------- ----------
Total liabilities.......... 2,302,566 186,076 2,488,642 1,982,534 165,043 4,636,219
---------- --------- ---------- ---------- --------- ----------
Shareholders' equity:
Preferred stock.................... 293,265 293,265 100,000(I) 393,265
Common stock....................... 699 699 486 (137)(J) 1,048
Additional paid-in capital......... 2,064,469 2,064,469 1,180,099 (388,486)(J) 2,856,082
Accumulated other comprehensive
income (loss).................... (4,844) (4,844) (14,690) 14,690(K) (4,844)
Distributions in excess of
earnings......................... (243,490) (119,746) (363,236) 25,776 (25,776)(K) (363,236)
Less: Common stock in treasury, at
cost............................. (315,861) (315,861) (72,354) 72,354(K) (315,861)
---------- --------- ---------- ---------- --------- ----------
Total shareholders'
equity................... 1,794,238 (119,746) 1,674,492 1,119,317 (227,355) 2,566,454
---------- --------- ---------- ---------- --------- ----------
Total liabilities and
shareholders' equity..... $4,096,804 $ 66,330 $4,163,134 $3,101,851 $ (62,312) $7,202,673
========== ========= ========== ========== ========= ==========
See notes to pro forma combined balance sheet.
106
114
NOTES TO PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2001
(UNAUDITED)
(A) Represents the historical consolidated balance sheet of FelCor as of March
31, 2001.
(B) Effective January 1, 2001, with the enactment of the REIT Modernization
Act, FelCor had completed transactions that resulted in its newly formed
taxable REIT subsidiaries acquiring leases for 96 hotels that were
previously leased to either DJONT or Bass. Accordingly, the assets and
liabilities associated with these hotels are included in FelCor's
consolidated balance sheet as of March 31, 2001. In March 2001, FelCor
entered into an agreement with Bass to acquire the remaining 88 hotel
leases effective July 1, 2001. In consideration for the acquisition of
these leases, taxable REIT subsidiaries of FelCor will enter into long-term
management agreements with Bass with regard to these hotels and issue to
Bass 100 shares of FelCor common stock. A portion of the management fees
with respect to the 88 hotels managed by Bass will be considered lease
termination costs and FelCor will record a lease termination cost of $125
million in the third quarter of 2001. This pro forma adjustment column
represents the historical hotel assets and liabilities associated with the
88 hotels and the lease termination cost liability as if the Bass leases
were acquired effective March 31, 2001.
(C) Represents the historical consolidated balance sheet of MeriStar as of
March 31, 2001. Certain reclassifications have been made to conform to the
presentation of FelCor's balance sheet.
(D) On May 10, 2001, FelCor and MeriStar announced that they had signed a
merger agreement, under which MeriStar will merge with and into FelCor, a
wholly-owned subsidiary of FelCor Partnership will merge with and into
MeriStar Partnership and the limited partners of MeriStar Partnership,
other than FelCor and its subsidiaries, will exchange their interests in
MeriStar Partnership for interests in FelCor Partnership and, where
applicable, cash. Under the merger agreement, each holder of MeriStar
common stock will receive, for each share of MeriStar common stock, $4.60
in cash plus 0.784 of a share of FelCor common stock. Each holder of common
units and profits-only partnership units in MeriStar Partnership, other
than FelCor Partnership and its subsidiaries, will receive, for each common
unit and profits-only unit, $4.60 in cash plus 0.784 of a common unit of
FelCor Partnership. Each holder of Class C preferred units in MeriStar
Partnership will receive, for each unit, $4.60 in cash plus 0.784 of a
Series C preferred unit in FelCor Partnership. Each holder of Class D
preferred units in MeriStar Partnership will receive, for each unit, one
Series D preferred unit in FelCor Partnership. Amounts represent
adjustments to record the merger and related transactions as if the merger
had occurred on March 31, 2001. The calculation of the merger acquisition
cost is as follows (in thousands, except share and unit data):
Issuance of 34.861 million shares of FelCor common stock in
exchange for 44.5 million shares of MeriStar common
stock..................................................... $ 770,436
Issuance of 2.769 million FelCor Partnership common units in
exchange for 3.5 million MeriStar Partnership common and
profits-only units........................................ 61,202
Issuance of 755,954 FelCor Partnership Series C preferred
units in exchange for 964,227 MeriStar Partnership Class C
preferred units........................................... 16,707
Payment of $4.60 per share of MeriStar common stock and per
MeriStar Partnership common, Class C preferred and
profits-only units........................................ 225,227
Issuance of 392,157 FelCor Partnership Series D preferred
units in exchange for a like number of MeriStar
Partnership Class D preferred units....................... 8,690
Issuance of 3.6 million FelCor stock options based on a
0.784 exchange ratio in exchange for MeriStar stock
options, assuming all MeriStar option holders are not
retained by FelCor........................................ 10,600
Assumption of MeriStar's liabilities........................ 1,887,451
Transaction costs........................................... 39,600
----------
Total merger acquisition cost............................... $3,019,913
==========
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NOTES TO PRO FORMA COMBINED BALANCE SHEET -- (CONTINUED)
The following is a calculation of estimated transaction costs (in
thousands):
Severance and excise tax payments........................... $15,000
Financial advisory fees..................................... 12,000
Consent payments in connection with debt agreements......... 4,600
Legal fees.................................................. 3,000
Accounting fees............................................. 1,000
Mailing and filing fees..................................... 1,000
Other....................................................... 3,000
-------
Transaction costs................................. $39,600
=======
(E) Represents the purchase accounting adjustment to the historical carrying
value of MeriStar investment in hotels as follows (in thousands):
FelCor allocation to investment in hotels................... $2,818,715
MeriStar historical carrying amount......................... 2,878,442
----------
Adjustment............................................. $ (59,727)
==========
(F) Represents the net effect of the following adjustments (in thousands):
Deferred financing costs for new borrowings................. $ 19,626
Elimination of historical MeriStar deferred financing
costs..................................................... (22,211)
--------
Adjustment............................................. $ (2,585)
========
(G) Represents the net increase in debt as a result of the merger and related
transactions as follows (in thousands):
Issuance of $600,000 senior notes, net of discount.......... $ 595,014
Issuance of new mortgage debt............................... 350,000
Borrowings on new line of credit............................ 362,709
Repayment of FelCor line of credit.......................... (248,900)
Repayment of FelCor mortgage debt........................... (61,744)
Repayment of MeriStar subordinated notes.................... (202,526)
Repayment of MeriStar convertible notes..................... (154,300)
Repayment of MeriStar line of credit........................ (247,000)
Repayment of MeriStar term loans............................ (195,000)
---------
Net adjustment......................................... $ 198,253
=========
(H) Represents the net adjustment to minority interest as follows (in
thousands, except share and unit data):
Issuance of 2.769 million FelCor Partnership common units in
exchange for 3.532 million MeriStar Partnership common and
profits-only units........................................ $ 61,202
Issuance of 755,954 FelCor Partnership Series C preferred
units in exchange for 964,227 MeriStar Partnership Class C
preferred units........................................... 16,707
Issuance of 392,157 FelCor Partnership Series D preferred
units in exchange for a like number of MeriStar
Partnership Class D preferred units....................... 8,690
Elimination of historical MeriStar minority interest........ (95,083)
Adjustment to reflect minority interest as 12.4% of common
equity.................................................... (24,726)
--------
Net adjustment.................................... $(33,210)
========
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NOTES TO PRO FORMA COMBINED BALANCE SHEET -- (CONTINUED)
The minority interest percentage is calculated as follows (in thousands):
Historical FelCor common stock.............................. 53,394
Historical FelCor Partnership units convertible into FelCor
common stock.............................................. 9,014
FelCor common stock issued in the merger.................... 34,861
FelCor Partnership units convertible into FelCor common
stock issued in the merger................................ 3,525
--------
Total shares and units............................ 100,794
========
Units as a percentage of shares and units................... 12.4%
(I) Represents the issuance of $100 million in cumulative redeemable preferred
stock.
(J) Represents the net adjustments resulting from the merger and related
transactions as follows (in thousands, except share and unit data):
ADDITIONAL
COMMON PAID IN
STOCK CAPITAL
------ -----------
Issuance of 34.861 million shares of FelCor common stock in
exchange for 44.466 million shares of MeriStar common
stock..................................................... $ 349 $ 770,087
Elimination of historical MeriStar balances................. (486) (1,180,099)
Offering expenses of new $100,000 of FelCor cumulative
redeemable preferred stock................................ (3,200)
Adjustment to reflect minority interest as 12.4% of common
equity.................................................... 24,726
----- -----------
Net adjustments................................... $(137) $ (388,486)
===== ===========
(K) Represents the elimination of historical MeriStar balances.
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DESCRIPTION OF FELCOR CAPITAL STOCK
The following description is a summary of the material terms of FelCor's
capital stock. You should also review FelCor's charter and bylaws, including
articles supplementary to the charter describing the Series A and Series B
preferred stock, copies of which are available from FelCor upon request or
through the SEC or the SEC's website, as described in "Where You Can Find More
Information." FelCor is a Maryland corporation governed by its charter, bylaws
and the Maryland General Corporation Law. Under FelCor's charter, FelCor has the
authority to issue up to 200,000,000 shares of common stock and 20,000,000
shares of preferred stock. Under Maryland law, stockholders generally are not
responsible for the corporation's debts or obligations.
DESCRIPTION OF FELCOR COMMON STOCK
At June 30, 2001, FelCor had outstanding 53,332,541 shares of common stock.
Terms
Subject to the preferential rights of any series of preferred stock
outstanding, the holders of common stock are entitled to one vote per share on
all matters voted on by stockholders, including the election of directors.
FelCor's charter does not provide for cumulative voting in the election of
directors. Except as otherwise required by law or provided in articles
supplementary relating to preferred stock of any series, the holders of common
stock exclusively possess all voting power.
Subject to any preferential rights of any series of preferred stock
outstanding, the holders of common stock are entitled to those dividends, if
any, as may be declared from time to time by the FelCor board of directors from
assets legally available for dividends and, upon liquidation, are entitled to
receive pro rata all assets of FelCor available for distribution to those
holders. All shares of common stock will, when issued, be fully paid and
nonassessable and will have no preemptive rights. FelCor may, however, enter
into contracts with stockholders to grant them preemptive rights.
Holders of shares of common stock have no redemption rights. Subject to the
provisions of the charter regarding the restrictions on transfer of stock,
shares of common stock will have equal dividend, liquidation and other rights.
Under the Maryland General Corporation Law, a Maryland corporation
generally cannot dissolve, amend its charter, merge, sell all or substantially
all of its assets, engage in a share exchange or engage in similar transactions
outside the ordinary course of business unless approved by the affirmative vote
of stockholders holding at least two thirds of the shares entitled to vote on
the matter unless a lesser percentage, but not less than a majority of all of
the votes entitled to be cast on the matter, is set forth in the corporation's
charter. FelCor's charter requires the affirmative vote of a majority of the
votes entitled to be cast in those situations.
Restrictions on Ownership and Transfer
Shares of FelCor common stock are subject to restrictions upon their
ownership and transfer which were adopted for the purpose of enabling FelCor to
preserve its status as a REIT. For a description of those restrictions, see the
discussions below under the captions, "-- Certain FelCor Charter and Bylaw
Provisions -- Restrictions on Ownership and Transfer."
Exchange Listing
FelCor common stock is listed on the NYSE under the symbol "FCH".
Transfer Agent
The transfer agent and registrar for the common stock is SunTrust Bank,
located in Atlanta, Georgia.
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DESCRIPTION OF FELCOR PREFERRED STOCK
The FelCor board of directors may, without further action of the
stockholders of FelCor, establish and issue shares of preferred stock in one or
more series and fix the rights, preferences and restrictions of the series of
preferred stock. The rights of holders of common stock are subject to, and may
be adversely affected by, the rights of holders of preferred stock. The issuance
of additional shares of preferred stock could adversely affect the voting power
of holders of common stock and could have the effect of delaying or preventing a
change in control of FelCor or other corporate action. The board has established
two series of preferred stock which are described below.
Series A Preferred Stock
In April 1996, the board of directors authorized FelCor to classify and
issue the Series A preferred stock as part of the authorized preferred stock. At
June 30, 2001, there were outstanding 5,980,600 shares of Series A preferred
stock.
The outstanding shares of Series A preferred stock are validly issued,
fully paid and nonassessable. The holders of the Series A preferred stock have
no preemptive rights. The shares of Series A preferred stock are not subject to
any sinking fund or other obligation of FelCor to redeem or retire the Series A
preferred stock. Unless converted or redeemed by FelCor into common stock, the
Series A preferred stock will have a perpetual term, with no maturity.
Ranking. The Series A preferred stock ranks on parity with the outstanding
Series B preferred stock and senior to the common stock as to dividends and
liquidation preference. While any shares of Series A preferred stock are
outstanding, FelCor may not authorize, create or increase the authorized amount
of any class or series of stock that ranks senior to the Series A preferred
stock without the consent of the holders of two-thirds of the votes entitled to
be cast by holders of the outstanding Series A preferred stock. However, FelCor
may create additional classes of stock, increase the authorized number of shares
of preferred stock or issue series of preferred stock ranking junior to or on
parity with the Series A preferred stock without the consent of any holder of
Series A preferred stock.
Dividends. If declared by the board of directors of FelCor, dividends on
each share of the Series A preferred stock will be paid quarterly based on
either $0.4875 per share or the cash dividends on the number of shares of common
stock into which a share of Series A preferred stock is then convertible,
whichever is greater. Dividends on the Series A preferred shares will be paid
prior to payment of any dividends on the common stock or preferred stock other
than the Series B preferred stock. Any unpaid dividends will accrue and are
cumulative.
Redemption. FelCor has the right to redeem shares of Series A preferred
stock at any time. FelCor may either issue shares of its common stock based upon
a conversion rate of 0.7752 shares of common stock for each share of Series A
preferred stock or deliver cash in an amount equal to the aggregate market value
of the number of shares of common stock into which the Series A preferred stock
is convertible, plus accrued and unpaid dividends. FelCor may only exercise this
redemption option if the closing price of the common stock on the NYSE equals or
exceeds $32.25 per share for 20 trading days within any period of 30 consecutive
trading days. FelCor may not redeem the Series A preferred stock unless all
dividends have been declared and paid on the Series A and Series B preferred
stock, or unless FelCor is acquiring shares of capital stock to preserve its
status as a REIT or for purposes of a FelCor employee benefit plan.
Liquidation Preference. Upon liquidation, dissolution or winding up of
FelCor, whether voluntary or involuntary, and before payment of any amount to
any other class or series of capital stock other than holders of Series B
preferred stock, the holders of Series A preferred stock are entitled to receive
$25.00 per share plus any accrued and unpaid dividends. If there are
insufficient assets to pay the liquidation preference, FelCor's assets will be
distributed pro rata among the holders of Series A preferred stock and Series B
preferred stock.
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Voting Rights. The holders of Series A preferred stock have no voting
rights. However, if six quarterly dividends payable on the Series A or Series B
preferred stock are in arrears, the holders of the Series A and Series B
preferred stock will have the right to elect two additional members to FelCor's
board of directors until the dividends have been paid or declared and set apart
for payment. FelCor may not amend its charter to materially and adversely affect
the rights, preferences or voting power of the holders of the Series A preferred
stock or the Series B preferred stock or create any class of stock senior to the
Series A and Series B preferred stock without the approval of two-thirds of the
votes entitled to be cast by holders of the outstanding Series A and Series B
preferred stock.
Conversion Rights. Holders of Series A preferred stock have the right, at
any time prior to redemption, to convert their preferred stock into shares of
FelCor common stock at a conversion price of $32.25 per share of common stock.
Exchange Listing. The Series A preferred stock is listed on the NYSE under
the symbol "FCHpA".
Transfer Agent. The transfer agent and registrar for the Series A
preferred stock is SunTrust Bank, Atlanta, Georgia.
Series B Preferred Stock and Depositary Shares
In April 1998, the Board of Directors authorized FelCor to classify and
issue the Series B preferred stock as part of the authorized preferred stock. At
June 30, 2001, there were outstanding 57,500 shares of Series B preferred stock
represented by 5,750,000 depositary shares, each of which represent a 1/100
fractional interest in a share of Series B preferred stock.
Ranking. The Series B preferred stock ranks on parity with the outstanding
Series A preferred stock and senior to the common stock as to dividends and
liquidation preference. While any shares of Series B preferred stock are
outstanding, FelCor may not authorize, create or increase the authorized amount
of any class or series of stock that ranks senior to the Series B preferred
stock without the consent of the holders of two-thirds of the votes entitled to
be cast by holders of the outstanding Series B preferred stock. However, FelCor
may create additional classes of stock, increase the authorized number of
preferred stock or issue series of preferred stock ranking junior to or on a
parity with the Series B preferred stock without the consent of any holder of
Series B preferred stock.
Dividends. If declared by the board of directors of FelCor, dividends on
each share of Series B preferred stock will be paid quarterly at an annual rate
of $225.00 per share. Dividends on the Series B preferred shares will be paid
prior to payment of any dividends on the common stock or preferred stock other
than the Series A preferred stock. Any unpaid dividends will accrue and are
cumulative.
Redemption. FelCor has the right to redeem shares of Series B preferred
stock at any time after May 7, 2003 at a redemption price of $2,500 per share,
or $25 per depositary share, plus any accrued and unpaid dividends. The
redemption price of the Series B preferred stock, other than accrued and unpaid
dividends, may only be paid from proceeds of the sale of other capital stock of
FelCor. The shares of Series B preferred stock have no stated maturity and are
not subject to any sinking fund or mandatory redemption provisions. FelCor may
not redeem the Series B preferred stock unless all dividends have been declared
and paid on the Series A and Series B preferred stock, or unless FelCor is
acquiring shares of capital stock to preserve its status as a REIT or for
purposes of a FelCor employee benefit plan.
Liquidation Preference. Upon liquidation, dissolution or winding up of
FelCor, whether voluntary or involuntary, and before payment of any amount to
any other class or series of capital stock other than holders of Series B
preferred stock, the holders of Series A preferred stock are entitled to receive
$2,500 per share plus any accrued and unpaid dividends. If there are
insufficient assets to pay the liquidation preference, FelCor's assets will be
distributed pro rata among the holders of Series A preferred stock and Series B
preferred stock.
Voting Rights. Each share of Series B preferred stock is entitled to 100
votes, which may be directed separately by the holder or the holder's proxy. If
six quarterly dividends payable on the Series A
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or Series B preferred stock are in arrears, the holders of the Series A and
Series B preferred stock will have the right to elect two additional members to
FelCor's board of directors until the dividends have been paid or declared and
set apart for payment. FelCor may not enter into any share exchange or
consolidation or merger with any other entity, unless the rights of the Series B
preferred stockholders remain unchanged, without the approval of two-thirds of
the outstanding depositary shares representing the Series B preferred stock. In
addition, FelCor may not amend its charter to materially and adversely affect
the rights, preferences or voting power of the holders of the Series A preferred
stock or the Series B preferred stock or create any class of stock senior to the
Series A and Series B preferred stock without the approval of two-thirds of the
votes entitled to be cast by holders of the outstanding Series A and Series B
preferred stock.
Conversion Rights. Shares of Series B preferred stock are not convertible
into or exchangeable for any other property or securities of FelCor.
Exchange Listing. The Series B preferred stock is listed on the NYSE under
the symbol "FCHpB".
Transfer Agent. The transfer agent and registrar for the depositary shares
is SunTrust Bank, Atlanta, Georgia.
SELECTED FELCOR CHARTER PROVISIONS
Restrictions on Ownership and Transfer
For FelCor to qualify as a REIT under the federal income tax laws, it must
meet some requirements concerning the ownership of its outstanding stock. Not
more than 50% in value of FelCor's outstanding stock may be owned, actually and
constructively under the applicable attribution provisions of the federal income
tax laws, by five or fewer individuals, including some entities, during the last
half of a taxable year. This is known as the 5/50 rule. Also, FelCor stock must
be beneficially owned by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable year.
For the purpose of, among other reasons, preserving FelCor's REIT
qualification, the FelCor charter contains provisions that restrict the
ownership and transfer of FelCor's capital stock under some circumstances. These
ownership limitation provisions provide that no person may own more than 9.9% of
the outstanding shares of any class of FelCor's capital stock, subject to
exceptions. The board of directors may waive the ownership limit with respect to
a stockholder if it determines that the stockholder's ownership will not
jeopardize FelCor's status as a REIT. The board has waived these provisions for
some parties in the past.
Transfers of FelCor capital stock that would cause FelCor to become closely
held under the Internal Revenue Code or otherwise fail to qualify as a REIT
under the Internal Revenue Code are prohibited. Any transfer of capital stock of
FelCor or any other event that would cause FelCor to violate the 5/50 rule or to
own 10% or more of the ownership interests in any entity that leases any hotels
or in any sublessee is prohibited. That prohibition does not prevent FelCor from
leasing its hotels to TRSs. All certificates representing shares of capital
stock will bear a legend referring to the restrictions described above.
The provisions described above may have the effect of precluding an
acquisition of control of FelCor without approval of the board of directors.
Operations
FelCor generally is prohibited from engaging in some activities, including
acquiring or holding property or engaging in any activity that would cause
FelCor to fail to qualify as a REIT.
Classification of the Board of Directors
Under the charter, the board of directors is divided into three classes.
Directors of each class will be chosen for three-year terms upon the expiration
of their current terms, and each year one class of directors will be elected by
the stockholders. FelCor believes that classification of the board of directors
will help to assure the continuity and stability of FelCor's business strategies
and policies as determined by the board of directors. Any vacancy will be
filled, at any regular meeting or at any special meeting called for that
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purpose, by a majority of the remaining directors, except that a vacancy
resulting from an increase in the number of directors must be filled by a
majority of the entire board of directors.
The classified board provision could have the effect of making the
replacement of incumbent directors more time consuming and difficult. The
staggered terms of directors may delay, defer or prevent a transaction or change
of control of FelCor that might involve a premium price for holders of common
stock or otherwise be in their best interest.
Information regarding removal of directors is contained in "Comparison of
Stockholder Rights" in this joint proxy statement/prospectus.
MARYLAND TAKEOVER STATUTES
Under the Maryland General Corporation Law, some business combinations,
including a merger, consolidation, share exchange or, in some circumstances, an
asset transfer or issuance or reclassification of equity securities, are
prohibited. These transactions include those between a Maryland corporation and
the following persons:
- an interested stockholder, which is defined as any person who
beneficially owns 10% or more of the voting power of the corporation's
shares, or who is an affiliate or an associate of the corporation who, at
any time within a two-year period prior to the transaction, was the
beneficial owner of 10% or more of the voting power of the corporation's
shares; or
- an affiliate of an interested stockholder.
A person is not an interested stockholder if the board of directors
approved in advance the transaction by which the person otherwise would have
become an interested stockholder. The board of directors may provide that its
approval is subject to compliance with any terms and conditions determined by
the board of directors. Transactions between a corporation and an interested
stockholder are prohibited for five years after the date on which an affiliate
becomes an interested stockholder under the above test. After five years, any
business combination must be recommended by the board of directors of the
corporation and approved by at least 80% of the stockholders of the corporation,
two-thirds of which must be holders of shares other than those held by the
interested stockholder with whom the business combination is to be effected,
unless the corporation's stockholders receive a minimum price as defined by
Maryland law and other conditions under Maryland law are satisfied.
A Maryland corporation may elect not to be governed by these provisions by
either having its board of directors exempt specific interested stockholders, or
by placing a provision in its charter expressly electing not to be governed by
the specific section of the Maryland law or amending its existing charter with
the approval of at least 80% of the votes entitled to be cast by holders of
outstanding shares of voting stock of the corporation and two-thirds of the
votes entitled to be cast by holders of shares other than those held by any
interested stockholder. The FelCor charter contains exemptions from these
provisions for any business combination involving Hervey Feldman, former
Chairman of FelCor, or Mr. Corcoran or any present or future affiliates,
associates or other persons acting in concert or as a group with Mr. Feldman or
Mr. Corcoran.
The Maryland General Corporation Law also prevents, subject to exceptions,
an acquiror who acquires enough shares to exercise specified percentages of
voting power of a corporation from having any voting rights except to the extent
approved by two-thirds of the votes entitled to be cast on the matter not
including shares of stock owned by the acquiring person and any officers or
directors who are employees of the corporation. These provisions are referred to
as the control share statute.
The control share statute does not apply to shares acquired in a merger,
consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by a corporation's charter
or bylaws. FelCor's charter contains a provision exempting any and all
acquisitions of FelCor's shares of stock from the control share statute. This
provision could be amended or eliminated in the future. If this exemption in the
charter is eliminated, the control share statute could discourage offers to
acquire FelCor stock and could increase the difficulty of completing an offer.
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The Maryland General Corporation Law also provides that Maryland
corporations that are subject to the Exchange Act and have at least three
outside directors can elect by resolution of the board of directors to be
subject to some corporate governance provisions that may be inconsistent with
the corporation's charter and bylaws. Under the applicable statute, a board of
directors may classify itself without the vote of stockholders. A board of
directors classified in that manner cannot be altered by amendment to the
charter of the corporation. Further, the board of directors may, by electing
into the applicable statutory provisions and notwithstanding the charter or
bylaws:
- provide that a special meeting of stockholders, will be called only at
the request of stockholders, entitled to cast at least a majority of the
votes entitled to be cast at the meeting,
- reserve for itself the right to fix the number of directors,
- provide that a director may be removed only by the vote of the holders of
two-thirds of the stock entitled to vote, and
- retain for itself sole authority to fill vacancies created by the death,
removal or resignation of a director.
In addition, a director elected to fill a vacancy under this provision will
serve for the balance of the unexpired term instead of until the next annual
meeting of stockholders. A board of directors may implement all or any of these
provisions without amending the charter or bylaws and without stockholder
approval. A corporation may be prohibited by its charter or by resolution of its
board of directors from electing any of the provisions of the statute. FelCor is
not prohibited from implementing any or all of the statute. If implemented,
these provisions could discourage offers to acquire FelCor stock and could
increase the difficulty of completing an offer.
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COMPARISON OF STOCKHOLDER RIGHTS
Both FelCor and MeriStar are incorporated in Maryland and governed by the
Maryland General Corporation Law. The FelCor charter and bylaws and the MeriStar
charter and bylaws are similar in several respects, including with respect to
the following matters: majority vote required for extraordinary transactions,
absence of cumulative voting, classification of the board of directors, director
qualifications, indemnification of officers and directors, limitations on
director liability, voting rights and inapplicability of the control share
statute. The following is a summary of the material differences between the
rights of holders of FelCor common stock and those of the holders of MeriStar
common stock after the merger. These differences arise from differences between
the FelCor charter and bylaws and the MeriStar charter and bylaws.
NUMBER OF DIRECTORS
The FelCor board of directors must be a minimum of three directors, but not
more than nine, unless otherwise determined by resolution of 80% of the board of
directors. The minimum number of members of the MeriStar board of directors is
three, and the bylaws prescribe a maximum of up to 15 members. Currently,
MeriStar has 10 directors, and FelCor has 11 directors.
AMENDMENTS TO CHARTER
Amendments to the FelCor and MeriStar charters are governed by the
provisions of the Maryland General Corporation Law which require the board of
directors to adopt a resolution which sets forth the proposed amendment, declare
that it is advisable, and direct that the proposed amendment be submitted for
consideration at either an annual or special meeting of the stockholders
entitled to vote to approve the amendment.
FelCor's charter requires that any proposed amendment to the charter will
become effective only upon the affirmative vote of the holders of not less than
a majority of all votes entitled to be cast on the matter. However, any
amendment to or repeal of provisions of the charter relating to ownership
limitations on the stock of FelCor will be effective only if it is adopted upon
the affirmative vote of not less than two-thirds of the aggregate votes entitled
to be cast on the proposed amendment. Any amendment to or repeal of provisions
of FelCor's charter relating to the board of directors requires the affirmative
vote of not less than 80% of the board of directors and 75% of the aggregate
votes entitled to be cast on the proposed amendment.
MeriStar's charter requires that an amendment to the charter addressing any
stock provisions become effective only upon the affirmative vote of all
independent directors and the holders of not less than two-thirds of all votes
entitled to be cast on the matter. To amend any provisions in the MeriStar
charter addressing the classification of directors, the removal of directors,
independent directors, pre-emptive rights, indemnification and liability of
directors and officers and amendments to the charter, approval by the
affirmative vote of the holders of not less than two thirds of all votes
entitled to be cast on the matter is required.
PREFERRED STOCK
MeriStar has no outstanding shares of preferred stock. FelCor has
outstanding shares of two series of preferred stock. The FelCor preferred stock
has preferences over common stock on dividends or liquidating distributions. For
a description of the terms of FelCor's preferred stock, see "Description of
FelCor Capital Stock -- Description of FelCor Preferred Stock."
The FelCor charter expressly provides that the board of directors may set,
change or eliminate any of the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms and
condition of redemption of any of the unissued shares of the preferred stock of
FelCor. The MeriStar charter expressly provides that the board of directors may
designate the rights, preferences and priorities of any of the unissued shares
of the preferred stock of MeriStar, provided that
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the preferred stock will not be used for anti-takeover purposes and will not
have super-majority voting rights.
SPECIAL MEETINGS OF THE STOCKHOLDERS
The bylaws of FelCor provide that a special meeting of the stockholders may
be called by the chairman of the board, the chief executive officer, the
president or the majority of the board of directors or a majority of the
independent directors, or the holders of at least 10% of the outstanding shares
of stock entitled to vote at the meeting.
The bylaws of MeriStar provide that a special meeting of stockholders may
be called by the president, chief executive officer or the board of directors,
or the holders of at least a majority of the outstanding shares of stock
entitled to vote at the meeting. The stockholders must pay for the costs of the
special meeting if called by the stockholders.
REMOVAL OF DIRECTORS
FelCor's charter provides that directors may be removed from office at any
time, but only for cause and then only by the affirmative vote of a majority of
the holders of stock entitled to vote in an election for directors.
MeriStar's charter provides that a director may be removed with or without
cause by the affirmative vote of 75% of the votes entitled to be cast in the
election of directors.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material U.S. federal income tax
consequences of the merger and related transactions to FelCor, MeriStar and
their respective stockholders as well as other tax considerations for U.S.
stockholders of FelCor. The following discussion is based upon current
provisions of the Internal Revenue Code of 1986, referred to as the Code,
existing, temporary, and proposed Treasury regulations thereunder, and current
administrative rulings and court decisions. Future legislative, judicial, or
administrative actions or decisions, which may be retroactive in effect, may
affect the accuracy of any statements in this joint proxy statement/prospectus
with respect to the transactions entered into or contemplated prior to the
effective date of those changes. No attempt has been made to comment on all U.S.
federal income tax consequences of the merger and related transactions that may
be relevant to U.S. stockholders of FelCor and MeriStar. Stockholders of FelCor
and MeriStar may not all be affected in the same manner by the tax
considerations discussed below because of their different tax situations.
Jenkens & Gilchrist, a Professional Corporation, counsel for FelCor, and Paul,
Weiss, Rifkind, Wharton & Garrison, counsel for MeriStar, have reviewed the
discussion below in "U.S. Federal Income Tax Consequences of the Merger" and are
of the opinion that the discussion fairly describes the U.S. federal income tax
consequences of the transactions referred to in that section that are likely to
be material to U.S. stockholders of FelCor or MeriStar. Hunton & Williams,
special tax counsel for FelCor, has reviewed the discussion set forth below in
"U.S. Federal Income Tax Consequences of FelCor's Status as a REIT" and is of
the opinion that the discussion fairly describes the U.S. federal income tax
consequences that are likely to be material to U.S. stockholders of FelCor or
MeriStar. Each of the opinions discussed in this paragraph has been filed as an
exhibit to the registration statement of which this joint proxy statement/
prospectus forms a part. The opinions are based on various assumptions, are
subject to limitations, including assumptions regarding the accuracy of factual
representations made by FelCor and MeriStar and the parties to the merger
agreement taking actions contemplated by, and otherwise satisfying their
obligations under, the merger agreement, and are not binding on the Internal
Revenue Service or any court. The Internal Revenue Service may challenge part or
all of those opinions, and such a challenge could be successful.
The following discussion may not apply to particular categories of FelCor
or MeriStar stockholders subject to special treatment under U.S. federal income
tax laws, such as insurance companies, financial institutions, broker-dealers,
estates, trusts, tax-exempt organizations except as provided below, non-U.S.
stockholders except as provided below, holders whose shares were acquired
through the exercise of employee stock options or otherwise as compensation, and
other persons subject to special tax treatment under U.S. federal income tax
laws. Stockholders of FelCor and MeriStar are urged to consult their own tax
advisors regarding the specific tax consequences of the transactions and matters
referred to herein, including the state, local, foreign, and other tax
consequences of the transactions and matters referred to herein, and of
potential changes in applicable tax laws.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
General
The merger is intended to qualify as a reorganization under section
368(a)(1)(A) of the Code. The tax consequences summarized below are based on the
assumption that the merger will qualify as a reorganization. It is a
non-waivable condition to FelCor's obligation to close the merger that FelCor
receive an opinion from Jenkens & Gilchrist that the merger will qualify as a
reorganization within the meaning of section 368(a)(1)(A) of the Code. It also
is a non-waivable condition to MeriStar's obligation to close the merger that
MeriStar receive an opinion from Paul Weiss that the merger will qualify as a
reorganization within the meaning of section 368(a)(1)(A) of the Code. The
foregoing opinions of counsel will rely on customary representations made by
FelCor and MeriStar and applicable factual assumptions. If any of the factual
assumptions or representations relied upon in the opinions of counsel are
inaccurate, the opinions may not accurately describe the tax treatment of the
merger, and this discussion may not accurately describe the tax consequences of
the merger.
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Tax Treatment of Holders of MeriStar Common Stock
MeriStar stockholders will receive $4.60 in cash and 0.784 of a share of
FelCor common stock for each share of MeriStar common stock exchanged in the
merger. Assuming, consistent with the above described opinions, the merger of
MeriStar with and into FelCor constitutes a reorganization within the meaning of
section 368(a)(1)(A) of the Code, the following tax consequences generally will
occur to MeriStar stockholders:
- Recognition of Gain: A MeriStar stockholder will recognize gain upon the
receipt of cash consideration in the merger in an amount equal to the
lesser of:
- the cash consideration received in the merger, excluding cash received
instead of a fractional share of FelCor common stock; or
- the sum of the cash consideration, excluding cash received instead of a
fractional share of FelCor common stock, plus the fair market value of
the FelCor common stock received in the merger less the stockholder's
adjusted tax basis in its MeriStar common stock being exchanged.
The treatment of this gain for tax purposes is described below. A MeriStar
stockholder that receives cash instead of a fractional share of FelCor common
stock also will recognize gain or loss as described below.
- Character of Gain. In general, the determination of whether the gain
recognized by a MeriStar stockholder in the merger will be treated as
capital gain, assuming that the MeriStar common stock was held as a
capital asset, or dividend income depends upon whether and to what extent
the transactions related to the merger will be deemed to reduce the
stockholder's percentage ownership of FelCor following the merger. For
purposes of that determination, the MeriStar stockholder is treated as if
the stockholder first exchanged all of its shares of MeriStar common
stock solely for FelCor common stock and then FelCor immediately redeemed
a portion of the FelCor common stock in exchange for the cash
consideration that the MeriStar stockholder actually received in the
merger. This is referred to as a deemed redemption. If, under Section 302
of the Code, a stockholder's percentage ownership immediately after the
deemed redemption is "substantially disproportionate" to the
stockholder's percentage ownership immediately before the deemed
redemption determined by applying a mathematical test, the gain
recognized will be treated as a capital gain. Based on the expected range
of values of FelCor common stock at the time of the merger, it is
anticipated that the deemed redemption will not be substantially
disproportionate with respect to holders of MeriStar common stock.
Section 302 of the Code also provides that any gain recognized by a
stockholder in the deemed redemption will be capital gain if the deemed
redemption is "not essentially equivalent to a dividend" with respect to
that stockholder. In order for the deemed redemption to be "not
essentially equivalent to a dividend," the deemed redemption must result
in a "meaningful reduction" in the stockholder's deemed percentage stock
ownership of FelCor following the merger. That determination generally
requires a comparison of:
- the percentage of the outstanding stock of FelCor the stockholder is
considered to have owned immediately before the deemed redemption, to
- the percentage of the outstanding stock of FelCor the stockholder owns
immediately after the deemed redemption.
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The Internal Revenue Service has indicated in a published ruling that, in
the case of a small minority holder of a publicly held corporation whose
relative stock interest is minimal and who exercises no control over
corporate affairs, a reduction in the holder's proportionate interest in
the corporation from 0.0001118% to 0.0001081%, an approximate 3.31%
reduction in relative interest, would constitute a meaningful reduction.
In applying the foregoing tests, under the attribution rules of section
318 of the Code, a MeriStar stockholder will be deemed to own:
- stock owned and, in some cases, constructively owned by family
members, by some estates and trusts of which the stockholder is a
beneficiary and by some affiliated entities; and
- stock subject to an option actually or constructively owned by the
stockholder or other persons.
Aside from the guidance provided above, authority is limited on the
application of the "not essentially equivalent to a dividend" test. FelCor does
not intend to report the cash consideration paid in the merger as a dividend
paid to MeriStar stockholders. However, the determination as to whether a
MeriStar stockholder will recognize capital gain or dividend income upon the
merger is complex and is determined on a stockholder-by-stockholder basis.
Accordingly, each MeriStar stockholder is urged to consult his or her own tax
advisor with respect to this determination.
Any capital gain recognized by a MeriStar stockholder will be long-term
capital gain if the MeriStar stockholder's holding period in the MeriStar common
stock is more than one year.
- No Loss Recognized. A MeriStar stockholder will not recognize loss upon
the receipt of cash and FelCor common stock in exchange for MeriStar
common stock in the merger, except in connection with the receipt of cash
instead of a fractional share of FelCor common stock, as described below.
- Tax Basis. The aggregate tax basis of the FelCor common stock received
by a MeriStar stockholder in the merger, including a fractional share of
FelCor common stock for which cash is received, will be the same as the
aggregate tax basis of the stockholder's MeriStar common stock exchanged
therefor, decreased by the amount of cash, other than cash received
instead of a fractional share of FelCor common stock, received in the
merger, and increased by the amount of gain recognized by the stockholder
in the exchange, other than gain recognized in connection with cash
received for a fractional share, but including the amount of gain that is
treated as a dividend.
- Holding Period. The holding period for the FelCor common stock received
by a stockholder of MeriStar in the merger will include the holding
period for the MeriStar common stock being exchanged, provided that the
MeriStar common stock was held as a capital asset at the time of the
merger.
- Fractional Shares. A MeriStar stockholder that receives cash instead of
a fractional share of FelCor common stock will be treated as if it had
received the fractional share in the merger and then FelCor had redeemed
such fractional share. The stockholder generally will recognize gain or
loss in an amount equal to the difference between the amount of cash
received for the fractional share and the portion of the stockholder's
adjusted tax basis in its newly received FelCor common stock that is
allocated to the fractional share. The gain or loss generally will be
treated as capital gain or loss if the stockholder holds its MeriStar
common stock as a capital asset at the time of the merger.
Backup Withholding
Backup withholding tax at a rate of 30.5% may apply to cash paid in the
merger to a MeriStar stockholder. Backup withholding will not apply, however, if
the MeriStar stockholder:
- furnishes a correct taxpayer identification number and certifies that he
or she is not subject to backup withholding on Internal Revenue Service
Form W-9 or an appropriate substitute form;
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- provides a certificate of foreign status on Internal Revenue Service Form
W-8 BEN or an appropriate substitute form; or
- is a corporation or is otherwise exempt from backup withholding and, when
required, demonstrates that fact.
The Internal Revenue Service may impose a penalty upon any taxpayer that
fails to provide the correct taxpayer identification number.
Tax Treatment of MeriStar
Assuming, consistent with the above described opinions, the merger
qualifies as a reorganization within the meaning of section 368(a)(1)(A) of the
Code, MeriStar will not recognize gain or loss in connection with the merger.
Tax Protection Agreements
MeriStar has previously entered into agreements with some holders of
MeriStar Partnership units that require MeriStar to indemnify these holders for
their tax liabilities that arise on the taxable sale or exchange of some
properties by MeriStar. It is not anticipated that the partnership merger will
trigger any material indemnity obligation of MeriStar under these agreements.
Tax Treatment of FelCor and its Stockholders
Assuming, consistent with the above described opinions, the merger
qualifies as a reorganization within the meaning of Section 368(a)(1)(A) of the
Code, neither FelCor nor its stockholders will recognize gain or loss in
connection with the merger, although FelCor will succeed to any tax liabilities
of MeriStar.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF FELCOR'S STATUS AS A REIT
This section describes the material U.S. federal income tax issues that may
be relevant to FelCor common stockholders due to FelCor's status as a REIT. The
statements in this section are based on the current U.S. federal income tax laws
governing qualification as a REIT. New laws, interpretations thereof, or court
decisions, any of which may take effect retroactively, could cause any statement
in this section to be inaccurate.
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO YOU OF OWNERSHIP OF FELCOR COMMON STOCK AND OF FELCOR'S ELECTION
TO BE TAXED AS A REIT. SPECIFICALLY, YOU SHOULD CONSULT YOUR OWN TAX ADVISOR
REGARDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF YOUR
STOCK OWNERSHIP AND FELCOR'S REIT ELECTION, AND REGARDING POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
REIT Qualification
FelCor elected to be taxed as a REIT under the tax laws beginning with its
short taxable year ended December 31, 1994. MeriStar's predecessor elected to be
taxed as a REIT under the federal income tax laws beginning with its short
taxable year ended December 31, 1996. Each of FelCor and MeriStar believes that
it has operated in a manner intended to qualify as a REIT since the beginning of
the first short taxable year for which it elected to be taxed as a REIT and,
following the merger, FelCor intends to continue to so operate. This section
discusses the laws governing the tax treatment of a REIT and its stockholders.
These laws are highly technical and complex.
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The obligation of FelCor and MeriStar to complete the merger is subject to
the non-waivable condition that Hunton & Williams deliver an opinion to FelCor
and MeriStar dated as of the closing date that:
- commencing with its taxable year ended December 31, 1994, FelCor was
organized and has operated in conformity with the requirements for
qualification as a REIT under the Code;
- FelCor Partnership has been since its formation in 1994, and continues to
be, treated for federal income tax purposes as a partnership and not as a
corporation or association taxable as a corporation; and
- the merger will not prevent FelCor from continuing to operate in
conformity with the requirements for qualification as a REIT under the
Code.
In addition, the obligation of FelCor and MeriStar to complete the merger
is subject to the non-waivable condition that Paul Weiss deliver an opinion to
FelCor and MeriStar dated as of the closing date that:
- commencing with its taxable year ended December 31, 1996, MeriStar or its
predecessor was organized and has operated in conformity with the
requirements for qualification as a REIT under the Code; and
- MeriStar Partnership has been since its formation in 1996, and continues
to be, treated for federal income tax purposes as a partnership and not
as a corporation or association taxable as a corporation.
Those opinions will be based upon customary assumptions, representations,
and qualifications and will not be binding upon the Internal Revenue Service.
Investors should be aware that opinions of counsel are not binding upon the
Internal Revenue Service or any court. It must be emphasized that the opinions
of Hunton & Williams and Paul Weiss described above will be based on various
assumptions and conditioned upon representations made by FelCor and MeriStar,
respectively, as to factual matters, including representations regarding the
nature of FelCor's and MeriStar's properties and the future conduct of FelCor's
business. Moreover, FelCor's continued qualification and taxation as a REIT
depend upon its ability to meet on a continuing basis, through actual annual
operating results, the qualification tests set forth in the federal tax laws.
Those qualification tests involve the percentage of income that FelCor earns
from specified sources, the percentage of FelCor's assets that falls within
specified categories, the diversity of FelCor's share ownership, and the
percentage of its earnings that FelCor distributes. The REIT qualification tests
are described in more detail below. While Hunton & Williams and Paul Weiss will
review those matters in connection with the foregoing opinions, Hunton &
Williams will not review FelCor's compliance with those tests on a continuing
basis. Accordingly, the actual results of FelCor's operation for any particular
taxable year may not satisfy these requirements. For a discussion of the tax
consequences of failure to qualify as a REIT, see "-- Failure to Qualify."
Taxation of FelCor
If FelCor qualifies as a REIT, it generally will not be subject to federal
income tax on the taxable income that it distributes to its stockholders. The
benefit of that tax treatment is that it avoids double taxation, or taxation at
both the corporate and stockholder levels, that generally results from owning
stock in a corporation. However, FelCor will be subject to federal tax in the
following circumstances:
- FelCor will pay federal income tax on taxable income, including net
capital gain, that it does not distribute to its stockholders during, or
within a specified time period after, the calendar year in which the
income is earned.
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- FelCor may be subject to the alternative minimum tax on any items of tax
preference that it does not distribute or allocate to its stockholders.
- FelCor will pay income tax at the highest corporate rate on net income
from the sale or other disposition of property acquired through
foreclosure that it holds primarily for sale to customers in the ordinary
course of business, as well as on other non-qualifying income from
foreclosure property.
- FelCor will pay a 100% tax on net income from sales or other dispositions
of property, other than foreclosure property, that it holds primarily for
sale to customers in the ordinary course of business.
- If FelCor fails to satisfy the 75% gross income test or the 95% gross
income test, as described below under "-- Requirements for
Qualification -- Income Tests," and nonetheless continues to qualify as a
REIT because it meets other requirements, it will pay a 100% tax on the
gross income attributable to the greater of the amounts by which it fails
the 75% and 95% gross income tests, multiplied by a fraction intended to
reflect its profitability.
- If FelCor fails to distribute during a calendar year at least the sum of
85% of its REIT ordinary income for the year, 95% of its REIT capital
gain net income for the year and any undistributed taxable income from
prior periods, it will pay a 4% excise tax on the excess of that required
distribution over the amount it actually distributed.
- FelCor may elect to retain and pay income tax on its net long-term
capital gain. In that case, a U.S. stockholder would be taxed on its
proportionate share of FelCor's undistributed long-term capital gain and
would receive a credit or refund for its proportionate share of the tax
FelCor paid.
- If FelCor acquires any asset from a C corporation, or a corporation that
generally is subject to full corporate-level tax, in a merger or other
transaction in which it acquires a basis in the asset that is determined
by reference to the C corporation's basis in the asset, it will pay tax
at the highest regular corporate rate applicable if it recognizes gain on
the sale or disposition of the asset during the 10-year period after it
acquires the asset. The amount of gain on which it will pay tax generally
is the lesser of:
- the amount of gain that it recognizes at the time of the sale or
disposition; and
- the amount of gain that it would have recognized if it had sold the
asset at the time it acquired the asset.
The rule described above will apply assuming that FelCor makes an election under
applicable Treasury regulations on its tax return for the year in which it
acquires assets from a C corporation. FelCor made an election under the Treasury
regulations with respect to the assets that it acquired from Bristol in its
merger with Bristol in 1998. In addition, MeriStar made an election under the
Treasury regulations with respect to the assets that it acquired from CapStar in
its predecessor's merger with CapStar in 1998. Accordingly, any gain recognized
by FelCor on the disposition of any asset acquired from Bristol or CapStar
during the 10-year period beginning on the date of either FelCor's or MeriStar's
acquisition of the asset, as appropriate, to the extent of the asset's built-in
gain, will be subject to tax at the highest regular corporate rate. In addition,
FelCor has designated 16 hotels, some of which FelCor acquired from Bristol in
the Bristol merger, as assets held for possible disposition. If FelCor is
successful in selling those hotels, it could incur corporate income tax
liability with respect to the related built-in gain, the amount of which cannot
yet be determined.
- FelCor will incur a 100% excise tax on transactions with a TRS, that are
not conducted on an arm's-length basis.
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Requirements for Qualification
A REIT is a corporation, trust, or association that meets the following
requirements:
1. it is managed by one or more trustees or directors;
2. its beneficial ownership is evidenced by transferable shares, or by
transferable certificates of beneficial interest;
3. it would be taxable as a domestic corporation, except for the REIT
provisions of the federal income tax laws;
4. it is neither a financial institution nor an insurance company
subject to special provisions of the federal income tax laws;
5. at least 100 persons are beneficial owners of its shares or
ownership certificates;
6. no more than 50% in value of its outstanding shares or ownership
certificates is owned, directly or indirectly, by five or fewer
individuals, as defined in the tax laws to include some types of entities,
during the last half of any taxable year;
7. it elects to be a REIT, or has elected REIT status for a previous
taxable year, and satisfies all relevant filing and other administrative
requirements established by the Internal Revenue Service that must be met
to elect and maintain REIT status;
8. it uses a calendar year for federal income tax purposes and
complies with the recordkeeping requirements of the federal income tax
laws; and
9. it meets other qualification tests, described below, regarding the
nature of its income and assets.
FelCor must meet requirements 1 through 4 during its entire taxable year
and must meet requirement 5 during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
If FelCor complies with all the requirements for ascertaining the ownership of
its outstanding shares in a taxable year and has no reason to know that it
violated requirement 6, it will be deemed to have satisfied requirement 6 for
that taxable year. For purposes of determining share ownership under requirement
6, an individual generally includes a supplemental unemployment compensation
benefits plan, a private foundation, or a portion of a trust permanently set
aside or used exclusively for charitable purposes. An individual, however,
generally does not include a trust that is a qualified employee pension or
profit sharing trust under the federal income tax laws, and beneficiaries of
this type of a trust will be treated as holding shares of FelCor's stock in
proportion to their actuarial interests in the trust for purposes of requirement
6.
FelCor has issued sufficient common stock with enough diversity of
ownership to satisfy requirements 5 and 6 set forth above. In addition, FelCor's
charter restricts the ownership and transfer of the common stock so that FelCor
should continue to satisfy requirements 5 and 6. The provisions of the charter
restricting the ownership and transfer of the common stock are described in
"Description of FelCor Capital Stock -- Selected FelCor Charter and Bylaw
Provisions -- Restrictions on Ownership and Transfer."
A corporation that is a "qualified REIT subsidiary" is not treated as a
corporation separate from its parent REIT. All assets, liabilities, and items of
income, deduction, and credit of a qualified REIT subsidiary are treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
qualified REIT subsidiary is a corporation, other than a taxable REIT
subsidiary, all of the capital stock of which is owned by the REIT. Thus, in
applying the requirements described herein, any qualified REIT subsidiary of
FelCor will be ignored, and all assets, liabilities, and items of income,
deduction, and credit of the subsidiary will be treated as assets, liabilities,
and items of income, deduction, and credit of FelCor.
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In the case of a REIT that is a partner in a partnership, the REIT is
treated as owning its proportionate share of the assets of the partnership and
as earning its allocable share of the gross income of the partnership for
purposes of the applicable REIT qualification tests. Thus, FelCor's
proportionate share of the assets, liabilities, and items of income of FelCor
Partnership and of any other partnership, joint venture, or limited liability
company that is treated as a partnership for federal income tax purposes in
which FelCor has acquired or will acquire an interest, directly or indirectly,
which are referred to as partnership subsidiaries, are treated as assets and
gross income of FelCor for purposes of applying the various REIT qualification
requirements.
FelCor and its subsidiaries also own equity interests in non-corporate,
single-owner or -member entities. As long as an entity described in the
preceding sentence does not elect to be treated as an association taxable as a
corporation for federal income tax purposes, the entity will be disregarded for
federal income tax purposes and all assets, liabilities, and items of income,
deduction, and credit of the entity will be treated as assets, liabilities, and
items of income, deduction, and credit of FelCor or the FelCor subsidiary that
owns the equity interests in the entity.
Income Tests. FelCor must satisfy two gross income tests annually to
maintain its qualification as a REIT. First, at least 75% of its gross income
for each taxable year must consist of defined types of income that it derives,
directly or indirectly, from investments relating to real property or mortgages
on real property or temporary investment income. Qualifying income for purposes
of that 75% gross income test generally includes:
- rents from real property;
- interest on debt secured by mortgages on real property or on interests in
real property;
- dividends or other distributions on and gain from the sale of shares in
other REITs; and
- gain from the sale of real property or mortgage loans.
Second, in general, at least 95% of its gross income for each taxable year
must consist of income that is qualifying income for purposes of the 75% gross
income test, other types of dividends and interest, gain from the sale or
disposition of stock or securities, income from some hedging transactions, or
any combination of the foregoing. Gross income from FelCor's sale of property
that it holds primarily for sale to customers in the ordinary course of business
is excluded from both income tests. The following paragraphs discuss the
specific application of the gross income tests to FelCor.
Rents from Real Property. Rent that FelCor receives from real property
that it owns and leases to tenants will qualify as "rents from real property,"
which is qualifying income for purposes of the 75% and 95% gross income tests,
only if the following conditions are met:
- First, the rent must not be based, in whole or in part, on the income or
profits of any person, but may be based on a fixed percentage or
percentages of receipts or sales.
- Second, neither FelCor nor a direct or indirect owner of 10% or more of
its stock may own, actually or constructively, 10% or more of a tenant
from whom it receives rent, other than a TRS.
- Third, if the tenant is a TRS, the TRS may not directly or indirectly
operate or manage the related property. Instead, the property must be
operated on behalf of the TRS by a person who qualifies as an independent
contractor and who is, or is related to a person who is, actively engaged
in the trade or business of operating lodging facilities for any person
unrelated to FelCor and the TRS. See "-- Other Tax
Consequences -- Taxable REIT Subsidiaries."
- Fourth, all of the rent received under a lease of real property will not
qualify as rents from real property unless the rent attributable to the
personal property leased in connection with such lease is no more than
15% of the total rent received under the lease.
- Fifth, FelCor generally must not operate or manage its real property or
furnish or render services to its tenants, other than through an
independent contractor who is adequately compensated and from
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whom FelCor does not derive revenue. However, FelCor need not provide
services through an independent contractor, but instead may provide
services directly to its tenants, if the services are usually or
customarily rendered in connection with the rental of space for occupancy
only and are not considered to be provided for the tenants' convenience.
In addition, FelCor may provide a minimal amount of non-customary
services to the tenants of a property, other than through an independent
contractor, as long as its income from the services does not exceed 1% of
its income from the related property. Furthermore, FelCor may own up to
100% of the stock of a TRS, which may provide customary and noncustomary
services to FelCor's tenants without tainting FelCor's rental income from
the related properties. See "-- Other Tax Consequences -- Taxable REIT
Subsidiaries."
Under its percentage leases, FelCor's lessees lease from FelCor Partnership
and the partnership subsidiaries the land, buildings, improvements, furnishings
and equipment comprising the hotels, for terms of five to 10 years, with options
to renew for total terms, including the initial term, of not more than 15 years.
The percentage leases provide that the lessees are obligated to pay to FelCor
Partnership and the partnership subsidiaries the greater of a minimum base rent
or percentage rent as well as additional charges or other expenses, as defined
in the leases. Percentage rent is calculated by multiplying fixed percentages by
gross room or suite revenues, and gross food and beverage revenues and rent for
each of the hotels. Both base rent and the thresholds in the percentage rent
formulas are adjusted for inflation. Base rent and percentage rent accrue and
are due monthly.
In order for the base rent, percentage rent, and additional charges to
constitute rents from real property, the percentage leases must be respected as
true leases for federal income tax purposes and not treated as service
contracts, joint ventures, or some other type of arrangement. The determination
of whether the percentage leases are true leases depends on an analysis of all
the surrounding facts and circumstances. In making this determination, courts
have considered a variety of factors, including the following:
- the intent of the parties;
- the form of the agreement;
- the degree of control over the property that is retained by the property
owner, or whether the lessee has substantial control over the operation
of the property or is required simply to use its best efforts to perform
its obligations under the agreement; and
- the extent to which the property owner retains the risk of loss with
respect to the property, or whether the lessee bears the risk of
increases in operating expenses or the risk of damage to the property or
the potential for economic gain or appreciation with respect to the
property.
In addition, tax law provides that a contract that purports to be a service
contract or a partnership agreement will be treated instead as a lease of
property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not:
- the service recipient is in physical possession of the property;
- the service recipient controls the property;
- the service recipient has a significant economic or possessory interest
in the property, or whether the property's use is likely to be dedicated
to the service recipient for a substantial portion of the useful life of
the property, the recipient shares the risk that the property will
decline in value, the recipient shares in any appreciation in the value
of the property, the recipient shares in savings in the property's
operating costs, or the recipient bears the risk of damage to or loss of
the property;
- the service provider bears the risk of substantially diminished receipts
or substantially increased expenditures if there is nonperformance under
the contract;
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- the service provider uses the property concurrently to provide
significant services to entities unrelated to the service recipient; and
- the total contract price substantially exceeds the rental value of the
property for the contract period.
Since the determination whether a service contract should be treated as a
lease is inherently factual, the presence or absence of any single factor will
not be dispositive in every case.
FelCor believes that the percentage leases will be treated as true leases
for tax purposes. This belief is based, in part, on the following facts:
- FelCor Partnership and the partnership subsidiaries, on the one hand, and
the lessees, on the other hand, intend for their relationship to be that
of a lessor and lessee and the relationship is documented by lease
agreements;
- the lessees have the right to the exclusive possession, use, and quiet
enjoyment of the hotels during the term of the percentage leases;
- the lessees bear the cost of, and are responsible for, day-to-day
maintenance and repair of the hotels, other than the cost of maintaining
underground utilities, structural elements, and capital improvements, and
generally dictate how the hotels are operated, maintained, and improved;
- the lessees bear all of the costs and expenses of operating the hotels,
including the cost of any inventory used in their operation, during the
term of the percentage leases, other than real estate and personal
property taxes and property and casualty insurance premiums;
- the lessees benefit from any savings in the costs of operating the hotels
during the term of the percentage leases;
- the lessees generally have indemnified FelCor Partnership and the
partnership subsidiaries against all liabilities imposed on FelCor
Partnership and the partnership subsidiaries during the term of the
percentage leases by reason of:
- injury to persons or damage to property occurring at the hotels;
- the lessees' use, management, maintenance, or repair of the hotels;
- any environmental liability caused by acts or grossly negligent failures
to act of the lessees;
- taxes and assessments in respect of the hotels that are the obligations
of the lessees; or
- any breach of the percentage leases or of any sublease of a hotel by the
lessees;
- the lessees are obligated to pay substantial fixed rent for the period of
use of the hotels;
- the lessees stand to incur substantial losses or reap substantial gains
depending on how successfully they operate the hotels;
- FelCor Partnership and the partnership subsidiaries cannot use the hotels
concurrently to provide significant services to entities unrelated to the
lessees; and
- the total contract price under the percentage leases does not
substantially exceed the rental value of the hotels for the term of the
percentage leases.
Investors should be aware that there are no controlling Treasury
regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the percentage leases that discuss whether these
leases constitute true leases for tax purposes. If the percentage leases are
characterized as service contracts or partnership agreements, rather than as
true leases, part or all of the payments that FelCor Partnership and the
partnership subsidiaries receive from the lessees may not be considered rent or
may not otherwise satisfy the various requirements for qualification as rents
from real property. In that
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case, FelCor likely would not be able to satisfy either the 75% or 95% gross
income test and, as a result, would lose its REIT status.
As described above, in order for the rent received by FelCor to constitute
rents from real property, several other requirements must be satisfied. One
requirement is that the percentage rent must not be based in whole or in part on
the income or profits of any person. The percentage rent, however, will qualify
as rents from real property if it is based on percentages of receipts or sales
and the percentages:
- are fixed at the time the percentage leases are entered into;
- are not renegotiated during the term of the percentage leases in a manner
that has the effect of basing percentage rent on income or profits; and
- conform with normal business practice.
More generally, the percentage rent will not qualify as rents from real
property if, considering the percentage leases and all the surrounding
circumstances, the arrangement does not conform with normal business practice,
but is in reality used as a means of basing the percentage rent on income or
profits. Since the percentage rent is based on fixed percentages of the gross
revenues from the hotels that are established in the percentage leases, and
FelCor has represented that the percentages will not be renegotiated during the
terms of the percentage leases in a manner that has the effect of basing the
percentage rent on income or profits and that the percentages conform with
normal business practice, the percentage rent should not be considered based in
whole or in part on the income or profits of any person. Furthermore, FelCor has
represented that, with respect to other hotel properties that it acquires in the
future, it will not charge rent for any property that is based in whole or in
part on the income or profits of any person, except by reason of being based on
a fixed percentage of gross revenues, as described above.
Another requirement for qualification of the rent received by FelCor as
rents from real property is that FelCor must not own, actually or
constructively, 10% or more of the stock or the assets or net profits of any
lessee, referred to as a related party tenant, other than a TRS. The
constructive ownership rules generally provide that, if 10% or more in value of
the stock of FelCor is owned, directly or indirectly, by or for any person,
FelCor is considered as owning the stock owned, directly or indirectly, by or
for that person. FelCor does not own, and does not expect to own, any stock or
any assets or net profits of any lessee directly, other than its TRSs and
MeriStar's TRSs. Moreover, FelCor's charter prohibits transfers of FelCor stock
that would cause FelCor to own, actually or constructively, 10% or more of the
ownership interests in a lessee. Such charter provision is not intended to
prevent FelCor from leasing its hotels to a TRS. Based on the foregoing, FelCor
should never own, actually or constructively, 10% of more of any lessee other
than a TRS. Furthermore, FelCor has represented that, with respect to other
hotel properties that it acquires in the future, it will not rent any property
to a related party tenant. However, because the constructive ownership rules are
broad and it is not possible to monitor continually direct and indirect
transfers of FelCor stock, such transfers or other events of which FelCor has no
knowledge could cause FelCor to own constructively 10% or more of a lessee other
than a TRS at some future date.
REITs are permitted to own up to 100% of the stock of one or more TRSs
beginning on January 1, 2001. A TRS is a taxable corporation that is permitted
to lease hotels from the related REIT as long as it does not directly or
indirectly operate or manage any hotels or health care facilities or provide
rights to any brand name under which any hotel or health care facility is
operated other than rights held by the TRS as a franchisee or in a similar
capacity and that are provided to an eligible independent contractor to operate
or manage the facility. A third requirement for the qualification of the rent
received by FelCor as rents from real property is that, if the rent is received
from a TRS, the property must be a qualified lodging facility operated on behalf
of the TRS by a person who qualifies as an independent contractor, from whom
FelCor does not derive income, and who is, or is related to a person who is,
actively engaged in the trade or business of operating qualified lodging
facilities for any person unrelated to FelCor and the TRS lessee, referred to as
an eligible independent contractor. A qualified lodging facility is a hotel,
motel, or other establishment in which more than one-half of the dwelling units
are used on a transient basis, unless wagering activities are conducted at or in
connection with the facility by any person who is engaged in the
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business of accepting wagers and who is legally authorized to engage in that
type of business at or in connection with the facility. A qualified lodging
facility includes customary amenities and facilities operated as part of, or
associated with, the lodging facility as long as the amenities and facilities
are customary for other properties of a comparable size and class owned by other
unrelated owners. An independent contractor is a person who does not own,
directly or constructively, more than 35 percent of the ownership interests in
the REIT and, if the entity is a corporation, not more than 35 percent of the
total shares or total combined voting power of the entity, or, if the entity is
not a corporation, not more than 35 percent of the interest in the assets or net
profits of the entity is owned, directly or constructively, by one or more
persons or entities owning 35 percent or more of the REIT. Each of FelCor and
MeriStar formed TRSs as of January 1, 2001 to acquire leases for its hotels. In
connection with the acquisition by those TRSs of the leases, the TRSs engaged or
will engage independent third-party hotel managers to operate the related hotels
on behalf of those TRSs. Furthermore, FelCor has represented that, with respect
to properties that it leases to its TRSs in the future, each TRS will engage an
eligible independent contractor to manage and operate the hotels leased by that
TRS.
A fourth requirement for qualification of the rent received by FelCor as
rents from real property is that the rent attributable to the personal property
leased in connection with the lease of a hotel must not be greater than 15% of
the total rent received under the lease. The rent attributable to the personal
property contained in a hotel is the amount that bears the same ratio to total
rent for the taxable year as the average of the fair market values of the
personal property at the beginning and at the end of the taxable year bears to
the average of the aggregate fair market values of both the real and personal
property contained in the hotel at the beginning and at the end of the taxable
year, referred to as the personal property ratio. Prior to January 1, 2001, the
personal property ratio was computed based on relative adjusted tax bases
instead of fair market values. With respect to each hotel, FelCor believes
either that the personal property ratio is less than 15% or that any income
attributable to excess personal property will not jeopardize FelCor's ability to
qualify as a REIT. However, the Internal Revenue Service could challenge
FelCor's calculation of a personal property ratio, and a court could uphold the
assertion. If this type of challenge were successfully asserted, FelCor could
fail to satisfy the 95% or 75% gross income test and thus lose its REIT status.
A fifth requirement for qualification of the rent received by FelCor as
rents from real property is that, other than within the 1% de minimis exception
described above and other than through a TRS, FelCor cannot furnish or render
noncustomary services to the tenants of its hotels, or manage or operate its
hotels, other than through an independent contractor who is adequately
compensated and from whom FelCor does not derive or receive any income. Provided
that the percentage leases are respected as true leases, FelCor should satisfy
that requirement, because FelCor Partnership and the partnership subsidiaries do
not perform any services other than customary ones for their lessees.
Furthermore, FelCor has represented that, with respect to other hotel properties
that it acquires in the future, it will not perform noncustomary services for
the lessee of the property. However, FelCor's TRSs can provide customary and
noncustomary services to FelCor's lessees without tainting FelCor's rental
income from the related properties. See "-- Other Tax Consequences -- Taxable
REIT Subsidiaries."
If a portion of the rent received by FelCor from a hotel does not qualify
as rents from real property because the rent attributable to personal property
exceeds 15% of the total rent for a taxable year, the portion of the rent that
is attributable to personal property will not be qualifying income for purposes
of either the 75% or 95% gross income test. Thus, if rent attributable to
personal property, plus any other income that is nonqualifying income for
purposes of the 95% gross income test, during a taxable year exceeds 5% of
FelCor's gross income during the year, FelCor could lose its REIT status. In
addition, none of the rent from a particular hotel would qualify as rents from
real property if:
- the percentage rent is considered based on the income or profits of the
related lessee;
- the lessee is a related party tenant other than a TRS;
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- the TRS that leases the hotel directly or indirectly manages or operates
the hotel, the person that operates or manages the hotel on behalf of the
TRS is not an eligible independent contractor, or the hotel is not a
qualified lodging facility, each as described above; or
- FelCor furnishes noncustomary services to the tenants of the hotel, or
manages or operates the hotel, other than through a qualifying
independent contractor or a TRS.
In that case, FelCor might lose its REIT status because it would be unable
to satisfy either the 75% or 95% gross income test.
In addition to the rent, the lessees are required to pay additional charges
to FelCor Partnership and the partnership subsidiaries. To the extent that the
additional charges represent either reimbursements of amounts that FelCor
Partnership and the partnership subsidiaries are obligated to pay to third
parties or penalties for nonpayment or late payment of those amounts, the
charges should qualify as rents from real property. However, to the extent that
the charges represent interest that is accrued on the late payment of the rent
or additional charges, the charges will not qualify as rents from real property,
but instead should be treated as interest that qualifies for the 95% gross
income test.
Interest. The term "interest" generally does not include any amount
received or accrued, directly or indirectly, if the determination of the amount
depends in whole or in part on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from the term
"interest" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Furthermore, to the extent that interest from a loan that
is based on the residual cash proceeds from the sale of the property securing
the loan constitutes a "shared appreciation provision," income attributable to
the participation feature will be treated as gain from the sale of the secured
property.
Prohibited Transactions. A REIT will incur a 100% tax on the net income
derived from any sale or other disposition of property, other than foreclosure
property, that the REIT holds primarily for sale to customers in the ordinary
course of a trade or business. Whether a REIT holds an asset primarily for sale
to customers in the ordinary course of a trade or business depends on the facts
and circumstances in effect from time to time, including those related to a
particular asset. FelCor believes that none of the assets owned by FelCor
Partnership and the partnership subsidiaries is held for sale to customers and
that a sale of an asset held by FelCor Partnership or a partnership subsidiary
would not be in the ordinary course of the owning entity's business. However,
FelCor has designated 15 hotels as assets held for possible disposition, which
hotels would be disposed of in strategic dispositions that would not be in the
ordinary course of its business. FelCor will attempt to comply with the terms of
safe-harbor provisions in the federal income tax laws prescribing when an asset
sale will not be characterized as a prohibited transaction. However, FelCor may
not able to comply with these safe-harbor provisions. In addition, FelCor
Partnership and the partnership subsidiaries may not be able to avoid owning
property that may be characterized as property held primarily for sale to
customers in the ordinary course of a trade or business.
Foreclosure Property. FelCor will be subject to tax at the maximum
corporate rate on any income from foreclosure property, other than income that
would be qualifying income for purposes of the 75% gross income test, less
expenses directly connected with the production of that income. However, gross
income from foreclosure property will qualify for purposes of the 75% and 95%
gross income tests. Foreclosure property is any real property, including
interests in real property, and any personal property incident to that real
property:
- that is acquired by a REIT as the result of the REIT having bid in the
property at foreclosure, or having otherwise reduced the property to
ownership or possession by agreement or process of law, after there was a
default or default was imminent on a lease of the property or on an
indebtedness that the property secured; and
- for which the REIT makes a proper election to treat the property as
foreclosure property.
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However, a REIT will not be considered to have foreclosed on a property
where the REIT takes control of the property as a mortgagee-in-possession and
cannot receive any profit or sustain any loss except as a creditor of the
mortgagor. Property generally ceases to be foreclosure property with respect to
a REIT at the end of the third taxable year following the taxable year in which
the REIT acquired such property, or longer if an extension is granted by the
Secretary of the Treasury. The foregoing grace period is terminated and
foreclosure property ceases to be foreclosure property on the first day:
- on which a lease is entered into with respect to the property that, by
its terms, will give rise to income that does not qualify for purposes of
the 75% gross income test or any amount is received or accrued, directly
or indirectly, under a lease entered into on or after the day that the
REIT acquired the property that will give rise to income that does not
qualify for purposes of the 75% gross income test;
- on which any construction takes place on the property, other than
completion of a building, or any other improvement, where more than 10%
of the construction of the building or other improvement was completed
before default became imminent; or
- which is more than 90 days after the day on which the property was
acquired by the REIT and the property is used in a trade or business
which is conducted by the REIT, other than through an independent
contractor from whom the REIT itself does not derive or receive any
income.
As a result of the rules with respect to foreclosure property, if a lessee
defaults on its obligations under a percentage lease, FelCor terminates the
lessee's leasehold interest, and FelCor is unable to find a replacement lessee
for the hotel within 90 days of the foreclosure, gross income from hotel
operations conducted by FelCor from that hotel would cease to qualify for the
75% and 95% gross income tests unless FelCor is able to hire an independent
contractor to manage and operate the hotel. In that event, FelCor might be
unable to satisfy the 75% and 95% gross income tests and, thus, might fail to
qualify as a REIT.
Hedging Transactions. From time to time, FelCor or FelCor Partnership may
enter into hedging transactions with respect to one or more of its assets or
liabilities. Its hedging activities may include entering into interest rate
swaps, caps, and floors, options to purchase these items, and futures and
forward contracts. To the extent that FelCor or FelCor Partnership enters into
an interest rate swap or cap contract, option, futures contract, forward rate
agreement, or any similar financial instrument to hedge its indebtedness
incurred to acquire or carry "real estate assets," any periodic income or gain
from the disposition of that contract should be qualifying income for purposes
of the 95% gross income test, but not the 75% gross income test. To the extent
that FelCor or FelCor Partnership hedges with other types of financial
instruments, or in other situations, it is not entirely clear how the income
from those transactions will be treated for purposes of the gross income tests.
FelCor intends to structure any hedging transactions in a manner that does not
jeopardize FelCor's status as a REIT.
Failure to Satisfy Gross Income Tests. If FelCor fails to satisfy one or
both of the gross income tests for any taxable year, it nevertheless may qualify
as a REIT for that year if it qualifies for relief under provisions of the
federal income tax laws. Those relief provisions generally will be available if:
- its failure to meet those tests is due to reasonable cause and not due to
willful neglect;
- it attaches a schedule of sources of its income to its tax return; and
- any incorrect information on the schedule was not due to fraud with
intent to evade tax.
It cannot be predicted, however, whether in all circumstances FelCor would
qualify for the relief provisions. In addition, as discussed above in
"-- Taxation of FelCor," even if the relief provisions apply, FelCor would incur
a 100% tax on the gross income attributable to the greater of the amounts by
which it fails the 75% and 95% gross income tests, multiplied by a fraction
intended to reflect its profitability.
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Asset Tests. To maintain its qualification as a REIT, FelCor also must
satisfy the following asset tests at the close of each quarter of each taxable
year:
- First, at least 75% of the value of its total assets must consist of:
- cash or cash items, including some receivables;
- government securities;
- interests in real property, including leaseholds and options to acquire
real property and leaseholds;
- interests in mortgages on real property;
- stock in other REITs; and
- investments in stock or debt instruments during the one-year period
following FelCor's receipt of new capital that it raises through equity
offerings or offerings of debt with at least a five-year term.
- Second, of FelCor's investments not included in the 75% asset class, the
value of its interest in any one issuer's securities may not exceed 5% of
the value of its total assets.
- Third, FelCor may not own more than 10% of the voting power or value of
any one issuer's outstanding securities.
- Fourth, no more than 20% of the value of FelCor's total assets may
consist of the securities of one or more TRSs.
- Fifth, no more than 25% of the value of FelCor's total assets may consist
of the securities of TRSs and other non-TRS taxable subsidiaries and
other assets that are not qualifying assets for purposes of the 75% asset
test.
For purposes of the second and third asset tests, the term "securities"
does not include FelCor's stock in another REIT, its equity or debt securities
of a qualified REIT subsidiary or TRS, or its equity interest in any
partnership. The term "securities," however, generally includes FelCor's debt
securities issued by a partnership, except that debt securities of a partnership
are not treated as securities for purposes of the 10% value test if FelCor owns
at least a 20% profits interest in the partnership.
As stated above, FelCor may own up to 100% of the stock of one or more TRSs
beginning on January 1, 2001. However, overall, no more than 20% of the value of
FelCor's assets may consist of securities of one or more TRSs, and no more than
25% of the value of FelCor's assets may consist of the securities of TRSs and
other non-TRS taxable subsidiaries and other assets that are not qualifying
assets for purposes of the 75% asset test.
If FelCor should fail to satisfy the asset tests at the end of a calendar
quarter, it would not lose its REIT status if (1) it satisfied the asset tests
at the close of the preceding calendar quarter and (2) the discrepancy between
the value of its assets and the asset test requirements arose from changes in
the market values of its assets and was not wholly or partly caused by the
acquisition of one or more non-qualifying assets. If FelCor did not satisfy the
condition described in clause (2) of the preceding sentence, it still could
avoid disqualification as a REIT by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which the discrepancy arose.
Distribution Requirements. Each taxable year, FelCor must distribute
dividends, other than capital gain dividends and deemed distributions of
retained capital gain, to its stockholders in an aggregate amount at least equal
to:
- the sum of 90% of its REIT taxable income, computed without regard to the
dividends paid deduction and its net capital gain or loss, and 90% of its
after-tax net income, if any, from foreclosure property; minus
- the sum of some types of non-cash income.
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FelCor must pay these distributions in the taxable year to which they
relate, or in the following taxable year if it declares the distribution before
it timely files its federal income tax return for the year and pays the
distribution on or before the first regular dividend payment date after the
declaration. The distribution requirement was lowered from 95% to 90% as of
January 1, 2001.
FelCor will pay federal income tax on taxable income, including net capital
gain, that it does not distribute to stockholders. Furthermore, if it fails to
distribute during a calendar year, or by the end of January following the
calendar year in the case of distributions with declaration and record dates
falling in the last three months of the calendar year, at least the sum of:
- 85% of its REIT ordinary income for that year;
- 95% of its REIT capital gain income for that year; and
- any undistributed taxable income from prior periods,
it will incur a 4% nondeductible excise tax on the excess of the required
distribution over the amounts it actually distributed. FelCor may elect to
retain and pay income tax on the net long-term capital gain it receives in a
taxable year. See "-- Taxation of Taxable U.S. Stockholders." If it so elects,
it will be treated as having distributed that retained amount for purposes of
the 4% excise tax described above. FelCor has made, and FelCor intends to
continue to make, timely distributions sufficient to satisfy the annual
distribution requirements.
It is possible that, from time to time, FelCor may experience timing
differences between the actual receipt of income and actual payment of
deductible expenses and the inclusion of that income and deduction of expenses
in arriving at its REIT taxable income. For example, FelCor may not deduct
recognized capital losses from its REIT taxable income. Further, it is possible
that, from time to time, FelCor may be allocated a share of net capital gain
attributable to the sale of depreciated property that exceeds its allocable
share of cash attributable to that sale. As a result of the foregoing, FelCor
may have less cash than is necessary to distribute all of its taxable income and
thereby avoid corporate income tax and the excise tax imposed on undistributed
income. In this situation, FelCor may need to borrow funds or issue additional
common or preferred stock.
Under some circumstances, FelCor may be able to correct a failure to meet
the distribution requirement for a year by paying deficiency dividends to its
stockholders in a later year. FelCor may include these deficiency dividends in
its deduction for dividends paid for the earlier year. Although FelCor may be
able to avoid income tax on amounts distributed as deficiency dividends, it will
be required to pay interest to the Internal Revenue Service based upon the
amount of any deduction it takes for deficiency dividends. FelCor also may be
able to use the deficiency dividend procedure to correct a failure of MeriStar
to meet the distribution requirement in a year prior to or ending upon the
merger.
A REIT may not have any accumulated earnings and profits from a non-REIT
corporation at the end of any taxable year. In connection with the merger of
Bristol with and into FelCor in 1998, Arthur Andersen LLP prepared and provided
to FelCor its computation of Bristol's accumulated earnings and profits through
the date of the merger, and FelCor made a corresponding special one-time
distribution to its stockholders. In connection with the merger of CapStar with
and into American General Hospitality Corporation, the predecessor to MeriStar,
in 1998, KPMG LLP prepared and provided to MeriStar its computation of CapStar's
accumulated earnings and profits through the date of the merger, and the
distribution of the stock of MeriStar Hotels & Resorts, Inc. by CapStar prior to
the CapStar merger was determined to be sufficient to reduce the earnings and
profits of CapStar to zero at the time of the CapStar merger. However, the
determination of accumulated earnings and profits for federal income tax
purposes is extremely complex and the computations of Arthur Andersen LLP and
KPMG LLP are not binding on the Internal Revenue Service. Should the Internal
Revenue Service successfully assert either that Bristol's accumulated earnings
and profits were greater than the amount so distributed by FelCor or that
CapStar's accumulated earnings and profits were greater than the amount so
distributed by CapStar, FelCor may fail to qualify as a REIT. Alternatively, the
Internal Revenue Service may permit FelCor to
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avoid losing its REIT status by paying a deficiency dividend on MeriStar's or
its behalf to eliminate any remaining C corporation earnings and profits of
Bristol or CapStar. The Internal Revenue Service could assert loss of REIT
status as the penalty for failing to distribute the C corporation earnings and
profits of Bristol or CapStar in 1998.
Recordkeeping Requirements
FelCor must maintain records in order to qualify as a REIT. In addition, to
avoid a monetary penalty, it must request on an annual basis information from
its stockholders designed to disclose the actual ownership of its outstanding
stock. FelCor has complied, and FelCor intends to continue to comply, with these
requirements.
Failure to Qualify
If FelCor were to fail to qualify as a REIT in any taxable year, and no
relief provision applied, it would be subject to federal income tax and any
applicable alternative minimum tax on its taxable income at regular corporate
rates. In calculating its taxable income in a year in which it failed to qualify
as a REIT, FelCor would not be able to deduct amounts paid out to stockholders.
In fact, FelCor would not be required to distribute any amounts to stockholders
in that year. In this event, to the extent of its current and accumulated
earnings and profits, all distributions to stockholders would be taxable as
ordinary income. Subject to certain limitations of the federal income tax laws,
corporate stockholders might be eligible for the dividends received deduction.
Unless FelCor qualified for relief under specific statutory provisions, it also
would be disqualified from taxation as a REIT for the four taxable years
following the year during which it ceased to qualify as a REIT. FelCor may not
be able to qualify for this statutory relief in all circumstances. In addition,
MeriStar's failure to qualify as a REIT in any taxable year prior to or ending
upon the merger could jeopardize FelCor's REIT status after the merger and/or
cause FelCor to be subject to federal income tax.
Taxation of Taxable U.S. Stockholders
As long as FelCor qualifies as a REIT, a taxable U.S. stockholder must take
into account distributions that are made out of FelCor's current or accumulated
earnings and profits and that FelCor does not designate as capital gain
dividends or retained long-term capital gain as ordinary income. A U.S.
stockholder will not qualify for the dividends received deduction generally
available to corporations. As used herein, the term "U.S. stockholder" means a
holder of FelCor common stock that for U.S. federal income tax purposes is:
- a citizen or resident of the United States;
- a corporation or partnership, including an entity treated as a
corporation or partnership for U.S. federal income tax purposes, created
or organized in or under the laws of the United States or of a political
subdivision of the United States;
- an estate whose income is subject to U.S. federal income taxation
regardless of its source; or
- any trust if a U.S. court is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust or it has a
valid election in place to be treated as a U.S. person.
A U.S. stockholder generally will recognize distributions that FelCor
designates as capital gain dividends as long-term capital gain without regard to
the period for which the U.S. stockholder has held its FelCor common stock.
FelCor generally will designate its capital gain dividends as either 20% or 25%
rate distributions. A corporate U.S. stockholder, however, may be required to
treat up to 20% of some capital gain dividends as ordinary income.
FelCor may elect to retain and pay income tax on the net long-term capital
gain that it receives in a taxable year. In that case, a U.S. stockholder would
be taxed on its proportionate share of FelCor's
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undistributed long-term capital gain. The U.S. stockholder would receive a
credit or refund for its proportionate share of the tax FelCor paid. The U.S.
stockholder would increase the basis in its stock by the amount of its
proportionate share of FelCor's undistributed long-term capital gain, minus its
share of the tax FelCor paid.
A U.S. stockholder will not incur tax on a distribution in excess of
FelCor's current and accumulated earnings and profits if the distribution does
not exceed the adjusted tax basis of the U.S. stockholder's FelCor common stock.
Instead, this distribution will reduce the adjusted tax basis of the
stockholder's common stock. A U.S. stockholder will recognize a distribution in
excess of both FelCor's current and accumulated earnings and profits and the
U.S. stockholder's adjusted tax basis in its common stock as long-term capital
gain, or short-term capital gain if the common stock has been held for one year
or less, assuming the common stock is a capital asset in the hands of the U.S.
stockholder. In addition, if FelCor declares a distribution in October,
November, or December of any year that is payable to a U.S. stockholder of
record on a specified date in any month, the distribution shall be treated as
both paid by FelCor and received by the U.S. stockholder on December 31 of that
year, provided that FelCor actually pays the distribution during January of the
following calendar year.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of FelCor. Instead, these losses would be
carried over by FelCor for potential offset against its future income generally.
Taxable distributions from FelCor and gain from the disposition of the FelCor
common stock will not be treated as passive activity income and, therefore,
stockholders generally will not be able to apply any passive activity losses,
such as losses from some types of limited partnerships in which the stockholder
is a limited partner, against that income. In addition, taxable distributions
from FelCor and gain from the disposition of the common stock generally will be
treated as investment income for purposes of the investment interest
limitations. FelCor will notify stockholders after the close of its taxable year
as to the portions of the distributions attributable to that year that
constitute ordinary income, return of capital, and capital gain.
Taxation of U.S. Stockholders on the Disposition of the FelCor Common
Stock. In general, a U.S. stockholder who is not a dealer in securities must
treat any gain or loss realized upon a taxable disposition of the FelCor common
stock as long-term capital gain or loss if the U.S. stockholder has held the
common stock for more than one year and otherwise as short-term capital gain or
loss. However, a U.S. stockholder must treat any loss upon a sale or exchange of
common stock held by the stockholder for six months or less as a long-term
capital loss to the extent of any actual or deemed distributions previously
received from FelCor that are characterized as long-term capital gain. All or a
portion of any loss that a U.S. stockholder realizes upon a taxable disposition
of the common stock may be disallowed if the U.S. stockholder purchases other
shares of common stock within 30 days before or after the disposition.
Capital Gains and Losses. A taxpayer generally must hold a capital asset
for more than one year for gain or loss derived from its sale or exchange to be
treated as long-term capital gain or loss. On June 7, 2001, President Bush
signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001.
That legislation reduces the highest marginal individual income tax rate of
39.6% to 39.1% for the period from July 1, 2001 to December 31, 2001, to 38.6%
for the period from January 1, 2002 to December 31, 2003, to 37.6% for the
period from January 1, 2004 to December 31, 2005, and to 35% for the period from
January 1, 2006 to December 31, 2010. The maximum tax rate on long-term capital
gain applicable to non-corporate taxpayers is 20% for sales and exchanges of
assets held for more than one year. The maximum tax rate on long-term capital
gain from the sale or exchange of "section 1250 property," or depreciable real
property, is 25% to the extent that the gain would have been treated as ordinary
income if the property were "section 1245 property." With respect to
distributions that FelCor designates as capital gain dividends and any retained
capital gain that it is deemed to distribute, FelCor generally may designate
whether the distribution is taxable to its non-corporate stockholders at a 20%
or 25% rate. Thus, the tax rate differential between capital gain and ordinary
income for non-corporate taxpayers may be significant. In addition, the
characterization of income as capital gain or ordinary income may affect the
deductibility of capital losses. A non-corporate taxpayer may deduct capital
losses not offset by capital gains against its ordinary income only up to a
maximum annual amount of $3,000. A non-corporate taxpayer may carry
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forward unused capital losses indefinitely. A corporate taxpayer must pay tax on
its net capital gain at ordinary corporate rates. A corporate taxpayer may
deduct capital losses only to the extent of capital gains, with unused losses
being carried back three years and forward five years.
Information Reporting Requirements and Backup Withholding FelCor will
report to its stockholders and to the Internal Revenue Service the amount of
distributions it pays during each calendar year, and the amount of tax it
withholds, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of up to 31% with respect to
distributions unless the holder:
- is a corporation or comes within other exempt categories and, when
required, demonstrates this fact; or
- provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with the
applicable requirements of the backup withholding rules.
A stockholder who does not provide FelCor with its correct taxpayer
identification number also may be subject to penalties imposed by the Internal
Revenue Service. Any amount paid as backup withholding will be creditable
against the stockholder's income tax liability. In addition, FelCor may be
required to withhold a portion of capital gain distributions to any stockholders
who fail to certify their non-foreign status to FelCor. See "-- Taxation of
Non-U.S. Stockholders."
Taxation of Tax-Exempt Stockholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts and annuities, generally are
exempt from federal income taxation. However, they are subject to taxation on
their unrelated business taxable income. While many investments in real estate
generate unrelated business taxable income, the Internal Revenue Service has
issued a published ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute unrelated business taxable income,
provided that the exempt employee pension trust does not otherwise use the
shares of the REIT in an unrelated trade or business of the pension trust. Based
on that ruling, amounts that FelCor distributes to tax-exempt stockholders
generally should not constitute unrelated business taxable income. However, if a
tax-exempt stockholder were to finance its acquisition of the FelCor common
stock, or of the MeriStar common stock that was exchanged for FelCor common
stock, with debt, a portion of the income that it receives from FelCor would
constitute unrelated business taxable income under the "debt-financed property"
rules. Furthermore, social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group legal services
plans that are exempt from taxation under special provisions of the federal
income tax laws are subject to different unrelated business taxable income
rules, which generally will require them to characterize distributions that they
receive from FelCor as unrelated business taxable income. Finally, in some
circumstances, a qualified employee pension or profit sharing trust that owns
more than 10% of FelCor's stock is required to treat a percentage of the
dividends that it receives from FelCor as unrelated business taxable income. The
percentage is equal to the gross income that FelCor derives from an unrelated
trade or business, determined as if it were a pension trust, divided by its
total gross income for the year in which it pays the dividends. That rule
applies to a pension trust holding more than 10% of FelCor's stock only if:
- the percentage of its dividends that the tax-exempt trust would be
required to treat as unrelated business taxable income is at least 5%;
- FelCor qualifies as a REIT by reason of the modification of the rule
requiring that no more than 50% of FelCor's stock be owned by five or
fewer individuals that allows the beneficiaries of the pension trust to
be treated as holding FelCor's stock in proportion to their actuarial
interests in the pension trust; and
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- either one pension trust owns more than 25% of the value of FelCor's
stock or a group of pension trusts individually holding more than 10% of
the value of FelCor's stock collectively owns more than 50% of the value
of FelCor's stock.
Taxation of Non-U.S. Stockholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
stockholders, collectively referred to as non-U.S. stockholders, are complex.
This section is only a summary of these rules. NON-U.S. STOCKHOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND
LOCAL INCOME TAX LAWS ON OWNERSHIP OF THE FELCOR COMMON STOCK, INCLUDING ANY
REPORTING REQUIREMENTS.
A non-U.S. stockholder that receives a distribution that is not
attributable to gain from FelCor's sale or exchange of U.S. real property
interests, as defined below, and that FelCor does not designate as a capital
gain dividend or retained capital gain will recognize ordinary income to the
extent that FelCor pays the distribution out of its current or accumulated
earnings and profits. A withholding tax equal to 30% of the gross amount of the
distribution ordinarily will apply to that distribution unless an applicable tax
treaty reduces or eliminates the tax. However, if a distribution is treated as
effectively connected with the non-U.S. stockholder's conduct of a U.S. trade or
business, the non-U.S. stockholder generally will be subject to federal income
tax on the distribution at graduated rates, in the same manner as U.S.
stockholders are taxed with respect to those distributions. A non-U.S.
stockholder that is a corporation also may be subject to the 30% branch profits
tax with respect to the distribution. FelCor plans to withhold U.S. income tax
at the rate of 30% on the gross amount of any such distribution paid to a
non-U.S. stockholder unless either:
- a lower treaty rate applies and the non-U.S. stockholder files an IRS
Form W-8BEN evidencing eligibility for that reduced rate with FelCor; or
- the non-U.S. stockholder files an IRS Form W-8ECI with FelCor claiming
that the distribution is effectively connected income.
A non-U.S. stockholder will not incur tax on a distribution in excess of
FelCor's current and accumulated earnings and profits if the distribution does
not exceed the adjusted basis of its FelCor common stock. Instead, the
distribution will reduce the adjusted basis of the stockholder's common stock. A
non-U.S. stockholder will be subject to tax on a distribution that exceeds both
FelCor's current and accumulated earnings and profits and the adjusted basis of
its common stock, if the non-U.S. stockholder otherwise would be subject to tax
on gain from the sale or disposition of its common stock, as described below.
Because FelCor generally cannot determine at the time it makes a distribution
whether or not the distribution will exceed its current and accumulated earnings
and profits, it normally will withhold tax on the entire amount of any
distribution at the same rate as it would withhold on a dividend. However, a
non-U.S. stockholder may obtain a refund of amounts that FelCor withholds if
FelCor later determines that a distribution did exceed its current and
accumulated earnings and profits.
FelCor must withhold 10% of any distribution that exceeds its current and
accumulated earnings and profits. Consequently, although it intends to withhold
at a rate of 30% on the entire amount of any distribution, to the extent that it
does not do so, it will withhold at a rate of 10% on any portion of a
distribution not subject to withholding at a rate of 30%.
For any year in which FelCor qualifies as a REIT, a non-U.S. stockholder
will incur tax on distributions that are attributable to gain from its sale or
exchange of "U.S. real property interests" under special provisions of the
federal income tax laws, or FIRPTA. The term "U.S. real property interests"
includes interests in real property and stock in corporations, at least 50% of
whose assets consists of interests in real property. Under those rules, a
non-U.S. stockholder is taxed on distributions attributable to gain from sales
of U.S. real property interests as if the gain were effectively connected with a
U.S. business of the non-U.S. stockholder. A non-U.S. stockholder thus would be
taxed on the distribution at the normal capital gains rates applicable to U.S.
stockholders, subject to applicable alternative minimum
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tax and a special alternative minimum tax in the case of a nonresident alien
individual. A non-U.S. corporate stockholder not entitled to treaty relief or
exemption also may be subject to the 30% branch profits tax on the distribution.
FelCor must withhold 35% of any distribution that it could designate as a
capital gain dividend. A non-U.S. stockholder may receive a credit against its
tax liability for the amount FelCor withholds.
A non-U.S. stockholder generally will not incur tax under FIRPTA as long as
non-U.S. persons always hold, directly or indirectly, less than 50% in value of
FelCor's stock. That test may not be met. However, a non-U.S. stockholder that
owned, actually or constructively, 5% or less of the FelCor common stock at all
times during a specified testing period will not incur tax under FIRPTA if the
common stock is "regularly traded" on an established securities market. Because
the FelCor stock is regularly traded on an established securities market, a
non-U.S. stockholder will not incur tax under FIRPTA unless it owns more than 5%
of the FelCor common stock. If the gain on the sale of the common stock were
taxed under FIRPTA, a non-U.S. stockholder would be taxed in the same manner as
U.S. stockholders with respect to the gain, subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations. Furthermore, a non-U.S. stockholder will incur
tax on gain not subject to FIRPTA if the gain is effectively connected with the
non-U.S. stockholder's U.S. trade or business, in which case the non-U.S.
stockholder will be subject to the same treatment as U.S. stockholders with
respect to the gain, or the non-U.S. stockholder is a nonresident alien
individual who was present in the U.S. for 183 days or more during the taxable
year and has a "tax home" in the United States, in which case the non-U.S.
stockholder will incur a 30% tax on his capital gains.
OTHER TAX CONSEQUENCES
Tax Aspects of FelCor's Investments in FelCor Partnership and the Partnership
Subsidiaries
The following discussion describes the material federal income tax
considerations applicable to FelCor's direct or indirect investments in FelCor
Partnership and the partnership subsidiaries. The discussion does not cover
state or local tax laws or any federal tax laws other than income tax laws.
Classification as Partnerships. FelCor is entitled to include in its
income its distributive share of each Partnership's income and to deduct its
distributive share of each Partnership's losses only if the Partnership is
classified for federal income tax purposes as a partnership rather than as a
corporation or an association taxable as a corporation. An organization will be
classified as a partnership, rather than as a corporation, for federal income
tax purposes if it:
- is treated as a partnership under Treasury regulations, effective January
1, 1997, relating to entity classification (the "check-the-box
regulations"); and
- is not a "publicly traded" partnership.
An entity that was treated as a partnership under the Treasury regulations
that were in effect prior to January 1, 1997 will retain its partnership
classification unless it has only one member.
Under the check-the-box regulations, an unincorporated entity with at least
two members may elect to be classified either as a partnership or an association
taxable as a corporation. If a domestic entity fails to make an election, it
generally will be treated as a partnership for federal income tax purposes. The
federal income tax classification of an entity that was in existence prior to
January 1, 1997 will be respected for all periods prior to January 1, 1997 if:
- the entity had a reasonable basis for its claimed classification;
- the entity and all members of the entity recognized the federal tax
consequences of any changes in the entity's classification within the 60
months prior to January 1, 1997; and
- neither the entity nor any member of the entity was notified in writing
by a taxing authority on or before May 8, 1996 that the classification of
the entity was under examination.
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Each Partnership in existence prior to January 1, 1997 reasonably claimed
partnership classification under the Treasury regulations relating to entity
classification in effect prior to January 1, 1997. In addition, each Partnership
intends to continue to be classified as a partnership for federal income tax
purposes, and no Partnership, other than FelCor TRS Holdings, LP, which has
elected to be taxed as a corporation and treated as a TRS, will elect to be
treated as an association taxable as a corporation under the check-the-box
regulations.
A publicly traded partnership is a partnership whose interests are traded
on an established securities market or are readily tradable on a secondary
market or a substantial equivalent. A publicly traded partnership will not,
however, be treated as a corporation for any taxable year if 90% or more of the
partnership's gross income for that year consists of passive-type income,
including real property rents, which includes rents that would be qualifying
income for purposes of the 75% gross income test, with modifications that
generally make it easier for the rents to qualify for the 90% passive income
exception, gains from the sale or other disposition of real property, interest
and dividends, referred to as the 90% passive income exception.
Treasury regulations (the "PTP regulations") provide limited safe harbors
from the definition of a publicly traded partnership. Under one of those safe
harbors, referred to as the private placement exclusion, interests in a
partnership will not be treated as readily tradable on a secondary market or a
substantial equivalent if all interests in the partnership were issued in a
transaction or transactions that were not required to be registered under the
Securities Act of 1933, as amended, and the partnership does not have more than
100 partners at any time during the partnership's taxable year. In determining
the number of partners in a partnership, a person owning an interest in a
partnership, grantor trust or S corporation that owns an interest in the
partnership is treated as a partner in the partnership only if substantially all
of the value of the owner's interest in the entity is attributable to the
entity's direct or indirect interest in the partnership, and a principal purpose
of the use of the entity is to permit the partnership to satisfy the 100-partner
limitation. Each Partnership other than FelCor Partnership qualifies for the
private placement exclusion. After the partnership merger, FelCor Partnership
will not qualify for the private placement exclusion because it will have more
than 100 partners. As a result, there is a substantial risk that FelCor
Partnership will be classified as a publicly traded partnership. However, FelCor
Partnership will not be treated as a corporation under the PTP regulations
because it will be eligible for the 90% passive income exception.
FelCor has not requested, and does not intend to request, a ruling from the
Internal Revenue Service that the Partnerships will be classified as
partnerships for federal income tax purposes. Instead, Hunton & Williams will
deliver an opinion to FelCor and MeriStar at closing that FelCor Partnership has
been since its formation, and continues to be, treated for federal income tax
purposes as a partnership and not as a corporation or association taxable as a
corporation. In addition, Paul Weiss will deliver an opinion to FelCor and
MeriStar at closing that MeriStar LP has been since its formation, and continues
to be, treated for federal income tax purposes as a partnership and not as a
corporation or association taxable as a corporation. The delivery of those
opinions is a non-waivable condition to the completion of the merger. Unlike a
tax ruling, an opinion of counsel is not binding on the Internal Revenue
Service, and the Internal Revenue Service could challenge the status of the
Partnerships as partnerships for federal income tax purposes. If that challenge
were sustained by a court, the Partnerships would be treated as corporations for
federal income tax purposes, as described below. The opinions of Hunton &
Williams and Paul Weiss will be based on existing law, which to a great extent
consists of administrative and judicial interpretation. Subsequent
administrative or judicial changes could modify the conclusions expressed in the
opinions.
If for any reason FelCor Partnership or any other Partnership were taxable
as a corporation, rather than as a partnership, for federal income tax purposes,
FelCor likely would not be able to qualify as a REIT. See "-- U.S. Federal
Income Tax Consequences of FelCor's Status as a REIT -- Requirements for
Qualification -- Income Tests" and "-- Requirements for Qualification -- Asset
Tests." In addition, any change in a Partnership's status for tax purposes might
be treated as a taxable event, in which case FelCor might incur tax liability
without any related cash distribution. See "-- U.S. Federal Income Tax
Consequences of FelCor's Status as a REIT -- Requirements for
Qualification -- Distribution Require-
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ments." Further, items of income and deduction of the Partnership would not pass
through to its partners, and its partners would be treated as stockholders for
tax purposes. Consequently, the Partnership would be required to pay income tax
at corporate rates on its net income, and distributions to its partners would
constitute dividends that would not be deductible in computing the Partnership's
taxable income.
Income Taxation of the Partnerships and their Partners
Partners, Not the Partnerships, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, FelCor is required to
take into account its allocable share of each Partnership's income, gains,
losses, deductions, and credits for any taxable year of Partnership ending
within or with the taxable year of FelCor, without regard to whether FelCor has
received or will receive any distribution from the Partnership.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, these allocations
will be disregarded for tax purposes if they do not comply with the provisions
of the federal income tax laws governing partnership allocations. If an
allocation is not recognized for federal income tax purposes, the item subject
to the allocation will be reallocated in accordance with the partners' interests
in the partnership, which will be determined by taking into account all of the
facts and circumstances relating to the economic arrangement of the partners
with respect to that item. Each Partnership's allocations of taxable income,
gain and loss are intended to comply with the requirements of the federal income
tax laws governing partnership allocations.
Tax Allocations with Respect to Contributed Properties. Income, gain, loss
and deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership must
be allocated in a manner so that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of unrealized gain
or unrealized loss, referred to as built-in gain or built-in loss, is generally
equal to the difference between the fair market value of the contributed
property at the time of contribution and the adjusted tax basis of the property
at the time of contribution, referred to as a book-tax difference. These
allocations are solely for federal income tax purposes and do not affect the
book capital accounts or other economic or legal arrangements among the
partners. The U.S. Treasury Department has issued regulations requiring
partnerships to use a "reasonable method" for allocating items with respect to
which there is a book-tax difference and outlining several reasonable allocation
methods.
Under FelCor Partnership's partnership agreement, depreciation or
amortization deductions of FelCor Partnership generally will be allocated among
the partners in accordance with their respective interests in FelCor
Partnership, except to the extent that FelCor Partnership is required under the
federal income tax laws governing partnership allocations to use a method for
allocating tax depreciation deductions attributable to contributed properties
that results in FelCor receiving a disproportionate share of the deductions. In
addition, gain or loss on the sale of a property that has been contributed, in
whole or in part, to FelCor Partnership will be specially allocated to the
contributing partners to the extent of any built-in gain or loss with respect to
the property for federal income tax purposes.
Basis in Partnership Interest. FelCor's adjusted tax basis in its
partnership interest in FelCor Partnership generally is equal to:
- the amount of cash and the basis of any other property contributed by
FelCor to FelCor Partnership;
- increased by its allocable share of FelCor Partnership's income and its
allocable share of indebtedness of FelCor Partnership; and
- reduced, but not below zero, by FelCor's allocable share of FelCor
Partnership's loss and the amount of cash distributed to FelCor, and by
constructive distributions resulting from a reduction in FelCor's share
of indebtedness of FelCor Partnership.
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If the allocation of FelCor's distributive share of FelCor Partnership's
loss would reduce the adjusted tax basis of FelCor's partnership interest in
FelCor Partnership below zero, the recognition of the loss will be deferred
until it would not reduce FelCor's adjusted tax basis below zero. To the extent
that FelCor Partnership's distributions, or any decrease in FelCor's share of
the indebtedness of FelCor Partnership, which is considered a constructive cash
distribution to the partners, reduce FelCor's adjusted tax basis below zero, the
distributions will constitute taxable income to FelCor. These distributions and
constructive distributions normally will be characterized as long-term capital
gain.
Depreciation Deductions Available to FelCor Partnership. To the extent
that FelCor Partnership acquired its hotels in exchange for cash, its initial
basis in these hotels for federal income tax purposes generally was or will be
equal to the purchase price paid by FelCor Partnership. FelCor Partnership
depreciates this depreciable hotel property for federal income tax purposes
under the modified accelerated cost recovery system of depreciation, or MACRS.
Under MACRS, FelCor Partnership generally depreciates furnishings and equipment
over a seven-year recovery period using a 200% declining balance method and a
half-year convention. If, however, FelCor Partnership places more than 40% of
its furnishings and equipment in service during the last three months of a
taxable year, a mid-quarter depreciation convention must be used for the
furnishings and equipment placed in service during that year. Under MACRS,
FelCor Partnership generally depreciates buildings and improvements over a
39-year recovery period using a straight line method and a mid-month convention.
FelCor Partnership's initial basis in the hotels acquired in exchange for units
in FelCor Partnership should be the same as the transferor's basis in the hotels
on the date of acquisition by FelCor Partnership. Although the law is not
entirely clear, FelCor Partnership generally depreciates the depreciable hotel
property for federal income tax purposes over the same remaining useful lives
and under the same methods used by the transferors. FelCor Partnership's tax
depreciation deductions are allocated among the partners in accordance with
their respective interests in FelCor Partnership, except to the extent that
FelCor Partnership is required under the federal income tax laws governing
partnership allocations to use a method for allocating tax depreciation
deductions attributable to contributed properties that results in FelCor
receiving a disproportionate share of the deductions.
Sale of a Partnership's Property
Generally, any gain realized by a partnership on the sale of property held
by the partnership for more than one year will be long-term capital gain, except
for any portion of the gain that is treated as depreciation or cost recovery
recapture. Any gain or loss recognized by a partnership on the disposition of
contributed properties will be allocated first to the partners of the
partnership who contributed the properties to the extent of their built-in gain
or loss on those properties for federal income tax purposes. The partners'
built-in gain or loss on the contributed properties will equal the difference
between the book value of those properties and the tax basis allocable to those
properties at the time of the contribution. Any remaining gain or loss
recognized by the partnership on the disposition of the contributed properties,
and any gain or loss recognized by the Partnership on the disposition of the
other properties, will be allocated among the partners in accordance with their
respective percentage interests in the partnership.
FelCor's share of any gain realized by a partnership on the sale of any
property held by the Partnership as inventory or other property held primarily
for sale to customers in the ordinary course of the Partnership's trade or
business will be treated as income from a prohibited transaction that is subject
to a 100% penalty tax. Prohibited transaction income also may have an adverse
effect upon FelCor's ability to satisfy the income tests for REIT status. See
"-- U.S. Federal Income Tax Consequences of FelCor's Status as a
REIT -- Requirements for Qualification -- Income Tests." FelCor, however, does
not presently intend to acquire or hold or to allow any partnership to acquire
or hold any property that represents inventory or other property held primarily
for sale to customers in the ordinary course of FelCor's or the partnership's
trade or business.
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Taxable REIT Subsidiaries
As described above, FelCor may own up to 100% of the stock of one or more
TRSs beginning on January 1, 2001. A TRS is a fully taxable corporation. A TRS
may lease hotels from FelCor under some circumstances, provide services to
FelCor's tenants and perform activities unrelated to FelCor's tenants, such as
third-party management, development and other independent business activities.
FelCor and a subsidiary must elect for the subsidiary to be treated as a TRS. A
corporation of which a TRS directly or indirectly owns more than 35% of the
voting power or value of the stock will automatically be treated as a TRS.
Overall, no more than 20% of the value of FelCor's assets may consist of
securities of one or more TRSs, and no more than 25% of the value of FelCor's
assets may consist of the securities of TRSs and other non-TRS taxable
subsidiaries and other assets that are not qualifying assets for purposes of the
75% asset test.
A TRS may not directly or indirectly operate or manage any hotels or health
care facilities or provide rights, other than to an eligible independent
contractor in some situations, to any brand name under which any hotel or health
care facility is operated. Rents received by FelCor from a TRS will qualify as
rents from real property as long as the related hotel is operated on behalf of
the TRS by a third-party hotel manager, who satisfies the following
requirements:
- the manager is, or is related to a person who is, actively engaged in the
trade or business of operating "qualified lodging facilities" for any
person unrelated to FelCor and the TRS;
- the manager does not own, directly or indirectly, more than 35% of
FelCor's stock;
- no more than 35% of the manager is owned, directly or indirectly, by one
or more persons owning 35% or more of FelCor's stock; and
- FelCor does not directly or indirectly derive any income from the
manager.
A manager that satisfies those requirements is referred to as an "eligible
independent contractor."
A "qualified lodging facility" is a hotel, motel or other establishment in
which more than one-half of the dwelling units used on a transient basis, unless
wagering activities are conducted at or in connection with the facility by any
person who is engaged in the business of accepting wagers and who is legally
authorized to engage in that business at or in connection with the facility. A
qualified lodging facility includes customary amenities and facilities operated
as part of, or associated with, the lodging facility as long as the amenities
and facilities are customary for other properties of a comparable size and class
owned by other unrelated owners.
The TRS rules limit the deductibility of interest paid or accrued by a TRS
to FelCor to assure that the TRS is subject to an appropriate level of corporate
taxation. The rules also impose a 100% excise tax on transactions between a TRS
and FelCor or its tenants that are not conducted on an arm's-length basis.
The TRS rules grandfathered non-TRS taxable subsidiaries in existence on
July 12, 1999 unless and until a taxable subsidiary engages in a new line of
business or acquires a substantial new asset or FelCor acquires, directly or
indirectly, additional stock in the taxable subsidiary. The TRS rules permit
REITs to convert existing non-TRS taxable subsidiaries into TRSs on a tax-free
basis prior to January 1, 2004.
Each of FelCor and MeriStar formed TRSs as of January 1, 2001 to acquire
leases for its hotels. In addition, each of FelCor and MeriStar made a TRS
election with respect to the non-TRS taxable subsidiaries in which it owned
stock prior to January 1, 2001. In connection with the acquisition by FelCor's
and MeriStar's TRSs of the leases, the TRSs engaged, or will engage, independent
third-party hotel managers to operate the related hotels on behalf of the TRSs.
Moreover, FelCor has represented that, with respect to properties that it leases
to its TRSs in the future, each TRS will engage an eligible independent
contractor to manage and operate the hotels leased by the TRS. Furthermore,
FelCor believes that all transactions between it and its TRSs are conducted on
an arm's-length basis.
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State and Local Taxes
FelCor and/or you may be subject to state and local tax in various states
and localities, including those states and localities in which FelCor or you
transact business, own property or reside. The state and local tax treatment in
those jurisdictions may differ from the federal income tax treatment described
above. Consequently, you should consult your own tax advisor regarding the
effect of state and local tax laws upon an investment in the FelCor common
stock.
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APPROVAL OF FELCOR'S 2001 RESTRICTED STOCK AND STOCK OPTION PLAN
The FelCor board of directors has approved and recommends to FelCor's
stockholders that they adopt the FelCor 2001 Restricted Stock and Stock Option
Plan, or the FelCor 2001 Plan, at the FelCor special meeting. The FelCor 2001
Plan has been approved by the FelCor board of directors.
The FelCor 2001 Plan will be approved by FelCor's stockholders if a quorum
is present at the FelCor special meeting and if the number of votes cast for
approval of the FelCor 2001 Plan exceeds the number of votes cast against its
approval.
The following summarizes some significant aspects of the FelCor 2001 Plan.
This summary is not intended to be complete and is subject in all respects to
the terms of the FelCor 2001 Plan, a complete copy of which is attached as
Appendix E to this joint proxy statement/prospectus. No awards have been made
under the FelCor 2001 Plan.
Share Authorization. The FelCor 2001 Plan provides for:
(1) the grant of stock options to purchase shares of FelCor common stock;
or
(2) the grant of FelCor common stock, which will be restricted shares of
stock. Under the FelCor 2001 Plan, 1,000,000 shares of FelCor common stock are
available for grant.
The FelCor 2001 Plan provides that in the event of any subdivision or
consolidation of outstanding shares of FelCor common stock or declaration of a
dividend payable in shares of FelCor common stock or capital reorganization or
reclassification or other similar transactions, the compensation committee may
adjust proportionally:
(1) the number of shares of FelCor common stock reserved under the FelCor
2001 Plan and covered by awards under it;
(2) the exercise or other price in respect of such awards; and
(3) the appropriate fair market value and other price determinations for
such awards.
In the event of a corporate merger, consolidation, reorganization or
liquidation, in which FelCor is not the surviving company, the compensation
committee shall be authorized to issue new options, or to make provisions for
the acceleration of the exercisability of, or lapse of restrictions with respect
to, awards and the termination of unexercised options, in connection with such
transaction.
Purpose and Administration. The FelCor board of directors has approved the
FelCor 2001 Plan to provide incentives to attract and retain independent
directors, executive officers and key employees. The FelCor 2001 Plan is
administered by the FelCor compensation committee or, in the case of grants to
independent directors, by the FelCor board of directors. The FelCor compensation
committee generally has the authority, within limitations set forth in the
FelCor 2001 Plan:
(1) to establish rules and regulations concerning the FelCor 2001 Plan;
(2) to determine the persons who may be granted options and restricted
shares;
(3) to fix the number of shares of FelCor common stock to be covered by
each option and the number of restricted shares granted; and
(4) to set the terms and provisions of each grant of options or restricted
shares to be granted.
The FelCor compensation committee has the right to cancel any outstanding
options and to issue new options on the terms and conditions as agreed to by the
person affected. Regardless of the above, during any calendar year, beginning
with the calendar year 2001, the maximum number of shares for which an award may
be granted under the FelCor 2001 Plan to any person whose compensation is
subject to the limitation on deductibility under Section 162(m) of the Code, is
250,000 shares.
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Eligibility. Participants in the FelCor 2001 Plan may be directors,
officers or employees of FelCor, its subsidiaries, including the FelCor
Partnership, or designated affiliates, as are selected by the FelCor
compensation committee.
Options. Options granted under the FelCor 2001 Plan may be incentive stock
options under Section 422 of the Internal Revenue Code or non-qualified options,
at the discretion of the FelCor compensation committee, except incentive stock
options will not be granted to employees of any affiliate which is a
partnership, or to independent directors. The FelCor 2001 Plan provides that the
exercise price of an option will be fixed by the FelCor compensation committee
on the date of grant; but, the exercise price of an incentive stock option must
be not less than the fair market value of a share of FelCor common stock on the
date of the grant. The exercise price of each option will be paid in full at the
time of exercise in cash or, to the extent, if any, authorized in the option
agreement, or by the compensation committee, by means of tendering shares of
FelCor common stock valued at fair market value on the date of exercise. In the
case of an incentive stock option granted to any person who owns, directly or
indirectly, stock possessing more than 10% of the total combined voting power of
all classes of FelCor capital stock, a ten percent owner, the option price will
not be less than 110% of the fair market value of a share of FelCor common stock
on the date of grant. Each option must expire within ten years from the date of
the grant except that any incentive stock option granted to a ten percent owner
must expire within five years from the date of the grant. Options granted under
the FelCor 2001 Plan will not be incentive stock options to an individual
participant to the extent the aggregate fair market value of the FelCor common
stock, determined as of the date of grant, subject to those options under the
FelCor 2001 Plan, or under any other plan maintained by FelCor or its subsidiary
which, first become exercisable by that participant in any year exceeds
$100,000.
No options may be exercised in circumstances which would violate federal or
state securities laws. Generally, options will be non-transferable and
non-assignable, but the estate of a deceased holder can exercise options.
Options generally will be exercisable by the holder subject to terms fixed by
the FelCor compensation committee.
Restricted Stock Awards. The FelCor 2001 Plan also permits the FelCor
compensation committee to grant restricted shares. Restricted shares will be
subject to the terms and conditions imposed by the FelCor compensation
committee. Except for restrictions on transfer set by the FelCor compensation
committee, the participants have all the rights of a holder of FelCor common
stock as to the restricted shares, including the right to vote the shares and
the right to receive any cash distributions. Except as determined by the FelCor
compensation committee at the time of grant or otherwise, if an employee is
terminated for any reason during the restriction period, all unvested restricted
shares will be forfeited by the participant.
Termination and Amendment. No options shall be granted and no restricted
shares may be awarded under the FelCor 2001 Plan on or after the tenth
anniversary of the adoption of the FelCor 2001 Plan by the FelCor board of
directors. The FelCor board of directors may amend any award previously granted,
prospectively or retroactively. No amendment may impair the rights of any
participant under any award without the consent of that participant, except as
expressly provided in the FelCor 2001 Plan or in the award for any amendment
made to cause the plan to qualify for an exemption provided by Rule 16b-3 under
the Exchange Act. The FelCor 2001 Plan may be terminated, modified or amended by
the FelCor board of directors at any time. Any modification or amendment either
(1) increasing the total number of shares which may be issued under options or
as restricted shares, (2) extending the term of the FelCor 2001 Plan, or (3)
materially modifying the requirements as to eligibility to receive options or
restricted shares is subject to stockholder approval within one year of the
adoption of such amendment. No termination, modification or amendment of the
FelCor 2001 Plan will adversely alter or affect the terms of any then
outstanding options or restricted shares without the consent of the holders.
Federal Income Taxes. No income is recognized by a participant in the
FelCor 2001 Plan at the time an option is granted. If the option is an incentive
stock option, no income will be recognized upon the participant's exercise of
the option. Income is recognized by a participant when he disposes of shares
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acquired under an incentive stock option. The exercise of a nonqualified stock
option generally is a taxable event that requires the participant to recognize,
as ordinary income, the difference between the shares' fair market value and the
option price.
A participant will recognize income on account of a restricted shares award
on the first day that the shares are either transferable or not subject to a
substantial risk of forfeiture. The amount of income recognized by the
participant is equal to the fair market value of the FelCor common stock for
which the restrictions have lapsed on that date.
The employer, either FelCor or its affiliate, will be entitled to claim a
federal income tax deduction on account of the exercise of a nonqualified option
or the vesting of a stock award. The amount of the deduction is equal to the
ordinary income recognized by the participant. The employer will not be entitled
to a federal income tax deduction on account of the grant or the exercise of an
incentive stock option. The employer may claim a federal income tax deduction on
account of certain dispositions of FelCor common stock acquired upon the
exercise of an incentive stock option.
THE FELCOR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE FELCOR
2001 PLAN.
LEGAL MATTERS
The validity of the FelCor common shares offered by this joint proxy
statement/prospectus will be passed upon for FelCor by Jenkens & Gilchrist, a
Professional Corporation, Dallas, Texas.
The qualification of the merger as a reorganization under section 368(a) of
the Internal Revenue Code will be passed upon for FelCor by Jenkens & Gilchrist,
a Professional Corporation, Dallas, Texas. The qualification of FelCor as a REIT
for federal income tax purposes and the partnership status of FelCor Partnership
will be passed upon by Hunton & Williams, Richmond, Virginia.
The qualification of the merger as a reorganization under section 368(a) of
the Internal Revenue Code will be passed upon for MeriStar, and the
qualification of MeriStar as a REIT for federal income tax purposes and the
partnership status of MeriStar Partnership will be passed upon by Paul, Weiss,
Rifkind, Wharton & Garrison, New York, New York.
EXPERTS
The financial statements incorporated in this joint proxy
statement/prospectus by reference to the Annual Reports on Form 10-K of FelCor
and FelCor Partnership for the year ended December 31, 2000 have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of MeriStar Hospitality Corporation and
subsidiaries as of December 31, 2000 and 1999, and for each of the years in the
three-year period ended December 31, 2000 and the financial statement schedule
of real estate and accumulated depreciation have been incorporated by reference
in this joint proxy statement/prospectus in reliance upon the report of KPMG
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
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The combined financial statements of Bristol Hotels & Resorts Tenant
Companies incorporated in this joint proxy statement/prospectus by reference
from FelCor's Annual Report on Form 10-K for the year ended December 31, 2000
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the 2002 annual meeting
of FelCor stockholders must have been received by the Secretary of FelCor no
later than December 5, 2001, to be considered for inclusion in its proxy
statement relating to the 2002 meeting.
To be considered for inclusion in the proxy statement relating to the
FelCor 2002 meeting, stockholder proposals submitted outside the Rule 14a-8
processes must have been received by the Secretary of FelCor no later than
February 18, 2002 to be presented at the 2002 annual meeting of stockholders,
and discretionary authority may be used if untimely submitted.
Due to the proposed merger, MeriStar does not currently expect to hold a
2002 annual meeting of stockholders because MeriStar will be merged with and
into FelCor and it will cease to exist as a separate legal entity. If the merger
is not completed and an annual meeting is held, to be eligible for inclusion in
MeriStar's proxy statement and form of proxy relating to that meeting, proposals
of stockholders intended to be presented at the meeting must be received by
MeriStar no later than December 24, 2001 and before MeriStar mails its proxy
statement to stockholders in connection with the meeting.
In addition, MeriStar's bylaws currently provide that in order for a
stockholder to nominate a candidate for election as a director at an annual
meeting of stockholders or propose business for consideration at an annual
meeting, written notice, including some specified information, generally must be
delivered to the secretary of MeriStar, at its principal executive offices, not
later than the close of business on the 60th day and no earlier than the close
of business on the 90th day prior to the first anniversary of the preceding
year's annual meeting. Accordingly, under MeriStar's current bylaws, a
stockholder nomination or proposal intended to be considered at the 2002 Annual
Meeting must be received by the secretary after the close of business on
February 24, 2002 and prior to the close of business on March 25, 2002. The
secretary of MeriStar will provide a copy of MeriStar's charter and bylaws upon
written request and without charge.
OTHER MATTERS
As of the date of this joint proxy statement/prospectus, neither the board
of directors of FelCor nor the board of directors of MeriStar knows of any
matters that will be presented for consideration at either special meeting other
than those described in this joint proxy statement/prospectus. If any other
matters properly come before either of the special meetings or any adjournments
or postponements of either of the special meetings, and are voted upon, the
enclosed proxies will confer discretionary authority on the individuals named as
proxies to vote the shares represented by those proxies as to any other matters.
Those individuals named in the FelCor proxies intend to vote or not vote
consistent with the recommendation of the management of FelCor. Those
individuals named as proxies in the MeriStar proxies intend to vote or not vote
consistent with the recommendation of the management of MeriStar.
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WHERE CAN YOU FIND MORE INFORMATION
FelCor has filed with the SEC a registration statement on Form S-4 of which
this joint proxy statement/prospectus forms a part. The registration statement
registers the distribution to MeriStar common stockholders of the FelCor common
stock to be issued in connection with the merger. The registration statement,
including the attached exhibits and schedules, contains additional relevant
information about FelCor common stock. The rules and regulations of the SEC
allow us to omit specified information included in the registration statement
from this joint proxy statement/prospectus. In addition, FelCor and MeriStar
file reports, proxy statements and other information with the SEC under the
Securities Exchange Act of 1934. You may read and copy any of this information
at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, including FelCor and
MeriStar, who file electronically with the SEC. The address of that site is
http://www.sec.gov. Reports, proxy statements and other information concerning
FelCor and MeriStar may also be inspected at the offices of the New York Stock
Exchange, which are located at 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows FelCor and MeriStar to "incorporate by reference"
information in this document, which means that the companies can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is considered
to be a part of this joint proxy statement/prospectus, except for any
information that is superseded by information included directly in this
document.
The documents listed below that FelCor and MeriStar have previously filed
with the SEC are considered to be a part of this joint proxy
statement/prospectus. They contain important business and financial information
about our companies that is not included in or delivered with this document.
FelCor SEC Filings (File No. 1-14236):
1. Annual Report on Form 10-K for the year ended December 31, 2000;
2. Quarterly Report on Form 10-Q for the three months ended March 31, 2001;
3. Current Reports on Form 8-K filed with the SEC on May 11 and June 14,
2001; and
4. Registration Statement on Form 8-A filed with the SEC, setting forth the
description of FelCor common stock, including any amendments or reports filed
for the purpose of updating that description.
FelCor Partnership SEC Filings:
1. Annual Report on Form 10-K for the year ended December 31, 2000; and
2. Quarterly Report on Form 10-Q for the three months ended March 31, 2001.
MeriStar SEC Filings (File No. 1-11903):
1. Annual Report on Form 10-K for the year ended December 31, 2000;
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2. Quarterly Report on Form 10-Q for the three months ended March 31, 2001;
3. Current Reports on Forms 8-K filed with the SEC on January 18, February
5 and May 10, 2001; and
4. Registration Statement on Form 8-A filed with the SEC, setting forth the
description of the MeriStar common stock, including any amendments or reports
filed for the purpose of updating that description.
FelCor and MeriStar incorporate by reference additional documents that
either company may file with the SEC between the date of this joint proxy
statement/prospectus and the date of each company's special meeting. These
include periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K, as well as proxy or other
materials.
FelCor has supplied all information contained or incorporated by reference
in this joint proxy statement/prospectus relating to FelCor, as well as all pro
forma financial information, and MeriStar has supplied all information contained
or incorporated by reference in this joint proxy statement/prospectus relating
to MeriStar. This document constitutes the prospectus of FelCor and a joint
proxy statement of MeriStar and FelCor.
WHAT INFORMATION YOU SHOULD RELY ON
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION THAT DIFFERS FROM, OR ADDS TO, THE INFORMATION DISCUSSED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS OR IN THE APPENDICES ATTACHED OR IN INFORMATION
WHICH IS SPECIFICALLY INCORPORATED BY REFERENCE. THEREFORE, IF ANYONE GIVES YOU
DIFFERENT OR ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT.
THIS DOCUMENT IS DATED , 2001. THE INFORMATION CONTAINED IN
THIS JOINT PROXY STATEMENT/ PROSPECTUS SPEAKS ONLY AS OF ITS DATE UNLESS THE
INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE APPLIES. THIS JOINT PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO EXCHANGE OR SELL, OR A
SOLICITATION OF AN OFFER TO EXCHANGE OR PURCHASE, FELCOR OR MERISTAR COMMON
STOCK OR TO ASK FOR PROXIES, TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO
DIRECT THESE ACTIVITIES.
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APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
FELCOR LODGING TRUST INCORPORATED,
AND
FELCOR LODGING LIMITED PARTNERSHIP,
ON THE ONE HAND,
AND
MERISTAR HOSPITALITY CORPORATION
AND
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.,
ON THE OTHER HAND
DATED AS OF MAY 9, 2001
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
158
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 -- The Merger.......................................... A-2
1.1 The Merger.................................................. A-2
1.2 Closing..................................................... A-2
1.3 Effective Time.............................................. A-2
1.4 Effects of the Merger....................................... A-2
1.5 Charters and Bylaws......................................... A-2
1.6 Directors and Officers...................................... A-2
ARTICLE 2 -- Treatment of Shares................................. A-3
2.1 Effect of the Merger on Stock............................... A-3
2.2 Delivery of Merger Consideration............................ A-3
ARTICLE 3 -- Certain Transactions Relating to the MeriStar OP.... A-7
3.1 Merger of MeriStar OP and FelCor OP......................... A-7
3.2 Closing and Effectiveness................................... A-7
3.3 Effects of OP Merger........................................ A-7
3.4 Certificate of Limited Partnership and Partnership
Agreement................................................. A-7
3.5 Effect of the OP Merger on Partnership Interests............ A-7
3.6 Issuance of New Certificates for FelCor OP Units............ A-8
ARTICLE 4 -- Representations and Warranties of the MeriStar Parties... A-9
4.1 Organization, Standing and Power of MeriStar................ A-9
4.2 MeriStar Subsidiaries....................................... A-9
4.3 MeriStar Structure.......................................... A-11
4.4 Organization, Standing and Power of MeriStar OP............. A-12
4.5 Registration Rights......................................... A-12
4.6 Authority; Noncontravention; Consents....................... A-12
4.7 SEC Documents; Financial Statements; Undisclosed
Liabilities............................................... A-13
4.8 Absence of Certain Changes or Events........................ A-13
4.9 Litigation.................................................. A-14
4.10 Properties.................................................. A-14
4.11 Employee Benefits........................................... A-15
4.12 Labor Matters; Employees.................................... A-17
4.13 Taxes....................................................... A-17
4.14 No Payments to Employees, Officers or Directors............. A-19
4.15 Brokers, Fees and Expenses.................................. A-19
4.16 Contracts; Debt Instruments................................. A-20
4.17 Environmental Matters....................................... A-20
4.18 Compliance with Laws........................................ A-21
4.19 Opinion of Financial Advisor................................ A-21
4.20 Maryland Takeover Law....................................... A-21
4.21 Information Supplied........................................ A-21
4.22 Investment Company Act of 1940.............................. A-21
4.23 Definition of Knowledge of MeriStar......................... A-21
4.24 Voting Requirements......................................... A-21
4.25 Related Party Agreements.................................... A-22
ARTICLE 5 -- Representations and Warranties of the FelCor Parties... A-22
5.1 Organization, Standing and Power of FelCor.................. A-22
5.2 FelCor Subsidiaries......................................... A-22
5.3 FelCor Structure............................................ A-23
5.4 Organization, Standing and Power of FelCor OP............... A-24
A-i
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PAGE
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5.5 Authority; Noncontravention; Consents....................... A-24
5.6 SEC Documents; Financial Statements; Undisclosed
Liabilities............................................... A-25
5.7 Absence of Certain Changes or Events........................ A-26
5.8 Litigation.................................................. A-26
5.9 Properties.................................................. A-26
5.10 Employee Benefit Plans; Labor Matters....................... A-28
5.11 Taxes....................................................... A-29
5.12 No Payments to Employees, Officers or Directors............. A-31
5.13 Brokers, Fees and Expenses.................................. A-31
5.14 Contracts; Debt Instruments................................. A-31
5.15 Environmental Matters....................................... A-31
5.16 Compliance with Laws........................................ A-32
5.17 Opinion of Financial Advisor................................ A-32
5.18 Maryland Takeover Laws...................................... A-32
5.19 Information Supplied........................................ A-32
5.20 Investment Company Act of 1940.............................. A-32
5.21 Definition of Knowledge of FelCor........................... A-32
5.22 Voting Requirements......................................... A-33
ARTICLE 6 -- Covenants........................................... A-33
6.1 No Solicitation by MeriStar................................. A-33
6.2 No Solicitation by FelCor................................... A-34
6.3 Conduct of MeriStar's Business Pending Merger............... A-35
6.4 Conduct of FelCor's Business Pending Merger................. A-37
6.5 Interim Transactions Committee.............................. A-38
6.6 Compliance with the Securities Act.......................... A-39
6.7 Filing of Certain Reports................................... A-39
6.8 Other Actions............................................... A-39
ARTICLE 7 -- Additional Covenants................................ A-39
7.1 Preparation of the Registration Statement and the Proxy
Statement; MeriStar Stockholders Meeting and FelCor
Stockholders Meeting...................................... A-39
7.2 Access to Information: Confidentiality...................... A-41
7.3 Regulatory Matters.......................................... A-41
7.4 Directors' and Officers' Indemnification.................... A-41
7.5 Public Announcements........................................ A-42
7.6 Employment Agreements and Workforce Matters................. A-42
7.7 Employee Benefit Plans...................................... A-42
7.8 Stock Option and Other Stock Plans.......................... A-43
7.9 Registration Statements..................................... A-44
7.10 Reorganization Status....................................... A-45
7.11 NYSE Listing................................................ A-45
7.12 Transfer Taxes.............................................. A-45
7.13 Payment of MeriStar Debt.................................... A-45
7.14 Resignations................................................ A-45
7.15 Assumption of Debt.......................................... A-45
7.16 Tax Provision............................................... A-45
7.17 Financing................................................... A-45
7.18 Relationship with MeriStar Hotels & Resorts................. A-46
7.19 Completion of Capital Projects.............................. A-46
7.20 Commercially Reasonable Efforts and Cooperation............. A-46
7.21 Financing Commitment........................................ A-46
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PAGE
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ARTICLE 8 -- Conditions.......................................... A-47
8.1 Conditions to Each Party's Obligation to Effect the
Merger.................................................... A-47
8.2 Conditions to Obligations of the MeriStar Parties........... A-48
8.3 Conditions to Obligations of the FelCor Parties............. A-48
8.4 Frustration of Closing Conditions........................... A-49
ARTICLE 9 -- Termination, Amendment and Waiver................... A-49
9.1 Termination................................................. A-49
9.2 Certain Fees and Expenses................................... A-50
9.3 Effect of Termination....................................... A-52
9.4 Amendment................................................... A-52
9.5 Extension; Waiver........................................... A-53
ARTICLE 10 -- General Provisions................................. A-53
10.1 Nonsurvival of Representations and Warranties............... A-53
10.2 Notices..................................................... A-53
10.3 Interpretation.............................................. A-54
10.4 Counterparts................................................ A-54
10.5 Entire Agreement; No Third-Party Beneficiaries.............. A-54
10.6 Governing Law............................................... A-54
10.7 Assignment.................................................. A-54
10.8 Enforcement................................................. A-54
10.9 Severability................................................ A-55
EXHIBITS
Exhibit "A" Articles of Merger
Exhibit "B" Certificate of Merger for OP Merger
Exhibit "C" Form of Affiliate Agreement
SCHEDULES
Schedule 1.6(a) List of Directors of Surviving Corporation
Schedule 7.18 Term Sheet
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INDEX OF DEFINED TERMS
DEFINED TERM SECTION
- ------------ ---------------
1940 Act.................................................... 4.22
Affiliates.................................................. 6.6
Agreement................................................... Preamble
Amended FelCor Bylaws....................................... 1.5
Amended FelCor Charter...................................... 1.5
Articles of Merger.......................................... Recitals
Assumed Option.............................................. 7.8(a)
Assumed Option Shares....................................... 7.8(c)
Base Amount................................................. 9.2(d)
Break-Up Expenses........................................... 9.2(e)
Break-Up Fee................................................ 9.2(d)
Break-Up Fee Ruling......................................... 9.2(d)
Break-Up Fee Tax Opinion.................................... 9.2(d)
Canceled Shares............................................. 2.2(b)
Cash Consideration.......................................... 2.1(a)
Certificate or Certificates................................. 2.2(b)
Closing..................................................... 1.2
Closing Date................................................ 1.2
Closing Price............................................... 9.1(l)
Code........................................................ Recitals
Confidentiality Agreement................................... 7.2
Continuing Employee......................................... 7.7(a)
Controlled Group............................................ 4.11
Department.................................................. 1.3
DRULPA...................................................... 3.1
Effective Time.............................................. 1.3
Encumbrances................................................ 4.10(a)
Environmental Laws.......................................... 4.17
ERISA....................................................... 4.11
Excess Shares............................................... 2.2(d)
Exchange Act................................................ 4.7
Exchange Agent.............................................. 2.2(a)
Exchange Factor............................................. 3.5(e)
Exchange Fund............................................... 2.2(a)
Exchange Ratio.............................................. 2.1(a)
Exchange Registration....................................... 7.9(b)
FelCor...................................................... Preamble
FelCor Acquisition Proposal................................. 6.2(a)
FelCor Benefit Plans........................................ 5.10(a)
FelCor Budget and Schedule.................................. 5.9(e)
FelCor Bylaws............................................... 1.5
FelCor Charter.............................................. 1.5
FelCor Class B Units........................................ 5.2(a)
FelCor Class C Units........................................ 3.5(c)
FelCor Class D Units........................................ 3.5(d)
FelCor Commitment........................................... 6.4(h)
FelCor Common Stock......................................... 2.1(a)
FelCor Common Units......................................... 3.5(a)
FelCor Deferred Stock....................................... 5.3(b)
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DEFINED TERM SECTION
- ------------ ---------------
FelCor Disclosure Letter.................................... Article 5 Intro
FelCor Financial Statement Date............................. 5.7
FelCor Franchise Agreements................................. 5.9(g)
FelCor Ground Leases........................................ 5.9(f)
FelCor LLC.................................................. 5.2(a)
FelCor Management Agreements................................ 5.9(h)
FelCor Material Adverse Change.............................. 5.7
FelCor Material Adverse Effect.............................. 5.1
FelCor OP................................................... Preamble
FelCor OP Certificate....................................... 3.4
FelCor OP Unit Holder....................................... 5.2(a)
FelCor OP Units............................................. 5.2(a)
FelCor Operating Partnership Agreement...................... 5.2(a)
FelCor Options.............................................. 5.3(a)
FelCor Parties.............................................. Preamble
FelCor Plans................................................ 5.3(a)
FelCor Properties........................................... 5.9(a)
FelCor Restricted Stock Grants.............................. 5.3(b)
FelCor SEC Documents........................................ 5.6
FelCor Series A Preferred Stock............................. 5.3(a)
FelCor Series A Preferred Units............................. 5.2(a)
FelCor Series B Preferred Stock............................. 5.3(a)
FelCor Series B Preferred Units............................. 5.2(a)
FelCor Stockholder Approval................................. 5.5(a)
FelCor Stockholders Meeting................................. 7.1(e)
FelCor Subsidiary(ies)...................................... 5.2(b)
FelCor Superior Proposal.................................... 6.2(b)
FelCor Tax Protection Agreements............................ 5.11(k)
FelCor Title Policies....................................... 5.9(a)
Final MeriStar Dividend..................................... 2.2(c)(ii)
Final MeriStar OP Distribution.............................. 2.2(c)(ii)
GAAP........................................................ 4.7
Governmental Entity......................................... 4.6(b)
Hazardous Materials......................................... 4.17
Indebtedness................................................ 4.16(b)
Indemnified Parties......................................... 7.4(a)
Indentures.................................................. 7.15
Interim Transactions Committee.............................. 6.5
J&G......................................................... 8.1(h)
Knowledge of FelCor......................................... 5.21
Knowledge of MeriStar....................................... 4.23
Laws........................................................ 4.6(b)
Liens....................................................... 4.2(a)
Market Price................................................ 2.2(e)
Merger...................................................... Recitals
Merger Consideration........................................ 2.1(a)
MeriStar.................................................... Preamble
MeriStar Acquisition Proposal............................... 6.1(a)
MeriStar Benefit Plans...................................... 4.11
MeriStar Budget and Schedule................................ 4.10(e)
MeriStar Bylaws............................................. 4.1
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DEFINED TERM SECTION
- ------------ ---------------
MeriStar Charter............................................ 4.1
MeriStar Class B Units...................................... 3.5(b)
MeriStar Class C Units...................................... 3.5(c)
MeriStar Class D Units...................................... 3.5(d)
MeriStar Commitment......................................... 6.3(h)
MeriStar Common Stock....................................... 2.1(a)
MeriStar Common Units....................................... 3.5(a)
MeriStar Convertible Notes.................................. 4.3(a)
MeriStar Disclosure Letter.................................. Article 4 Intro
MeriStar Financial Statement Date........................... 4.8
MeriStar Franchise Agreements............................... 4.10(g)
MeriStar GP Interest........................................ 3.5(f)
MeriStar Ground Leases...................................... 4.10(f)
MeriStar Hotels & Resorts................................... 4.25
MeriStar Incentive Plan..................................... 4.3(a)
MeriStar LP................................................. 4.2(a)
MeriStar Management Agreements.............................. 4.10(h)
MeriStar Material Adverse Change............................ 4.8
MeriStar Material Adverse Effect............................ 4.1
MeriStar OP................................................. Preamble
MeriStar OP Partnership Agreement........................... 4.2(a)
MeriStar OP Unit Holder..................................... 3.6(a)
MeriStar OP Units........................................... 3.5(g)
MeriStar Options............................................ 4.3(b)
MeriStar Parties............................................ Preamble
MeriStar POP Units.......................................... 3.5(e)
MeriStar Properties......................................... 4.10(a)
MeriStar SEC Documents...................................... 4.7
MeriStar Stock Option....................................... 7.8(a)
MeriStar Stockholder Approvals.............................. 4.6(a)
MeriStar Stockholders Meeting............................... 7.1(d)
MeriStar Subsidiary(ies).................................... 4.2(b)
MeriStar Superior Proposal.................................. 6.1(b)
MeriStar Tax Protection Agreements.......................... 4.13(l)
MeriStar Title Policies..................................... 4.10(a)
MeriStar Transfer Agent..................................... 2.2(c)(ii)
MGCL........................................................ 1.1
New FelCor OP Units......................................... 3.5(g)
NYSE........................................................ 1.2
OP Merger................................................... Recitals
OP Merger Articles.......................................... 3.2
OP Merger Closing........................................... 3.2
POP Unit Plan............................................... 3.5(e)
Paul Weiss.................................................. 8.1(h)
Payor....................................................... 9.2(d)
Person...................................................... 2.2(h)
Proxy Statement............................................. 7.1(a)
Qualifying Income........................................... 9.2(d)
Ratification Agreement...................................... 3.6(a)
Recipient................................................... 9.2(d)
Registration Statement...................................... 7.1(a)
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DEFINED TERM SECTION
- ------------ ---------------
REIT........................................................ 4.13(g)
REIT Requirements........................................... 9.2(d)
Restated Partnership Agreement.............................. 3.4
SEC......................................................... 4.6(b)
Securities Act.............................................. 4.7
Share Consideration......................................... 2.1(a)
Shelf Registration.......................................... 7.9(a)
Significant Subsidiary...................................... 6.1(a)
Stockholder Approvals....................................... 5.5(a)
Subsidiary.................................................. 4.2(b)
Surviving Corporation....................................... 1.1
Surviving Partnership....................................... 3.1
Tax(es)..................................................... 4.13(m)
Tax Returns................................................. 4.13(m)
Transactions................................................ Recitals
Vested...................................................... 3.5(e)
WARN........................................................ 4.12(d)
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of May 9,
2001, by and among FELCOR LODGING TRUST INCORPORATED, a Maryland corporation
("FelCor"), and FELCOR LODGING LIMITED PARTNERSHIP, a Delaware limited
partnership ("FelCor OP" and, together with FelCor, the "FelCor Parties"), on
the one hand, and MERISTAR HOSPITALITY CORPORATION, a Maryland corporation
("MeriStar"), and MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P., a Delaware
limited partnership ("MeriStar OP" and, together with MeriStar, the "MeriStar
Parties"), on the other hand.
RECITALS:
A. The Board of Directors of FelCor and the Board of Directors of MeriStar
have each determined that a business combination between FelCor and MeriStar on
substantially the terms and conditions set forth in this Agreement is advisable
and in the best interests of their respective companies and stockholders and
presents an opportunity for their respective companies to achieve long-term
strategic and financial benefits and, accordingly, have agreed to effect the
merger (the "Merger") of MeriStar with and into FelCor, with FelCor being the
surviving corporation, upon the terms and subject to the conditions set forth
herein.
B. Upon the terms and conditions set forth herein, MeriStar and FelCor
shall execute Articles of Merger (the "Articles of Merger") in substantially the
form attached hereto as Exhibit "A" and shall file such Articles of Merger in
accordance with applicable Maryland law to effectuate the Merger.
C. For federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended (the "Code"), and that this Agreement
shall constitute a plan of reorganization within the meaning of Treasury
Regulations Section 1.368-2(g).
D. Concurrent with the Merger, the MeriStar Parties and the FelCor Parties
will effect a merger of MeriStar OP with and into FelCor OP as contemplated by
Section 3.1, with FelCor OP as the survivor (the "OP Merger") (the Merger,
together with the other transactions, including without limitation, the OP
Merger, contemplated by this Agreement, being referred to collectively herein as
the "Transactions").
E. The FelCor Parties and the MeriStar Parties desire to make certain
representations, warranties and agreements in connection with the Transactions.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
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ARTICLE 1
THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions of this
Agreement, and in accordance with the Maryland General Corporation Law ("MGCL"),
MeriStar shall be merged with and into FelCor at the Effective Time (as defined
in Section 1.3). FelCor shall be the surviving corporation in the Merger and
shall continue its corporate existence under the laws of the State of Maryland
under the name "FelCor Lodging Trust Incorporated." The effects and consequences
of the Merger are set forth in Sections 1.4 through 1.6 and Article 2 hereof.
FelCor, after the Effective Time, is sometimes referred to herein as the
"Surviving Corporation."
1.2 CLOSING. The closing of the Merger (the "Closing") shall take place
at the offices of Jenkens & Gilchrist, a Professional Corporation, 1445 Ross
Avenue, Suite 3200, Dallas, Texas 75202, at 10:00 A.M. local time, on the third
New York Stock Exchange, Inc. ("NYSE") trading day immediately following the
date on which the last of the conditions set forth in Article 8 hereof (other
than conditions with respect to actions the respective parties will take at the
Closing) is first fulfilled or has been waived, if all such conditions continue
to be so satisfied or waived on such third trading day. If all such conditions
are not so satisfied or waived, the Closing shall be automatically extended from
time to time until the first subsequent trading day on which all such conditions
are again so satisfied or waived, subject, however, to Article 9 hereof.
Alternatively, the Closing may occur at such other time, date and place as
MeriStar and FelCor shall mutually agree in writing. The date on which the
Closing occurs is the "Closing Date."
1.3 EFFECTIVE TIME. The Merger shall become effective (the "Effective
Time") at 9:00 a.m., New York City time, on the NYSE trading day immediately
following the Closing Date or, if later, such date and time as the State
Department of Assessments and Taxation of Maryland ("Department") accepts the
Articles of Merger for record, or such other time specified in the Articles of
Merger (not to exceed 30 calendar days after the Articles of Merger are accepted
for record by the Department). Unless otherwise agreed, the parties will cause
the Effective Time to occur at 9:00 a.m., New York City time, on the NYSE
trading day immediately following the Closing Date.
1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
the MGCL.
1.5 CHARTERS AND BYLAWS. The charter of FelCor, as in effect on the date
hereof (the "FelCor Charter"), and as amended, prior to or at the Effective
Time, to reflect such matters as the parties may agree upon (the "Amended FelCor
Charter"), shall be the charter of the Surviving Corporation until thereafter
amended as provided by applicable law. The bylaws of FelCor, as in effect on the
date hereof (the "FelCor Bylaws"), and as amended, prior to the Effective Time,
to reflect such matters as the parties may agree upon (the "Amended FelCor
Bylaws"), shall be the bylaws of the Surviving Corporation until thereafter
amended as provided by applicable law, the Amended FelCor Charter and such
Amended FelCor Bylaws.
1.6 DIRECTORS AND OFFICERS.
(a) The directors of the Surviving Corporation immediately following the
Effective Time shall be the persons named on Schedule 1.6(a) to this Agreement,
each of whom shall serve as a "Class I," "Class II" or "Class III" director, as
specified on such schedule, until the earlier of his resignation or removal or
until his successor is duly elected and qualifies.
(b) FelCor and MeriStar agree that, in the event any person set forth on
Schedule 1.6(a) is unable or otherwise fails to serve, for any reason, as a
director of the Surviving Corporation at the Effective Time, then (i) if such
person was a member of the Board of Directors of MeriStar as of the date hereof,
MeriStar shall have the right to designate another individual, subject to
FelCor's reasonable approval, to serve as a director of the Surviving
Corporation at the Effective Time, (ii) if such person was a member of the Board
of Directors of FelCor as of the date hereof, FelCor shall have the right to
designate another individual, subject to MeriStar's reasonable approval, to
serve as a director of the Surviving Corporation at the Effective Time or (iii)
if such person was not a member of the Board of Directors of either MeriStar
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or FelCor as of the date hereof, a majority of the persons set forth on Schedule
1.6(a) shall have the right to designate another individual to serve as a
director of the Surviving Corporation at the Effective Time. FelCor shall use
its best efforts to have any person designated to be a director pursuant to the
previous sentence appointed as a director.
(c) The officers of FelCor immediately prior to the Effective Time shall be
the officers of the Surviving Corporation, each to serve until the earlier of
his resignation or removal or until his successor is duly elected and qualifies.
ARTICLE 2
TREATMENT OF SHARES
2.1 EFFECT OF THE MERGER ON STOCK.
(a) Common Stock of MeriStar. As of the Effective Time, by virtue of the
Merger and without any action on the part of any holder of any stock of
MeriStar, subject to Section 2.1(b), each issued and outstanding share of common
stock, par value $0.01 per share, of MeriStar ("MeriStar Common Stock"), other
than shares of MeriStar Common Stock to be canceled pursuant to Section 2.1(b),
shall be converted into (i) the right to receive cash in the amount of $4.60
(the "Cash Consideration"), without interest, and (ii) 0.784 (the "Exchange
Ratio") of one fully paid and nonassessable share of common stock, par value
$0.01 per share, of FelCor ("FelCor Common Stock"). All such shares of MeriStar
Common Stock automatically shall be canceled and retired and shall cease to
exist and be outstanding, and each certificate previously evidencing any such
shares shall thereafter represent such number of whole shares of FelCor Common
Stock into which such MeriStar Common Stock was converted in accordance with the
Exchange Ratio (the "Share Consideration") and the right to receive, without
interest, the Cash Consideration (collectively with the Share Consideration, the
"Merger Consideration"). The holders of such certificates previously
representing such shares of MeriStar Common Stock outstanding immediately prior
to the Effective Time shall cease to have any rights with respect to such shares
of MeriStar Common Stock, except as otherwise provided herein or by law. No
fractional share of FelCor Common Stock shall be issued in connection with the
Merger. In lieu thereof, a cash payment shall be made to each holder of a
fractional share interest pursuant to Section 2.2(d) or Section 2.2(e). If,
between the date of this Agreement and the Effective Time, the outstanding
shares of MeriStar Common Stock or FelCor Common Stock shall have been changed
into a different number of shares or a different class, by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares, the Cash Consideration and Exchange Ratio each shall be
correspondingly adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares.
(b) Cancellation of Certain Shares of MeriStar Common Stock. As of the
Effective Time, by virtue of the Merger and without any action on the part of
any holder thereof, any shares of MeriStar Common Stock that are owned by
MeriStar or any MeriStar Subsidiary (defined herein) (other than any shares held
in a fiduciary capacity) or by FelCor or any FelCor Subsidiary (as defined
herein) shall be canceled and retired and shall cease to exist, and no Merger
Consideration or other consideration shall be issued or delivered in exchange
therefor.
(c) Stock of FelCor. Each issued and outstanding share of FelCor Common
Stock, FelCor Series A Preferred Stock (as defined herein) and FelCor Series B
Preferred Stock (as defined herein) outstanding immediately prior to the
Effective Time will remain outstanding, and each certificate representing
outstanding shares of FelCor Common Stock, FelCor Series A Preferred Stock and
FelCor Series B Preferred Stock will thereafter represent an equal number of
shares of Common Stock, Series A Preferred Stock and Series B Preferred Stock,
as the case may be, of the Surviving Corporation.
2.2 DELIVERY OF MERGER CONSIDERATION.
(a) Deposit with Exchange Agent. As soon as practicable after the
Effective Time, FelCor shall deposit, in trust for the benefit of holders of
shares of MeriStar Common Stock to be converted pursuant
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to Section 2.1, with FelCor's transfer agent (the "Exchange Agent"),
certificates representing that number of shares of FelCor Common Stock required
to effect the issuance of the Share Consideration referred to in Section 2.1(a),
and cash in the amount required to effect the payment of the aggregate Cash
Consideration referred to in Section 2.1(a) and the payment of cash in lieu of
fractional shares pursuant to Section 2.2(d) or 2.2(e) (collectively, the
"Exchange Fund"). The Exchange Fund shall not be used for any purpose other than
as contemplated by this Agreement.
(b) Delivery Procedures. As soon as practicable after the Effective Time,
FelCor shall cause the Exchange Agent to mail to each holder of record of a
certificate or certificates (the "Certificate" or the "Certificates") which
immediately prior to the Effective Time represented outstanding shares of
MeriStar Common Stock (the "Canceled Shares") that were converted pursuant to
Section 2.1(a): (i) a letter of transmittal in customary and reasonable form
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon actual delivery of the Certificates to
the Exchange Agent) and (ii) instructions for use in effecting the surrender of
the MeriStar Common Stock. For purposes of the immediately preceding sentence,
FelCor may rely conclusively on the stockholder records of MeriStar in
determining the identity of, and the number of Canceled Shares held by, each
holder of a Certificate at the Effective Time. Without limitation to the rights
under Section 2.2(c), upon surrender of a Certificate to the Exchange Agent for
cancellation (or to such other agent or agents as may be appointed by FelCor),
together with a duly executed letter of transmittal and such other customary
documents as the Exchange Agent shall require, the holder of such Certificate
shall be entitled to receive, with respect to the shares of MeriStar Common
Stock formerly represented thereby (A) a certificate or certificates
representing that number of whole shares of FelCor Common Stock into which such
shares of MeriStar Common Stock were converted pursuant to the provisions of
Section 2.1(a), (B) a check in payment of the Cash Consideration, without
interest, which such holder has the right to receive pursuant to the provisions
of Section 2.1(a), and (C) a check in payment of the cash in lieu of fractional
shares, without interest, which such holder is entitled to receive pursuant to
Section 2.2(d) or (e). Until such surrender of a Certificate in compliance with
the immediately preceding sentence, FelCor shall have no obligation to deliver
the items required by clauses (A) through (C) of such sentence. FelCor shall
cause all shares of FelCor Common Stock issued pursuant to the Merger to be duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights.
(c) Certain Distributions.
(i) The FelCor Parties and the MeriStar Parties each shall authorize
under applicable law a dividend or distribution to their respective
stockholders and partners, as the case may be, for which the record date
shall be the close of business on the Closing Date; provided, however, that
such authorization shall not be made if the Closing Date occurs within 15
days after the record date for a regularly scheduled dividend or
distribution by the FelCor Parties, unless FelCor elects in its discretion
to require both such authorizations to occur. The dividend or distribution
shall be equal to such parties' most recent quarterly dividend or
distribution rate for such stockholders and partners, as the case may be,
multiplied by a fraction, the numerator of which is the number of days
elapsed since the last dividend record date through and including the
Effective Time, and the denominator of which is 91. Any dividend or
distribution made by the FelCor Parties pursuant to this Section 2.2(c)(i)
shall be paid in the ordinary course of business consistent with the past
practice of such parties as to the manner and timing of payment. Any
dividend or distribution made by the MeriStar Parties pursuant to this
Section 2.2(c)(i) shall be paid pursuant to the procedures set forth in
Section 2.2(c)(ii).
(ii) If, after taking into account (A) the regular quarterly dividends
or distributions declared by MeriStar to its stockholders with respect to
its taxable year ending at the Effective Time and (B) any dividend or
distribution that is to be paid to holders of MeriStar Common Stock under
Section 2.2(c)(i), MeriStar would fail to satisfy the requirements of
Section 857(a)(1) of the Code for the taxable year of MeriStar ending at
the Effective Time, then either (X) the amount of the dividend or
distribution with respect to MeriStar Common Stock under Section 2.2(c)(i)
shall be increased or (Y) if no dividend or distribution was declared by
MeriStar under Section 2.2(c)(i),
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MeriStar shall declare a dividend, in either event in an amount sufficient
for MeriStar to satisfy the requirements of Section 857(a)(1) of the Code
for such period. Any dividend or distribution made by MeriStar pursuant to
Section 2.2(c)(i) and/or pursuant to this Section 2.2(c)(ii) (the "Final
MeriStar Dividend") shall be declared and paid to holders of shares of
MeriStar Common Stock as of a record date which shall be the close of
business on the Closing Date. Any Final MeriStar Dividend shall be paid by
MeriStar to the stock transfer agent of MeriStar (the "MeriStar Transfer
Agent") on the Closing Date, and the MeriStar Transfer Agent shall pay the
Final MeriStar Dividend to the holders of the MeriStar Common Stock on or
before 30 days following the Closing Date. The FelCor Parties and the
MeriStar Parties, by mutual agreement, may accelerate the declaration date,
the record date, and/or the payment date of any Final MeriStar Dividend in
order to enable MeriStar to avoid or minimize excise tax liability under
Section 4981 of the Code for its taxable year ending at the Effective Time.
In the event that MeriStar declares a Final MeriStar Dividend with respect
to the MeriStar Common Stock, MeriStar OP shall simultaneously declare a
distribution (the "Final MeriStar OP Distribution") to holders of MeriStar
OP Units in an amount per unit equal to the Final MeriStar Dividend payable
per share of MeriStar Common Stock, the record date for which shall be the
close of business on the Closing Date. Any Final MeriStar OP Distribution
shall be paid by MeriStar OP to the MeriStar Transfer Agent on the Closing
Date and the MeriStar Transfer Agent shall pay such distribution to the
holders of the MeriStar OP Units on or before 30 days following the Closing
Date. MeriStar shall notify FelCor of the expected amount of any MeriStar
Final Dividend at least 20 days prior to the date for the declaration of
any Final MeriStar Dividend.
(iii) Except for (A) regular quarterly dividends or distributions
declared and paid by the MeriStar Parties and the FelCor Parties to their
respective stockholders and partners in the ordinary and normal course of
business, having record and payment dates consistent with their respective
past practices and being in amounts not greater than the respective party's
last dividend or distribution prior to the date hereof, and (B) the
dividend or distribution contemplated by Section 2.2(c)(i) and Section
2.2(c)(ii), neither the MeriStar Parties nor the FelCor Parties will
declare or pay any dividend or distribution to their respective
stockholders or partners prior to the Effective Time.
(iv) No dividends or other distributions declared or made after the
Effective Time with respect to shares of FelCor Common Stock with a record
date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of FelCor Common Stock
represented thereby until the holder of such Certificate shall surrender
such Certificate in the manner provided in Section 2.2(b). Subject to the
effect of unclaimed property, escheat and other applicable laws, following
surrender of any such Certificate, in addition to the Merger Consideration,
there shall be paid to the holder of the certificates representing whole
shares of FelCor Common Stock issued in consideration therefor, without
interest, (i) at the time of such surrender, the amount of dividends or
other distributions thereon with a record date after the Effective Time and
theretofore paid with respect to such whole shares of FelCor Common Stock
and (ii) at the appropriate payment date, the amount of dividends or other
distributions thereon, with a record date after the Effective Time but
prior to such surrender and having a payment date subsequent to such
surrender.
(d) No Fractional Securities. Notwithstanding any other provision hereof,
no fractional shares of FelCor Common Stock will be issued in connection with
the Merger. No holder of a fractional share interest will be entitled to
dividends, voting rights or any other stockholder rights in respect of such
fractional share. Instead, as soon as practicable after the Effective Time, the
Exchange Agent will determine the excess of (i) the number of whole shares of
FelCor Common Stock delivered to the Exchange Agent by FelCor pursuant to
Section 2.1(a) over (ii) the aggregate number of whole shares of FelCor Common
Stock to be distributed to holders of MeriStar Common Stock pursuant to Section
2.2(b) (such excess, the "Excess Shares"). FelCor will instruct the Exchange
Agent (i) to sell the Excess Shares at then-prevailing prices on the NYSE
through one or more member firms of the NYSE and (ii) to use reasonable efforts
to complete the sale of the Excess Shares as promptly following the Effective
Time as, in the Exchange Agent's sole judgment, is practicable consistent with
obtaining the
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best execution of such sales in light of prevailing market conditions and, in
any event, within ten calendar days following the Effective Time. The Exchange
Agent will hold such proceeds in trust for the holders of MeriStar Common Stock
who would otherwise be entitled to receive a fraction of a share of FelCor
Common Stock, and will determine the portion of the proceeds to which each such
holder is entitled, if any, by multiplying the amount of the aggregate net
proceeds of such sale by a fraction, the numerator of which is the amount of the
fractional share interest to which each such holder is entitled, and the
denominator of which is the aggregate amount of fractional share interests to
which all such holders of MeriStar Common Stock are entitled. The Surviving
Corporation will pay all commissions, transfer taxes, Exchange Agent's fees and
other out-of-pocket transaction costs incurred in connection with the sale of
such Excess Shares.
(e) Alternative Cash Payment. Notwithstanding the provisions of Section
2.2(d), FelCor may elect at its option, exercised prior to the Effective Time,
in lieu of the issuance and sale of Excess Shares and the making of payments
pursuant to Section 2.2(d), to pay each holder of MeriStar Common Stock who
would otherwise be entitled to receive a fraction of a share of FelCor Common
Stock, an amount in cash equal to the Market Price determined as of the Closing
Date, without interest, multiplied by the fraction of a share of FelCor Common
Stock to which such holder would otherwise be entitled. For purposes of this
Agreement, "Market Price" means the average of the closing sale prices of a
share of FelCor Common Stock (as reported in the NYSE Composite Tape) for the
ten consecutive NYSE trading days ending two trading days prior to the date as
of which such determination is to be made.
(f) Closing of Transfer Books; Etc. From and after the Effective Time, the
stock transfer books of MeriStar shall be closed and no registration of any
transfer of stock of MeriStar shall thereafter be made on the records of
MeriStar. In the event of a transfer of ownership of Canceled Shares which is
not registered in the transfer records of MeriStar, a certificate representing
the proper number of shares of FelCor Common Stock and a check or checks for the
Cash Consideration and cash in lieu of fractional shares may be issued to a
transferee in the proper amount or amounts if the Certificate representing such
Canceled Shares is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. In the event any Certificate(s)
shall have been lost, stolen or destroyed, upon the making of any affidavit of
that fact by the person claiming such certificates to be lost, stolen or
destroyed and, if required by FelCor or the Exchange Agent, upon the posting by
such person of a bond, in an amount reasonably determined by FelCor or the
Exchange Agent, as indemnity against any claim that may be made against it with
respect to such Certificate(s), the Exchange Agent will issue in respect of such
lost, stolen or destroyed Certificate(s), the Merger Consideration to be
received in exchange therefor (together with any cash in lieu of fractional
shares payable in accordance with Section 2.2(d) or (e)).
(g) Withholding Rights. FelCor or the Exchange Agent shall be entitled to
deduct and withhold from the Merger Consideration otherwise payable pursuant to
this Agreement to any holder of shares of MeriStar Common Stock, such amounts as
FelCor or the Exchange Agent is required to deduct and withhold with respect to
the making of such payment under the Code, or any provision of state, local or
foreign tax law. To the extent that amounts are so withheld by FelCor or the
Exchange Agent, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of the shares of MeriStar Common
Stock in respect of which such deduction and withholding was made by FelCor or
the Exchange Agent.
(h) Termination of Exchange. Any certificates representing Share
Consideration deposited with the Exchange Agent pursuant to Section 2.2(a) and
not exchanged within one year after the Effective Time pursuant to this Section
2.2 shall be returned by the Exchange Agent to FelCor, which shall thereafter
act as Exchange Agent. All funds held by the Exchange Agent for payment to the
holders of unsurrendered Certificates and unclaimed at the end of one year from
the Effective Time shall be returned to FelCor. Thereafter, any holder of
unsurrendered Certificates shall look solely to FelCor for the payment of any
funds to which such holder may be entitled, subject to applicable law. FelCor
shall not be liable to any Person for such shares or funds delivered by it to a
public official pursuant to any applicable abandoned property, escheat or
similar law. As used in this Agreement, the term "Person" shall mean any natural
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person, corporation, general or limited partnership, limited liability company,
joint venture, trust, association, unincorporated organization or entity of any
kind.
ARTICLE 3
CERTAIN TRANSACTIONS RELATING TO THE MERISTAR OP
3.1 MERGER OF MERISTAR OP AND FELCOR OP. At the Effective Time, MeriStar
and FelCor shall cause MeriStar OP to merge with and into FelCor OP in
accordance with the Delaware Revised Uniform Limited Partnership Act ("DRULPA")
and the partnership agreements of FelCor OP and MeriStar OP, with FelCor OP as
the surviving entity. The effects and consequences of the OP Merger are set
forth in this Article Three and the DRULPA. FelCor OP, after the effectiveness
of the OP Merger, is sometimes referred to herein as the "Surviving
Partnership."
3.2 CLOSING AND EFFECTIVENESS. The closing of the OP Merger (the "OP
Merger Closing") shall take place at the same time and place as the Closing. All
of the documents and transactions relating to the OP Merger Closing shall be
deemed to be part of the Closing. The OP Merger shall be conditioned upon prior
effectiveness of the Merger and shall be effective at the Effective Time of the
Merger. At the OP Merger Closing, MeriStar shall cause MeriStar OP to execute
the Certificate of Merger (the "OP Merger Articles") in the form attached hereto
as Exhibit "B," which certificate shall then be executed by FelCor OP and filed
with the Delaware Secretary of State.
3.3 EFFECTS OF OP MERGER. The OP Merger shall have the effects set forth
in the DRULPA. FelCor shall be the sole general partner of the Surviving
Partnership.
3.4 CERTIFICATE OF LIMITED PARTNERSHIP AND PARTNERSHIP AGREEMENT. The
certificate of limited partnership of FelCor OP as in effect immediately prior
to the Effective Time (the "FelCor OP Certificate") shall be the certificate of
limited partnership of the Surviving Partnership. The limited partnership
agreement of FelCor OP as amended and restated in a form reasonably satisfactory
to the parties (the "Restated Partnership Agreement") shall be the limited
partnership agreement of the Surviving Partnership, until thereafter amended as
provided by applicable law or therein.
3.5 EFFECT OF THE OP MERGER ON PARTNERSHIP INTERESTS.
(a) Common Units of MeriStar OP. As of the effectiveness of the OP Merger,
by virtue of the OP Merger and without any action on the part of any holder of
the partnership interests in MeriStar OP known as "OP Units" (herein called
"MeriStar Common Units"), each outstanding MeriStar Common Unit shall be
converted into the right to receive (i) the number of units of partnership
interest in FelCor OP known as "Partnership Units" or "Common Units" (herein
called "FelCor Common Units") equal to the Exchange Ratio, and (ii) cash in an
amount equal to the Cash Consideration, without interest.
(b) Class B Units of MeriStar OP. As of the effectiveness of the OP
Merger, there shall be no holders of the partnership interests in MeriStar OP
known as "Class B Units" (herein called "MeriStar Class B Units").
(c) Class C Units of MeriStar OP. As of the effectiveness of the OP
Merger, by virtue of the OP Merger and without any action on the part of any
holder of the partnership interests in MeriStar OP known as "Class C Units"
(herein called "MeriStar Class C Units"), each outstanding MeriStar Class C Unit
shall be converted into the right to receive (i) the number of units of
partnership interest in FelCor OP known as "Class C Units" (herein called
"FelCor Class C Units") equal to the Exchange Ratio, and (ii) cash in an amount
equal to the Cash Consideration, without interest.
(d) Class D Units of MeriStar OP. As of the effectiveness of the OP
Merger, by virtue of the OP Merger and without any action on the part of any
holder of the partnership interests in MeriStar OP known as "Class D Units"
(herein called "MeriStar Class D Units"), each outstanding MeriStar Class D Unit
shall be converted into the right to receive one unit of partnership interest in
FelCor OP known as "Class D Units" (herein called "FelCor Class D Units").
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(e) POP Units of MeriStar OP. As of the effectiveness of the OP Merger, by
virtue of the OP Merger and without any action on the part of any holder of the
partnership interests in MeriStar OP known as "POP Units" (herein called
"MeriStar POP Units"), each outstanding MeriStar POP Unit that is Vested (as
defined below) shall be converted into the right to receive (i) the number of
FelCor Common Units equal to the product of the Exchange Ratio times the
Exchange Factor (as defined below) and (ii) cash in an amount equal to the
product of the Cash Consideration, without interest, times the Exchange Factor
(as defined below). The term "Vested" means those MeriStar POP Units that are
fully vested and not subject to forfeiture as of the Effective Time, assuming
the Merger was completed, under the respective Restricted Unit Agreements (as
defined in the MeriStar Profits-Only Operating Partnership Units Plan (the "POP
Unit Plan")) dated effective as of March 29, 2000 and April 16, 2001 between
MeriStar, MeriStar OP and each of the respective holders of such MeriStar POP
Units. The term "Exchange Factor" shall mean 1.0. As of the effectiveness of the
OP Merger, by virtue of the OP Merger and without any action on the part of any
holder of the POP Units, each outstanding MeriStar POP Unit that is not Vested
shall be cancelled and cease to exist, and no consideration shall be issued or
delivered in exchange therefor.
(f) General Partner Interests of MeriStar OP. As of the effectiveness of
the OP Merger, by virtue of the OP Merger and without any action on the part of
MeriStar as the holder of the general partner's partnership interest in MeriStar
OP (the "MeriStar GP Interest"), each unit of partnership interest that
constitutes part of the MeriStar GP Interest shall be converted into the right
to receive (i) the number of FelCor Common Units equal to the Exchange Ratio,
and (ii) cash in an amount equal to the Cash Consideration, without interest.
(g) Effect on MeriStar OP Units. All MeriStar Common Units, MeriStar Class
B Units, MeriStar Class C Units, MeriStar Class D Units, MeriStar POP Units and
MeriStar GP Interest (collectively, the "MeriStar OP Units") shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each MeriStar OP Unit shall thereafter represent the right to
receive, upon making the deliveries required by Section 3.6(a), such number of
whole FelCor Common Units, FelCor Class C Units, and FelCor Class D Units
(collectively the "New FelCor OP Units"), and certificates representing such
FelCor OP Units, into which such MeriStar OP Units were converted in accordance
with Section 3.5(a)-(f) plus any applicable Cash Consideration, without
interest. The holders of such MeriStar OP Units outstanding immediately prior to
the Effective Time shall cease to have any rights with respect to such MeriStar
OP Units except as otherwise provided herein or by law. No fractional New FelCor
OP Units shall be issued, and, in lieu thereof, a cash payment, without
interest, shall be made pursuant to Section 3.6(c).
3.6 ISSUANCE OF NEW CERTIFICATES FOR FELCOR OP UNITS.
(a) Delivery Procedures. As soon as practicable after the Effective Time,
FelCor OP shall mail to each holder of record of a MeriStar OP Unit (a "MeriStar
OP Unit Holder"), a ratification and joinder agreement (a "Ratification
Agreement") by which the MeriStar OP Unit Holder ratifies and agrees to be bound
by the Restated Partnership Agreement, waives any rights they have under their
exchange rights agreements with MeriStar and MeriStar OP, acknowledges the
termination of the MeriStar OP Partnership Agreement and is admitted as a
limited partner in FelCor OP as a holder of the respective New FelCor OP Units
which the MeriStar OP Unit Holder is entitled to receive by virtue of the OP
Merger. The Ratification Agreement to be executed by holders of MeriStar POP
Units will also contain a waiver of any rights they have under the agreements by
which their POP Units were granted or under the POP Unit Plan. Without
limitation to the rights under Section 3.6(b), upon delivery to FelCor OP of a
duly executed Ratification Agreement, together with such other customary
documents as FelCor OP may require, the MeriStar OP Unit Holder shall be
entitled to receive, with respect to such MeriStar OP Units (i) a certificate or
certificates representing that number of whole New FelCor OP Units which such
MeriStar OP Unit Holder has the right to receive pursuant to Section 3.5, (ii) a
check in payment of the Cash Consideration, if any, without interest, which such
MeriStar OP Unit Holder has the right to receive pursuant to Section 3.5, and
(iii) a check in payment of the cash in lieu of fractional New FelCor OP Units,
without interest, which such holder is entitled to receive pursuant to Section
3.6(c). FelCor OP
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shall cause all FelCor OP Units issued pursuant to the OP Merger to be duly
authorized, validly issued, fully paid and non-assessable and not subject to
preemptive rights.
(b) Distributions After Effective Time. No distributions declared or made
after the Effective Time with respect to New FelCor OP Units with a record date
after the Effective Time shall be paid to any MeriStar OP Unit Holder with
respect to New FelCor OP Units until such MeriStar OP Unit Holder executes and
delivers to FelCor OP a Ratification Agreement. Subject to the effect of
unclaimed property, escheat and other applicable laws, following delivery to
FelCor OP of any such Ratification Agreement, in addition to the consideration
required by Section 3.5, there shall be paid to the holder of the certificates
representing whole New FelCor OP Units issued in consideration therefor, without
interest, (i) at the time of such delivery, the amount of distributions with a
record date after the Effective Time theretofore paid with respect to such whole
New FelCor OP Units and (ii) at the appropriate payment date, the amount of
distributions with a record date after the Effective Time but prior to delivery
and a payment date subsequent to delivery payable with respect to such whole New
FelCor OP Units.
(c) No Fractional FelCor OP Units. Notwithstanding any other provision
hereof, no fractional New FelCor OP Units will be issued in connection with the
OP Merger. In lieu of issuance of a fractional New FelCor OP Unit, FelCor OP
shall pay each MeriStar OP Unit Holder who would otherwise be entitled to
receive a fraction of a New FelCor OP Unit, an amount in cash, without interest,
equal to the Market Price determined as of the Closing Date multiplied by the
fraction of a New FelCor OP Unit to which such holder would otherwise be
entitled.
(d) Withholding Rights. FelCor OP shall be entitled to deduct and withhold
from the consideration otherwise payable under Section 3.5 to any holder of
MeriStar OP Units, such amounts as FelCor OP is required to deduct and withhold
with respect to the making of such payment under the Code, or any provision of
state, local or foreign tax law. To the extent that amounts are so withheld by
FelCor OP, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of the MeriStar OP Units, in respect
of which such deduction and withholding was made by FelCor OP.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE MERISTAR PARTIES
Except as set forth in the letter of even date herewith signed by the
Chairman of the Board or President of MeriStar and delivered to the FelCor
Parties prior to the execution hereof (the "MeriStar Disclosure Letter"), the
MeriStar Parties, jointly and severally, represent and warrant to the FelCor
Parties as follows:
4.1 ORGANIZATION, STANDING AND POWER OF MERISTAR. MeriStar is a
corporation duly organized and validly existing under the laws of the State of
Maryland, having the requisite corporate power to carry on its business as now
being conducted. MeriStar is duly qualified or licensed to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
nature of its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed, individually or in the aggregate, would
not have a material adverse effect on the business, properties, assets,
financial condition or results of operations of MeriStar and the MeriStar
Subsidiaries (as defined below), taken as a whole, or on the ability of the
MeriStar Parties to perform any of their respective substantive obligations
under this Agreement (any such effect, a "MeriStar Material Adverse Effect").
MeriStar has delivered to the FelCor Parties complete and correct copies of
MeriStar's Second Articles of Amendment and Restatement (the "MeriStar Charter")
and the Bylaws of MeriStar (the "MeriStar Bylaws"), in each case, as amended or
supplemented to the date of this Agreement.
4.2 MERISTAR SUBSIDIARIES.
(a) MeriStar is the record and beneficial owner of all of the issued and
outstanding shares of capital stock of MeriStar LP, Inc., a Nevada corporation
("MeriStar LP"). As of the date of hereof,
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MeriStar LP owns 43,978,936 MeriStar Common Units, representing approximately
90.3% of the issued and outstanding MeriStar Common Units. There are issued and
outstanding (i) an aggregate of 2,883,111 MeriStar Common Units, (ii) an
aggregate of 964,227 MeriStar Class C Units, (iii) an aggregate of 392,157
MeriStar Class D Units, and (iv) an aggregate of 802,292 MeriStar POP Units.
MeriStar also owns an approximate 1% general partnership interest in MeriStar
OP, constituting all of the general partner interests in MeriStar OP. All of the
MeriStar OP Units owned by MeriStar LP, the general partner interest in MeriStar
OP owned by MeriStar, and the issued and outstanding capital stock of MeriStar
LP owned by MeriStar, are free and clear of all pledges, claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever
(collectively, "Liens") other than those listed on Schedule 4.2(a) to the
MeriStar Disclosure Letter. The MeriStar OP Units are validly issued and
outstanding, fully paid and nonassessable. Schedule 4.2(a) of the MeriStar
Disclosure Letter sets forth the name of each MeriStar OP Unit Holder and the
number and type of MeriStar OP Units owned by each such MeriStar OP Unit Holder
in MeriStar OP as of the date of this Agreement. The MeriStar OP Units are
subject to no restriction except as set forth in the limited partnership
agreement of MeriStar OP (the "MeriStar OP Partnership Agreement") and pursuant
to applicable securities laws. MeriStar OP has not issued or granted and is not
a party to any outstanding commitments of any kind relating to, or any presently
effective agreements or understandings with respect to, interests in MeriStar
OP, whether issued or unissued, or securities convertible into or exchangeable
for interests in MeriStar OP or preemptive rights to purchase or rights of first
refusal with respect to such interests. Except as listed on Schedule 4.2(a) to
the MeriStar Disclosure Letter, no MeriStar OP Units, or other interests
therein, have been authorized or reserved for issuance to anyone other than
MeriStar LP or MeriStar.
(b) Schedule 4.2(b) to the MeriStar Disclosure Letter sets forth (i) each
Subsidiary (as defined below) of MeriStar (the "MeriStar Subsidiary" or
"MeriStar Subsidiaries"), (ii) the ownership interest therein of MeriStar, (iii)
if not wholly-owned by MeriStar, the identity and ownership interest of each of
the other owners of each MeriStar Subsidiary, (iv) each hotel (identified by
name and location) and other real property owned or leased by such MeriStar
Subsidiary, and (v) each entity not constituting a MeriStar Subsidiary in which
MeriStar or any MeriStar Subsidiary holds an ownership interest, indicating the
name, nature and business of such entity and the ownership interest therein held
by MeriStar, each MeriStar Subsidiary and each other Person. As used in this
Agreement, "Subsidiary" of any Person means any corporation, partnership,
limited liability company, joint venture, trust or other legal entity of which
such Person (either directly or through or together with another Subsidiary of
such Person) owns 50% or more of the capital stock or other equity interests of
such corporation, partnership, limited liability company, joint venture, trust
or other legal entity, except for passive investments held solely for investment
purposes and which are not material in amount.
(c) Except as set forth in Schedule 4.2(c) to the MeriStar Disclosure
Letter, (i) all the outstanding shares of capital stock of each MeriStar
Subsidiary that is a corporation have been duly and validly issued and are (A)
fully paid and nonassessable, (B) owned by MeriStar or by another MeriStar
Subsidiary and (C) owned free and clear of all Liens and (ii) all equity
interests owned by MeriStar or a MeriStar Subsidiary in another MeriStar
Subsidiary that is a partnership, joint venture, limited liability company or
trust are owned free and clear of all Liens. Each MeriStar Subsidiary, that is a
corporation is duly incorporated and validly existing under the laws of its
jurisdiction of incorporation and has the requisite corporate power and
authority to carry on its business as now being conducted, and each MeriStar
Subsidiary that is a partnership, limited liability company or trust is duly
organized and validly existing under the laws of its jurisdiction of
organization and has the requisite power and authority to carry on its business
as now being conducted. Each MeriStar Subsidiary is duly qualified or licensed
to do business and is in good standing in each jurisdiction in which the nature
of its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed, individually or in the aggregate, would
not have a MeriStar Material Adverse Effect. Copies of the articles or
certificates of incorporation, bylaws, organizational documents and partnership,
joint venture and operating agreements of each MeriStar Subsidiary, in each case
as amended to the date of this Agreement, have been previously delivered or made
available to the FelCor Parties. Neither MeriStar nor any of the MeriStar
Subsidiaries is in breach of any provision of any agreement,
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document or contract governing its rights in or to the interests owned or held
by it other than breaches which could not reasonably be expected to have a
MeriStar Material Adverse Effect. To the Knowledge of MeriStar (as defined in
Section 4.23), the other parties to such agreements, documents or contracts are
not in breach of any of their respective obligations under such agreements,
documents or contracts other than breaches which could not reasonably be
expected to have a MeriStar Material Adverse Effect.
4.3 MERISTAR STRUCTURE.
(a) The authorized shares of stock of MeriStar consist of 100,000,000
shares of preferred stock, $0.01 par value per share, none of which is issued or
outstanding, and 250,000,000 shares of MeriStar Common Stock, of which
44,465,990 shares were issued and outstanding as of the date hereof. On the date
hereof, (i) 4,549,561 shares of MeriStar Common Stock have been reserved for
issuance, and MeriStar has proposed an increase in the number of shares reserved
for issuance to an aggregate of 5,558,249 shares, under MeriStar's Incentive
Plan (the "MeriStar Incentive Plan"), under which options in respect of
4,470,348 shares of MeriStar Common Stock have been granted and are outstanding
on the date hereof, (ii) 125,000 shares of MeriStar Common Stock have been
reserved for issuance, and MeriStar has proposed an increase in the number of
shares reserved for issuance to an aggregate of 500,000 shares, under the
MeriStar Directors' Plan, (iii) 5,782,940 shares of MeriStar Common Stock have
been reserved for issuance upon the exchange of MeriStar OP Units, (iv)
4,538,235 shares of MeriStar Common Stock have been reserved for issuance upon
the conversion of MeriStar's 4.75% Convertible Subordinated Notes due 2004 (the
"MeriStar Convertible Notes"), (v) 500,000 shares of MeriStar Common Stock have
been reserved for issuance under MeriStar's Employee Stock Purchase Plan, and
(vi) 5,000,000 shares of MeriStar Common Stock have been reserved for issuance
under MeriStar's Dividend Reinvestment Plan, which will be terminated prior to
the Effective Time. On the date hereof, except as set forth in this Section 4.3
and the Schedules referenced in this Section 4.3, no shares of MeriStar Common
Stock or other voting securities of MeriStar were issued, reserved for issuance
or outstanding.
(b) Set forth in Schedule 4.3(b) to the MeriStar Disclosure Letter is a
true and complete list of the following: each qualified or nonqualified option
to purchase shares of MeriStar Common Stock granted under the MeriStar Incentive
Plan, the Directors' Plan or any other formal or informal stock-based
compensation arrangement ("MeriStar Options"). As of the date of this Agreement,
other than MeriStar Options, there were no outstanding warrants or other rights
to acquire stock, stock appreciation rights, phantom stock, dividend
equivalents, performance units, restricted stock grants and performance shares
granted under the MeriStar Incentive Plan or rights to receive shares of
MeriStar Common Stock on a deferred basis granted by MeriStar under the MeriStar
Incentive Plan. Schedule 4.3(b) to the MeriStar Disclosure Letter also sets
forth for each MeriStar Option the name of the grantee, the date of the grant,
status of the option as qualified or nonqualified under Section 422 of the Code,
the number of shares of MeriStar Common Stock subject to such option, the number
of shares subject to options that are currently exercisable, the exercise price
per share, the expiration date, and the number of such shares subject to stock
appreciation rights.
(c) All outstanding shares of MeriStar Common Stock are duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. Except for the MeriStar Convertible Notes, there are no bonds,
debentures, notes or other indebtedness of MeriStar having the right to vote (or
that are convertible into, or exchangeable for, securities having the right to
vote) on any matters on which stockholders of MeriStar may vote.
(d) Except (i) as set forth in this Section 4.3, in Schedule 4.3(b) or
4.3(d) to the MeriStar Disclosure Letter, or in the MeriStar OP Partnership
Agreement (as defined herein) and (ii) for the MeriStar OP Units held by
partners in the MeriStar OP (which, subject to certain restrictions, may be
exchanged by the holders thereof for either cash or, at MeriStar's option,
shares of MeriStar Common Stock on a one-for-one basis), (A) there are no
outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which MeriStar or any
MeriStar Subsidiary is a party or by which such entity is bound, obligating
MeriStar or any MeriStar Subsidiary to
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issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of MeriStar Common Stock, voting securities or other ownership interests
of MeriStar or of any MeriStar Subsidiary or obligating MeriStar or any MeriStar
Subsidiary to issue, grant, extend or enter into any such security, option,
warrant, call, right, commitment, agreement, arrangement or undertaking (other
than to MeriStar or a MeriStar Subsidiary), and (B) there are no outstanding
obligations of MeriStar or any MeriStar Subsidiary to repurchase, redeem or
otherwise acquire any shares of capital stock or ownership interest in MeriStar
or any MeriStar Subsidiary.
4.4 ORGANIZATION, STANDING AND POWER OF MERISTAR OP. MeriStar OP is a
limited partnership duly organized and validly existing under the laws of
Delaware and has the requisite power and authority to carry on its business as
now being conducted. MeriStar OP is duly qualified or licensed to do business
and is in good standing in each jurisdiction in which the nature of its business
or the ownership or leasing of its properties makes such qualification or
licensing necessary, other than in such jurisdictions where the failure to be so
qualified or licensed, individually or in the aggregate, would not have a
MeriStar Material Adverse Effect. MeriStar has delivered to the FelCor Parties
complete and correct copies of the MeriStar OP Partnership Agreement as amended
or supplemented to the date of this Agreement.
4.5 REGISTRATION RIGHTS. Except as set forth in Schedule 4.5 to the
MeriStar Disclosure Letter, no Person has any right to require the registration
of any shares of MeriStar Common Stock or any other securities of MeriStar or
any MeriStar Subsidiary.
4.6 AUTHORITY; NONCONTRAVENTION; CONSENTS.
(a) MeriStar has the requisite corporate power to enter into this Agreement
and, subject to the requisite stockholder approval of the Merger (the "MeriStar
Stockholder Approvals"), to consummate the transactions contemplated by this
Agreement. MeriStar OP has the requisite partnership power and authority to
enter into this Agreement, and to consummate the transactions contemplated by
this Agreement. The execution and delivery of this Agreement by the MeriStar
Parties and the consummation by the MeriStar Parties of the transactions
contemplated by this Agreement have been duly authorized by all necessary action
on the part of the MeriStar Parties, except for and subject to the MeriStar
Stockholder Approvals with respect to MeriStar and the approvals set forth on
Schedule 4.6(a) to the MeriStar Disclosure Letter. This Agreement has been duly
executed and delivered by the MeriStar Parties and constitutes a valid and
binding obligation of the MeriStar Parties, enforceable against the MeriStar
Parties in accordance with and subject to its terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to creditors'
rights and general principles of equity.
(b) Except as set forth in Schedule 4.6(b) to the MeriStar Disclosure
Letter, the execution and delivery of this Agreement by the MeriStar Parties do
not, and the consummation of the transactions contemplated by this Agreement
(including, without limitation, the Transactions), and compliance by the
MeriStar Parties with the provisions of this Agreement will not, conflict with,
or result in any violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any substantive obligation or to loss of a substantive benefit
under, or result in the creation of any Lien upon any of the properties or
assets of the MeriStar Parties or any MeriStar Subsidiary, under, (i) the
MeriStar Charter, the MeriStar Bylaws or the charter, organizational documents,
limited liability company agreement, partnership agreement or other governing
document (as the case may be) of any MeriStar Subsidiary, each as amended or
supplemented to the date of this Agreement, (ii) any loan or credit agreement,
note, bond, mortgage, indenture, reciprocal easement agreement, lease or other
agreement, instrument, permit, concession, franchise or license applicable to
MeriStar or any MeriStar Subsidiary or their respective properties or assets or
(iii) subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance, rule
or regulation (collectively, "Laws") applicable to MeriStar or any MeriStar
Subsidiary, or their respective properties or assets, other than, in the case of
clause (ii) or (iii), any such conflicts, violations, defaults, rights, loss or
Liens that individually or in the aggregate would not (x) have a MeriStar
Material Adverse Effect or (y) prevent the consummation of the transactions
contemplated by this Agreement. No consent, approval, order or authorization of,
or registration, declaration or filing with,
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any federal, state or local government or any court, administrative or
regulatory agency or commission or other governmental authority or agency,
domestic or foreign (a "Governmental Entity"), is required in connection with
the execution and delivery of this Agreement by the MeriStar Parties or the
consummation by the MeriStar Parties of the transactions contemplated by this
Agreement, except for (i) the filing with the Securities and Exchange Commission
(the "SEC") of the Proxy Statement (as defined in Section 7.1), (ii) the
acceptance for record of the Articles of Merger by the Department, (iii) such
filings as may be required in connection with the payment of any transfer and
gain taxes, and (iv) such other consents, approvals, orders, authorizations,
registrations, declarations and filings (A) as are set forth in Schedules 4.6(a)
and (b) to the MeriStar Disclosure Letter, (B) as may be required under (y)
federal, state or local environmental or Tax laws or (z) the "blue sky" laws of
various states, to the extent applicable; or (C) which, if not obtained or made,
would not prevent or delay in any material respect the consummation of any of
the transactions contemplated by this Agreement or otherwise prevent the
MeriStar Parties from performing their obligations under this Agreement in any
material respect or have, individually or in the aggregate, a MeriStar Material
Adverse Effect.
4.7 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED
LIABILITIES. MeriStar and its predecessors have filed all required reports,
schedules, forms, statements and other documents with the SEC since July 31,
1996 through the date hereof (the "MeriStar SEC Documents"). Except as set forth
on Schedule 4.7 to the MeriStar Disclosure Letter, no MeriStar Subsidiary is
required to file any form, report, registration statement, prospectus or other
document with the SEC. All of the MeriStar SEC Documents (other than preliminary
materials), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and, in each case, the rules and regulations
promulgated thereunder applicable to such MeriStar SEC Documents. None of the
MeriStar SEC Documents at the time of filing contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later MeriStar SEC Documents
filed and publicly available prior to the date of this Agreement. The
consolidated financial statements of MeriStar included in the MeriStar SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles ("GAAP") (except, in the case of unaudited statements, as
permitted by the applicable rules and regulations of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly presented, in accordance with the applicable
requirements of GAAP and the applicable rules and regulations of the SEC, the
consolidated financial position as of the dates thereof and the consolidated
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments) of MeriStar
and the MeriStar Subsidiaries. Except for liabilities and obligations set forth
in the MeriStar SEC Documents or in Schedule 4.7 to the MeriStar Disclosure
Letter, neither MeriStar nor any of the MeriStar Subsidiaries has any
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise), which are required by GAAP to be set forth on a consolidated
balance sheet of MeriStar or in the notes thereto and which, individually or in
the aggregate, would have a MeriStar Material Adverse Effect.
4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except for (i) matters
disclosed in the MeriStar SEC Documents or on Schedule 4.8 to the MeriStar
Disclosure Letter, (ii) the Transactions and the dividends and distributions
contemplated by Section 2.2(c), and (iii) the transactions permitted by Section
6.3, since the date of the most recent audited financial statements included in
the MeriStar SEC Documents (the "MeriStar Financial Statement Date"), MeriStar
and the MeriStar Subsidiaries have conducted their business only in the ordinary
and normal course (taking into account prior practices, including the
acquisition of properties and issuance of securities) and there has not been,
from the MeriStar Financial Statement Date through the date of this Agreement,
(a) any material adverse change in the business, financial condition or results
of operations of MeriStar and the MeriStar Subsidiaries taken as a whole,
including, without limitation, any increase in market rates of interest and
related costs of
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financing which results in yields for new issues of unsecured senior notes
issued by companies with a comparable debt rating to FelCor and MeriStar
exceeding an amount which the members of the Interim Transactions Committee (as
defined in Section 6.5) agree, in the exercise of their good faith business
judgment, makes the issuance of such debt not economically prudent (a "MeriStar
Material Adverse Change"), (b) any occurrence or circumstance that with the
passage of time would reasonably be expected to result in a MeriStar Material
Adverse Change, or (c) any action taken by MeriStar or any MeriStar Subsidiary
during the period from the MeriStar Financial Statement Date through the date of
this Agreement that, if taken during the period from the date of this Agreement
through the Effective Time, would constitute a breach of Section 6.3.
4.9 LITIGATION. Except as disclosed in the MeriStar SEC Documents or in
Schedule 4.9 to the MeriStar Disclosure Letter, and other than personal injury
and other routine tort litigation arising from the ordinary course of operations
of MeriStar and the MeriStar Subsidiaries (a) which are covered by adequate
insurance or (b) for which all material costs and liabilities arising therefrom
are reimbursable pursuant to common area maintenance or similar agreements,
there is no suit, action or proceeding pending (in which service of process has
been received by an employee or agent of MeriStar or any MeriStar Subsidiary)
or, to the Knowledge of MeriStar, threatened in writing against or affecting
MeriStar or any MeriStar Subsidiary that, individually or in the aggregate,
could reasonably be expected to have a MeriStar Material Adverse Effect or to
prohibit, restrict or interfere with the consummation of any of the
Transactions, nor is there any judgment, decree, injunction, rule or order of
any court or Governmental Entity or arbitrator outstanding against MeriStar or
any of the MeriStar Subsidiaries having, or which, insofar as reasonably can be
foreseen, in the future could have, any such Effect.
4.10 PROPERTIES.
(a) Schedule 4.10(a) to the MeriStar Disclosure Letter sets forth a
complete and accurate list and the address of all real property owned or leased
by MeriStar or any MeriStar Subsidiary (collectively, and together with the land
at each address referenced in Schedule 4.10(a) to the MeriStar Disclosure Letter
and all buildings, structures and other improvements and fixtures located on or
under such land and all easements, rights and other appurtenances to such land,
the "MeriStar Properties"). MeriStar or the MeriStar Subsidiaries, owns or own,
as the case may be, good and insurable fee simple title (or, if so indicated in
Schedule 4.10(a) to the MeriStar Disclosure Letter, leasehold title) to each of
the MeriStar Properties, in each case free and clear of liens, mortgages or
deeds of trust, claims against title, charges which are liens, security
interests or other encumbrances on title (collectively, "Encumbrances"), except
for such mortgages as are set forth on Schedule 4.16(b) to the MeriStar
Disclosure Letter or for which no disclosure is required by Section 4.16(b), the
Lien of real estate taxes not yet due and payable and such Encumbrances as
individually, and in the aggregate, could not reasonably be expected to have a
MeriStar Material Adverse Effect. Except for such of the following as
individually, or in the aggregate, could not reasonably be expected to have a
MeriStar Material Adverse Effect, policies of title insurance (or marked title
insurance commitments having the same force and effect as title insurance
policies) have been issued by national title insurance companies insuring the
fee simple or leasehold, as applicable, title of MeriStar or its Subsidiaries,
as applicable, to each of the MeriStar Properties in amounts at least equal to
the portion of the purchase price thereof allocated to real estate (the
"MeriStar Title Policies"), and, to MeriStar's Knowledge, the MeriStar Title
Policies are valid and in full force and effect and no claim has been made under
any such policy (except claims which have previously been fully resolved).
(b) Except as set forth in Schedule 4.10(b) to the MeriStar Disclosure
Letter, and except for matters which would not, individually or in the
aggregate, reasonably be expected to have a MeriStar Material Adverse Effect or
to materially and adversely affect the use or occupancy (or, if applicable, any
proposed development) of the MeriStar Properties, MeriStar has no Knowledge that
any currently required certificate, permit or license (including building
permits and certificates of occupancy) from any Governmental Entity having
jurisdiction over any MeriStar Property or any agreement, easement or other
right which is necessary to permit the lawful use, occupancy or operation of the
existing buildings, structures or other improvements which constitute a part of
any of the MeriStar Properties has not been
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obtained or is not in full force and effect, or of any pending modification or
cancellation of any of the same.
(c) Schedule 4.10(c) to the MeriStar Disclosure Letter sets forth a
complete and accurate list of all definitive agreements made or entered into by
MeriStar or any MeriStar Subsidiary as of the date hereof, which are scheduled
to close or be consummated after the date hereof, (x) to sell, mortgage, pledge,
hypothecate, lease or sublease any MeriStar Property, which, individually or in
the aggregate, are material, (y) to enter into a material transaction in respect
of the ownership or financing of any MeriStar Property or (z) to purchase, lease
or otherwise acquire any real property.
(d) Except as set forth in Schedule 4.10(d) to the MeriStar Disclosure
Letter, none of the MeriStar Properties is subject to any outstanding purchase
option, right of first refusal, right of first offer or similar right, other
than such rights as would not reasonably be expected to have a MeriStar Material
Adverse Effect, nor has MeriStar or any MeriStar Subsidiary entered into any
outstanding contracts with others for the sale, mortgage, pledge, hypothecation,
assignment, sublease or lease of any material portion of any MeriStar Property
or other transfer of all or any material part of any MeriStar Property as of the
date hereof, which are scheduled to close or be consummated after the date
hereof, and no Person has any right or option to acquire, or right of first
refusal or right of first offer with respect to, any interest of MeriStar or any
MeriStar Subsidiary in any MeriStar Property or any material part thereof.
(e) Schedule 4.10(e) to the MeriStar Disclosure Letter sets forth the
capital expenditure budget and schedule of MeriStar and each MeriStar Subsidiary
for each MeriStar Property, describing the capital expenditures which MeriStar
or any MeriStar Subsidiary has budgeted for such MeriStar Property for the
period running through December 31, 2001 (the "MeriStar Budget and Schedule").
(f) The ground leases underlying the leased MeriStar Properties
(collectively, the "MeriStar Ground Leases") are listed on Schedule 4.10(f) to
the MeriStar Disclosure Letter. Each of the MeriStar Ground Leases is valid,
binding and in full force and effect as against MeriStar or any MeriStar
Subsidiary and, to MeriStar's Knowledge, as against the other party thereto,
except to the extent the failure to be binding and in full force and effect
would not reasonably be expected to have a MeriStar Material Adverse Effect.
There does not exist under any of the MeriStar Ground Leases any default, and,
to MeriStar's Knowledge, no event has occurred which, with notice or lapse of
time or both, would constitute such a default, except as would not, individually
or in the aggregate, reasonably be expected to result in a MeriStar Material
Adverse Effect.
(g) Schedule 4.10(g) to the MeriStar Disclosure Letter sets forth a list of
the hotel franchise, license or other agreements relating to the names, marks or
systems (the "MeriStar Franchise Agreements") under which each of the MeriStar
Properties is being operated. Each of the MeriStar Franchise Agreements is in
full force and effect and, to the Knowledge of MeriStar, there are no defaults
thereunder by either party thereto, nor have any events occurred which, with the
giving notice or the passage of time or both would constitute a default or event
of default thereunder, except for those which either individually or in the
aggregate would not constitute a MeriStar Material Adverse Effect.
(h) Schedule 4.10(h) to the MeriStar Disclosure Letter sets forth a list of
the hotel management agreements (the "MeriStar Management Agreements") pursuant
to which each of the MeriStar Properties is being managed. Each of the MeriStar
Management Agreements is in full force and effect and, to the Knowledge of
MeriStar, there are no defaults thereunder by either party thereto, nor have any
events occurred which, with the giving notice or the passage of time or both
would constitute a default or event of default thereunder, except for those
which either individually or in the aggregate would not constitute a MeriStar
Material Adverse Effect.
4.11 EMPLOYEE BENEFITS. With respect to all MeriStar Benefit Plans (as
defined below), except for such matters, as, individually or in the aggregate,
could not reasonably be expected to have a MeriStar Material Adverse Effect, (a)
each MeriStar Benefit Plan and any related trust intended to be qualified under
Sections 401(a) and 501(a) of the Code has received a favorable determination
letter from the IRS that it is so qualified and, to the Knowledge of MeriStar,
nothing has occurred since the date of such letter
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that could reasonably be expected to materially adversely affect the qualified
status of such MeriStar Benefit Plan or related trust, (b) each MeriStar Benefit
Plan has been operated in all material respects in accordance with its terms and
with the terms and requirements of applicable law and all required returns and
filings for each MeriStar Benefit Plan have been timely made, (c) neither
MeriStar nor any MeriStar Subsidiary has incurred any tax, fine, lien, penalty
or other liability imposed under ERISA (defined below), the Code or other
applicable laws, rules and regulations, in connection with any MeriStar Benefit
Plan, and no administrative investigation, audit or other administrative
proceeding by the Department of Labor, the Pension Benefit Guaranty Corporation,
the Internal Revenue Service or other governmental agencies are pending, in
progress or, to the Knowledge of MeriStar or any MeriStar Subsidiary,
threatened, and no fact or event exists that could reasonably be expected to
give rise to any such material liability, (d) all contributions due and payable
on or before the date hereof in respect of each MeriStar Benefit Plan have been
made in full and in proper form, (e) neither MeriStar nor any MeriStar
Subsidiary has ever sponsored or been obligated to contribute to any
"multiemployer plan" (as defined in Section 3(37) of ERISA), any plan subject to
Section 413 of the Code, or any "defined benefit plan" (as defined in Section
3(35) of ERISA), (f) except as otherwise required under ERISA, the Code and
applicable laws, no MeriStar Benefit Plan currently or previously maintained by
MeriStar or any MeriStar Subsidiary provides any post-employment health or life
insurance coverage or benefits, except as required under Section 4980B of the
Code; (g) neither MeriStar, nor any MeriStar Subsidiary, is a member of a
"Controlled Group" (defined as any organization which is a member of a
controlled group of organizations within the meaning of Code Section 414(b),
(c), (m) or (o)), which has members other than themselves; (h) all material
reporting, disclosure and notice obligations imposed under ERISA and the Code
have been satisfied with respect to each MeriStar Benefit Plan, and (i) except
as set forth in Schedule 4.11 to the MeriStar Disclosure Letter, no benefit or
amount payable, or which may become payable in connection with the Transactions,
by MeriStar or any MeriStar Subsidiary pursuant to any MeriStar Benefit Plan,
agreement or contract with any employee, constitutes an "excess parachute
payment" which would not be deductible by reason of Section 280G of the Code.
Schedule 4.11 to the MeriStar Disclosure Letter contains a complete list of each
"employee benefit plan" (within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") excluding
"multiemployer plans" within the meaning of ERISA Section 3(37)), and all stock
purchase, stock option, severance, employment, change-in-control, fringe
benefit, collective bargaining, bonus, incentive, deferred compensation and all
other employee benefit plans, agreements, programs, policies or other
arrangements, whether or not subject to ERISA (including any funding mechanism
therefor now in effect or required in the future as a result of the transaction
contemplated by this Agreement or otherwise), whether formal or informal, oral
or written, legally binding or not, under which any current or former employee,
officer or director of MeriStar or any MeriStar Subsidiary has any present or
future right to benefits sponsored or maintained by MeriStar or any MeriStar
Subsidiary or under which MeriStar or any MeriStar Subsidiary has had or has any
present or could reasonably be expected to have any future liability. All such
plans, agreements, programs, policies and arrangements shall be collectively
referred to as the "MeriStar Benefit Plans." With respect to each MeriStar
Benefit Plan, MeriStar has provided to FelCor a current, accurate and complete
copy (or, to the extent no such copy exists, an accurate description) thereof
and, to the extent applicable: (i) any related trust agreement or other funding
instrument; (ii) the most recent determination letter, if applicable; (iii) any
summary plan description and other written communications (or a description of
any oral communications) by MeriStar or any MeriStar Subsidiary to their
employees concerning the extent of the benefits provided under a MeriStar
Benefit Plan; and (iv) for the most recent year (A) the Form 5500 and attached
schedules, (B) audited financial statements, and (C) attorney's response to an
auditor's request for information.
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4.12 LABOR MATTERS; EMPLOYEES.
(a) Except as set forth on Schedule 4.12(a) to the MeriStar Disclosure
Letter, neither MeriStar nor any of its Subsidiaries is a party to, or bound by,
any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor union organization. MeriStar has
delivered true, correct and complete copies of such agreements to the FelCor
Parties. There is no unfair labor practice or labor arbitration proceeding
pending or, to MeriStar's Knowledge, threatened against MeriStar or any of its
Subsidiaries relating to their business which, if determined adversely to
MeriStar or any of its Subsidiaries, would have a MeriStar Material Adverse
Effect.
(b) Schedule 4.12(b) to the MeriStar Disclosure Letter sets forth all
employment agreements between MeriStar or any of its Subsidiaries and any other
Person.
(c) Neither MeriStar, nor any MeriStar Subsidiary, is delinquent in
payments to any of its employees or consultants for any wages, salaries,
commissions, bonuses, benefits or other compensation for any services or
otherwise arising under any policy, practice, agreement, plan, program or Law,
which delinquency would, in the aggregate, have a MeriStar Material Adverse
Effect. None of MeriStar's or any MeriStar Subsidiary's employment policies or
practices is currently being audited or investigated by any Governmental Entity
or court. There is no pending or, to the Knowledge of MeriStar, threatened
litigation, unfair labor practice charge, or other charge or inquiry against
MeriStar or any MeriStar Subsidiary brought by or on behalf of any employee,
prospective employee, former employee, retiree, labor organization or other
representative of any of them with respect to employment practices which could
reasonably be expected to have a MeriStar Material Adverse Effect.
(d) Neither MeriStar nor any MeriStar Subsidiary is a party to, or
otherwise bound by, any consent decree with, or citation or other order by, any
Governmental Entity relating to employees or employment practices. MeriStar and
each MeriStar Subsidiary are in compliance in all material respects with all
applicable Laws, Contracts, and policies relating to employment, employment
practices, wages, hours, and terms and conditions of employment, including the
obligations of the Worker Adjustment and Retraining Notification Act of 1988, as
amended ("WARN"), and has not planned or implemented any early retirement,
separation or window program within the past five years.
4.13 TAXES.
(a) Except as set forth on Schedule 4.13(a) to the MeriStar Disclosure
Letter, each of MeriStar and the MeriStar Subsidiaries has timely filed or
caused to be timely filed all material Tax Returns (as defined below) required
to be filed by it and for any partnerships for which any of them is a general
partner (after giving effect to any filing extension properly granted by a
Governmental Entity having authority to do so) and has paid (or MeriStar has
paid on its behalf) all Taxes (as defined below) required to be paid as shown on
such returns and all such Tax Returns were, when filed, complete and accurate in
all material respects, except where the failure to file such Tax Returns, the
failure to pay such Taxes and the failure of such Tax Returns to be complete and
accurate in all material respects could not be reasonably expected to have a
MeriStar Material Adverse Effect. No material deficiencies for any Taxes have
been or are currently being proposed, asserted or assessed in writing, or to the
Knowledge of MeriStar, threatened in writing by any taxing authority against
MeriStar or any MeriStar Subsidiary. Neither MeriStar nor a MeriStar Subsidiary
has executed or filed with any taxing authority any agreement now in effect
extending the period for assessment of Taxes. No Tax Returns of MeriStar or any
MeriStar Subsidiary have been or are currently being audited by any applicable
taxing authority, and neither MeriStar nor any MeriStar Subsidiary has received
any written notice that such audit is contemplated. There are no material Tax
liens on any properties of MeriStar or any MeriStar Subsidiary other than liens
for current Taxes not yet due and payable. The most recent audited financial
statements contained in the MeriStar SEC Documents reflect an adequate accrual
in accordance with GAAP for all Taxes and deferred Taxes payable by MeriStar and
its Subsidiaries for all taxable periods and portions thereof through the date
of such financial statements. Except as would not have a MeriStar Material
Adverse Effect, MeriStar and each MeriStar Subsidiary have complied with all
applicable Laws relating to the payment, collection, withholding and deposit, as
the case may be, of Taxes and, to the extent required, have paid over to the
appropriate
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governmental authorities or are properly holding for such payment all taxes,
unemployment insurance and other amounts required by law to be withheld or
collected.
(b) MeriStar is not required to include in income any amount for an
adjustment pursuant to Section 481 of the Code, and except as set forth on
Schedule 4.13(b) to the MeriStar Disclosure Letter, is neither a party to nor
obligated under any agreement or other arrangement providing for the payment of
any amount that is not or would not be deductible by MeriStar by reason of
Section 280G of the Code or Section 162(m) of the Code.
(c) Neither MeriStar nor any MeriStar Subsidiary has taken or will take any
action that would create a material risk that the Merger would not qualify as a
reorganization within the meaning of Section 368(a) of the Code.
(d) Neither MeriStar nor any MeriStar Subsidiary is a party to or has any
obligation under any Tax sharing agreements or similar contract or arrangement
that would have a MeriStar Material Adverse Effect. No closing agreement
pursuant to Section 7121 of the Code (or any similar provision of state, local
or foreign law) has been entered into by MeriStar or any MeriStar Subsidiary
that would have a MeriStar Material Adverse Effect.
(e) Except as set forth on Schedule 4.13(e) to the MeriStar Disclosure
Letter, neither MeriStar nor any MeriStar Subsidiary has any material liability
for Taxes of any Person under Treasury Regulations Section 1.1502-6 (or any
similar provision of state, local or foreign law), as a transferee or successor,
by contract or otherwise, that would have a MeriStar Material Adverse Effect.
(f) Since the MeriStar Financial Statement Date, (i) MeriStar has incurred
no material liability for Taxes under Section 857(b), 860(c) or 4981 of the
Code, including, without limitation, any Tax arising from a prohibited
transaction described in Section 857(b)(6) of the Code, and (ii) neither
MeriStar nor a MeriStar Subsidiary has incurred any material liability for Taxes
other than in the ordinary course of business except where such liability for
Taxes could not reasonably be expected to have a MeriStar Material Adverse
Effect. No event has occurred, and no condition or circumstance exists, which
presents a material risk that any material Tax described in this paragraph (f)
will be imposed upon MeriStar.
(g) MeriStar or its predecessors (other than CapStar Hotel Company) (i) for
all taxable years commencing with its taxable year beginning July 31, 1996 and
ended December 31, 1996, and through December 31, 2000 has been subject to
taxation as a real estate investment trust within the meaning of Section 856 of
the Code (a "REIT") and has satisfied all requirements to qualify as a REIT for
such years, and (ii) has operated, and intends to continue to operate, in such
manner as to qualify as a REIT for the taxable year ending at the Effective
Time. To MeriStar's Knowledge, no action, proceeding or investigation that could
reasonably be expected to result in the termination of MeriStar's status as a
REIT has been taken or omitted or is pending or threatened.
(h) Except as set forth on Schedule 4.13(h) to the MeriStar Disclosure
Letter, MeriStar has not made an election under IRS Notice 88-19 or Temporary
Treasury Regulations Section 1.337(d)-5T(b)(3).
(i) Except as set forth on Schedule 4.13(i) to the MeriStar Disclosure
Letter, each of MeriStar OP and each other subsidiary of MeriStar that is
organized as a partnership, limited liability company or trust (including
entities in which MeriStar directly or indirectly owns less than 50% of the
equity ownership interests) has been at all times since August 3, 1998, and will
be through the Closing Date, treated for federal income tax purposes as either
(i) a partnership that is not either an association taxable as a corporation or
a publicly traded partnership under Section 7704 of the Code, (ii) a publicly
traded partnership that is eligible for partnership status under Section 7704(c)
of the Code, or (iii) a disregarded entity.
(j) Except as set forth on Schedule 4.13(j) to the MeriStar Disclosure
Letter, each of the corporations in which MeriStar owns a direct or indirect
equity ownership interest has been at all times since August 3, 1998, and
through the Closing Date will be, treated for federal income tax purposes as
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either (i) a "qualified REIT subsidiary" within the meaning of Section 856(i) of
the Code or (ii) a "taxable REIT subsidiary" within the meaning of Section
856(l) of the Code.
(k) Schedule 4.13(k) to the MeriStar Disclosure Letter sets forth a list of
the entities for which MeriStar has made taxable REIT subsidiary elections under
Section 856(l) and the effective dates of such elections. MeriStar has made a
taxable REIT subsidiary election for each entity that it intends to treat as a
taxable REIT subsidiary for its 2001 taxable year.
(l) Except for the agreements or with respect to the transactions that will
be set forth on Schedule 4.13(l) to the MeriStar Disclosure Letter (such
Schedule 4.13(l) to be delivered within 14 business days from the date of this
Agreement), neither MeriStar nor any MeriStar Subsidiary has entered into or is
subject to any "MeriStar Tax Protection Agreements." The MeriStar Parties
represent and warrant that the MeriStar Tax Protection Agreements listed on
Schedule 4.13(l) shall contain only such terms and provisions as are usual and
customary in agreements for similar purposes. As used herein, a MeriStar Tax
Protection Agreement is a written agreement (A) that has as one of its purposes
to permit a Person to take the position that such Person could defer federal
taxable income that otherwise might have been recognized upon a transfer of
property to the MeriStar OP or any other MeriStar Subsidiary that is treated as
a partnership for federal income tax purposes and that as a result of such
purpose (i) prohibits or restricts in any manner the disposition of any assets
of the MeriStar OP or such MeriStar Subsidiary or requires the MeriStar OP or
such MeriStar Subsidiary to indemnify or reimburse any Person for a loss of
federal income tax deferral as a result of any such asset disposition; (ii)
requires that the MeriStar OP or such MeriStar Subsidiary maintain, put in
place, or replace, indebtedness, whether or not secured by one or more of the
MeriStar Properties; or (iii) requires that the MeriStar OP or such MeriStar
Subsidiary offer to any Person at any time the opportunity to guarantee or
otherwise assume, directly or indirectly (including, without limitation, through
a "deficit restoration obligation," guarantee (including, without limitation, a
"bottom" guarantee), indemnification agreement, reimbursement agreement or other
similar arrangement), the risk of loss for federal income tax purposes for
indebtedness or other liabilities of the MeriStar OP or such MeriStar
Subsidiary, (B) that specifies or relates to a method of taking into account
book-tax disparities under Section 704(c) of the Code or the Treasury
Regulations promulgated thereunder with respect to one or more assets of the
MeriStar OP or such MeriStar Subsidiary or (C) that requires a particular method
for allocating one or more liabilities of MeriStar or such MeriStar Subsidiary
under Section 752 of the Code or the Treasury Regulations promulgated
thereunder. Except as would not have a MeriStar Material Adverse Effect, neither
MeriStar nor any MeriStar Subsidiary is in violation of or in default under any
MeriStar Tax Protection Agreement.
(m) As used in this Agreement, "Tax" or "Taxes" means any federal, state,
local, or foreign income, gross receipts, license, payroll, employment, excise,
severance, stamp, occupation, premium, windfall profits, environmental
(including taxes under Section 59A of the Code), customs duties, capital stock,
franchise, profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever, including any interest, penalty, or addition
thereto, whether disputed or not. "Tax Returns" means any return, declaration,
report, claim for refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any amendment
thereof.
4.14 NO PAYMENTS TO EMPLOYEES, OFFICERS OR DIRECTORS. Except as disclosed
on Schedule 4.14 to the MeriStar Disclosure Letter, there are no cash or
non-cash payments which will become payable to any employee, officer or director
of MeriStar or any MeriStar Subsidiary as a result of the Merger and the
Transactions, and there is no employment or severance contract, or other
agreement requiring payments, cancellation of indebtedness or other obligation
to be made upon a change of control or otherwise as a result of the consummation
of any of the transactions contemplated by this Agreement, with respect to any
employee, officer or director of MeriStar or any MeriStar Subsidiary.
4.15 BROKERS, FEES AND EXPENSES. No broker, investment banker, financial
advisor or other person, other than Salomon Smith Barney Inc., the fees and
expenses of which are as described in the engagement letter between Salomon
Smith Barney Inc. and MeriStar, a true and correct copy of which
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has previously been delivered to the FelCor Parties, is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated hereby, based upon arrangements
made by or on behalf of MeriStar or any MeriStar Subsidiary.
4.16 CONTRACTS; DEBT INSTRUMENTS.
(a) Except as set forth in Schedule 4.16(a) to the MeriStar Disclosure
Letter, and except as, individually or in the aggregate, would not have a
MeriStar Material Adverse Effect, neither MeriStar nor any MeriStar Subsidiary
has received a written notice that MeriStar or any MeriStar Subsidiary is in
violation of or in default under (nor to the Knowledge of MeriStar does there
exist any condition which upon the passage of time or the giving of notice or
both would cause such a violation of or default under) any loan or credit
agreement, note, bond, mortgage, indenture, lease, permit, concession,
franchise, license or any other contract, agreement, arrangement or
understanding, to which it is a party or by which it or any of its properties or
assets is bound, nor to the Knowledge of MeriStar does such a violation or
default exist.
(b) Except for any of the following expressly identified in MeriStar SEC
Documents, Schedule 4.16(b) to the MeriStar Disclosure Letter sets forth a list
of each loan or credit agreement, note, bond, mortgage, indenture and any other
agreement and instrument pursuant to which any Indebtedness (as defined below)
in excess of $10,000,000 of MeriStar or of any MeriStar Subsidiary, other than
such Indebtedness payable to MeriStar or a MeriStar Subsidiary, is outstanding
or may be incurred. For purposes of this Agreement, "Indebtedness" shall mean
(i) indebtedness for borrowed money, whether secured or unsecured, (ii)
obligations under conditional sale or other title retention agreements relating
to property purchased by such Person, (iii) capitalized lease obligations, (iv)
obligations under interest rate cap, swap, collar or similar transactions or
currency hedging transactions (valued at the termination value thereof), and (v)
guarantees of any such Indebtedness of any other Person.
4.17 ENVIRONMENTAL MATTERS. Except as, individually or in the aggregate,
would not have a MeriStar Material Adverse Effect and except as disclosed in the
MeriStar SEC Documents filed prior to the date of this Agreement, none of
MeriStar, any of the MeriStar Subsidiaries or, to the Knowledge of MeriStar, any
other Person has caused or permitted (a) the unlawful presence of any Hazardous
Materials (as defined below) on any of the MeriStar Properties or properties
formerly owned by MeriStar or (b) any unlawful spills, releases, discharges or
disposal of Hazardous Materials to have occurred on MeriStar Properties or
properties formerly owned by MeriStar or be presently occurring on or from the
MeriStar Properties, which presence or occurrence, individually or in the
aggregate, could reasonably be expected to have a MeriStar Material Adverse
Effect; and, in connection with the construction on or operation and use of the
MeriStar Properties, neither MeriStar nor any MeriStar Subsidiary has failed to
comply in any material respect with any applicable Environmental Laws (as
defined below), except to the extent such failure to comply, individually or in
the aggregate, could not be reasonably expected to have a MeriStar Material
Adverse Effect. No notice, notification, demand, request for information,
citation, summons, complaint or order has been received by or is pending, or to
the Knowledge of MeriStar, is threatened by, any Person against MeriStar or any
MeriStar Subsidiary, other than where such notice, notification, demand, request
for information, citation, summons, complaint or order has been fully resolved,
or individually and in the aggregate, could not be reasonably expected to result
in a MeriStar Material Adverse Effect. MeriStar has previously delivered or made
available to FelCor or its counsel true and complete copies of all internally
prepared or commissioned environmental studies, assessments and reports in the
possession or under the control of MeriStar that relate to the MeriStar
Properties and/or MeriStar's compliance with Environmental Laws.
As used in this Agreement, "Environmental Laws" means any and all federal,
state, foreign, interstate, local or municipal laws, rules, orders, regulations,
statutes, ordinances, codes, decisions, injunctions, orders, decrees,
requirements of any Governmental Entity, any and all common law requirements,
rules and bases of liability regulating, relating to or imposing liability or
standards of conduct concerning pollution, Hazardous Materials or protection of
human health, safety or the environment, as currently in effect and includes the
Comprehensive Environmental Response Act, 49 U.S.C. sec.sec. 1801,
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et seq., the Resource Conservation and Recovery Act, 42 U.S.C. sec.sec. 6901, et
seq., the Clean Water Act, 33 U.S.C. sec.sec. 1251, et seq., the Clean Air Act,
33 U.S.C. sec.sec. 2601, et seq., the Toxic Substances Control Act, 15 U.S.C.
sec.sec. 2601, et seq., the Federal Insecticide, Fungicide and Rodenticide Act,
7 U.S.C. sec.sec. 136, et seq., Occupational Safety and Health Act, 29 U.S.C.
sec.sec. 651, et seq. and the Oil Pollution Act of 1990, 33 U.S.C.
sec.sec. 2701, et seq., as such laws have been amended or supplemented, and the
regulations promulgated pursuant thereto, and all analogous state or local
statutes. As used in this Agreement, "Hazardous Materials" means any materials
or wastes, defined, listed, classified or regulated as hazardous, toxic, a
pollutant, a contaminant or dangerous in or under any Environmental Laws which
includes, but is not limited to, petroleum, petroleum products, friable
asbestos, urea formaldehyde, radioactive materials and polychlorinated
biphenyls.
4.18 COMPLIANCE WITH LAWS. Except as disclosed in the MeriStar SEC
Documents, neither MeriStar nor any MeriStar Subsidiary has violated or failed
to comply with any Law, permit, judgment, decree or order of any Governmental
Entity applicable to its business, properties or operations, except to the
extent that such violation or failure could not reasonably be expected to have a
MeriStar Material Adverse Effect.
4.19 OPINION OF FINANCIAL ADVISOR. The Board of Directors of MeriStar has
received the opinion of Salomon Smith Barney Inc., dated the date of this
Agreement, to the effect that the Merger Consideration is fair, from a financial
point of view, to the holders of shares of MeriStar Common Stock.
4.20 MARYLAND TAKEOVER LAW. The Maryland Business Combination Act and the
Maryland Control Share Acquisition Act will not apply to MeriStar in connection
with this Agreement and the other transactions contemplated hereby. The
provisions of Article II, Section 10 of the Bylaws of MeriStar relating to the
Maryland Control Share Acquisition Act have not been rescinded or revoked.
4.21 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by MeriStar specifically for inclusion or incorporation by reference in
(i) the Registration Statement (as defined in Section 7.1(a)), at the time the
Registration Statement is filed with the SEC or at the time it becomes effective
under the Securities Act, or (ii) the Proxy Statement (as defined in Section
7.1(a)), at the date it is first mailed to MeriStar's stockholders or at the
time of the MeriStar Stockholders Meeting (as defined in Section 7.1(d)), will
contain any untrue statement of material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Registration Statement and Proxy Statement will comply in all
material respects with the requirements of the Securities Act and the Exchange
Act, respectively, and the rules and regulations thereunder, except that no
representation or warranty is made by MeriStar with respect to statements made
or incorporated by reference therein based on information supplied by FelCor
specifically for inclusion or incorporated by reference in the Proxy Statement
or contained in any FelCor SEC Documents incorporated by reference in the
Registration Statement or the Proxy Statement.
4.22 INVESTMENT COMPANY ACT OF 1940. Neither MeriStar nor any MeriStar
Subsidiary is, or at the Effective Time will be, required to be registered under
the Investment Company Act of 1940, as amended (the "1940 Act").
4.23 DEFINITION OF KNOWLEDGE OF MERISTAR. As used in this Agreement, the
phrase "Knowledge of MeriStar" (or words of similar import) means the knowledge
of those individuals identified in Schedule 4.23 to the MeriStar Disclosure
Letter.
4.24 VOTING REQUIREMENTS. The MeriStar Stockholder Approvals, which shall
consist of the affirmative vote of holders of shares entitled to cast a majority
of all votes entitled to be cast on the matter at the MeriStar Stockholders
Meeting, which shall be a duly convened meeting at which a quorum is present and
acting throughout, to approve the Merger are the only votes of the holders of
any class or series of MeriStar's stock necessary to approve the Merger and the
other transactions contemplated by this Agreement. MeriStar, acting as the
general partner of MeriStar OP, has the power to cause MeriStar OP to effect the
OP Merger without obtaining any consent or approval of the limited partners of
MeriStar OP.
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4.25 RELATED PARTY AGREEMENTS. Except as listed on Schedule 4.25 to the
MeriStar Disclosure Letter, there is no binding contract, agreement,
undertaking, or commitment between MeriStar or any MeriStar Subsidiary, on the
one hand, and MeriStar Hotels & Resorts, Inc. ("MeriStar Hotels & Resorts"), MIP
Lessee, L.P., MeriStar Investment Partners, L.P., or any of their affiliated,
related or associated Persons (other than another MeriStar Subsidiary), on the
other hand.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE FELCOR PARTIES
Except as set forth in the letter of even date herewith signed by the
Chairman of the Board or President of FelCor and delivered to the MeriStar
Parties prior to the execution hereof (the "FelCor Disclosure Letter"), the
FelCor Parties, jointly and severally, represent and warrant to the MeriStar
Parties as follows:
5.1 ORGANIZATION, STANDING AND POWER OF FELCOR. FelCor is a corporation
duly organized and validly existing under the laws of the State of Maryland,
having the requisite corporate power to carry on its business as now being
conducted. FelCor is duly qualified or licensed to do business as a foreign
corporation and is in good standing in each jurisdiction in which the nature of
its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed, individually or in the aggregate, would
not have a material adverse effect on the business, properties, assets,
financial condition or results of operations of FelCor and the FelCor
Subsidiaries (as defined below), taken as a whole, or the ability of the FelCor
Parties to perform any of their respective substantive obligations under this
Agreement (any such effect a "FelCor Material Adverse Effect"). FelCor has
delivered to the MeriStar Parties complete and correct copies of the FelCor
Charter and the FelCor Bylaws.
5.2 FELCOR SUBSIDIARIES.
(a) FelCor is the record and beneficial owner of all of the issued and
outstanding membership interests of FelCor Nevada Holdings, L.L.C., a Nevada
limited liability company ("FelCor LLC"). As of the date hereof, FelCor LLC owns
57,782,448 FelCor Common Units representing approximately 86.6% of the issued
and outstanding FelCor Common Units. There are issued and outstanding (i) an
aggregate of 66,757,265 FelCor Common Units, (ii) an aggregate of 39,229 Class
B, Series II units of limited partnership interest in FelCor OP (the "FelCor
Class B Units"), (iii) an aggregate of 5,980,600 Series A Cumulative Convertible
Preferred Units (the "FelCor Series A Preferred Units"), and (iv) an aggregate
of 57,500 Series B Cumulative Redeemable Preferred Units (the "FelCor Series B
Preferred Units") (collectively, together with the FelCor Common Units, FelCor
Class B Units, FelCor Series A Preferred Units and FelCor Series B Preferred
Units, the "FelCor OP Units"). FelCor also owns an approximately 1.6% general
partner interest in FelCor OP, constituting all of the general partner interests
in FelCor OP. All of the FelCor OP Units owned by FelCor and FelCor LLC, the
general partner interest in FelCor OP owned by FelCor, and the issued and
outstanding membership interests in FelCor LLC owned by FelCor, are free and
clear of all Liens, other than those listed on Schedule 5.2(a) to the FelCor
Disclosure Letter. The FelCor OP Units are validly issued and outstanding, fully
paid and nonassessable. Schedule 5.2(a) to the FelCor Disclosure Letter sets
forth the name of each holder of a FelCor OP Unit (each a "FelCor OP Unit
Holder") and the number and type of FelCor OP Units owned by each such FelCor OP
Unit Holder in FelCor OP as of the date of this Agreement. The FelCor OP Units
are subject to no restriction except as set forth in the FelCor OP limited
partnership agreement (the "FelCor Operating Partnership Agreement") and
pursuant to applicable securities laws. FelCor OP has not issued or granted and
is not a party to any outstanding commitments of any kind relating to, or any
presently effective agreements or understandings with respect to, interests in
FelCor OP, whether issued or unissued, or securities convertible into or
exchangeable for interests in FelCor OP or preemptive rights to purchase or
rights of first refusal with respect to such interests. Except as listed on
Schedule 5.2(a) to the FelCor Disclosure Letter, no FelCor OP Units, or other
interests therein, have been authorized or reserved for issuance to anyone other
than FelCor LLC or FelCor.
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(b) Schedule 5.2(b) to the FelCor Disclosure Letter sets forth (i) each
Subsidiary of FelCor (the "FelCor Subsidiary" or "FelCor Subsidiaries"), (ii)
the ownership interest therein of FelCor, (iii) if not wholly-owned by FelCor,
the identity and ownership interest of each of the other owners of such FelCor
Subsidiary, (iv) each hotel (identified by name and location) and other real
property owned or leased by such FelCor Subsidiary, and (v) each entity not
constituting a FelCor Subsidiary in which FelCor or any FelCor Subsidiary holds
an ownership interest, indicating the name, nature and business of such entity
and the ownership interest therein held by each FelCor Subsidiary and each other
Person.
(c) Except as set forth in Schedule 5.2(c) to the FelCor Disclosure Letter,
(i) all the outstanding shares of capital stock of each FelCor Subsidiary that
is a corporation have been duly and validly issued and are (A) fully paid and
nonassessable, (B) owned by FelCor or another FelCor Subsidiary and (C) owned
free and clear of all Liens and (ii) all equity interests owned by FelCor or a
FelCor Subsidiary in another FelCor Subsidiary that is a partnership, joint
venture, trust or limited liability company are owned free and clear of all
Liens. Each FelCor Subsidiary, that is a corporation is duly incorporated and
validly existing under the laws of its jurisdiction of incorporation and has the
requisite corporate power and authority to carry on its business as now being
conducted, and each FelCor Subsidiary that is a partnership, limited liability
company, trust or joint venture is duly organized and validly existing under the
laws of its jurisdiction of organization and has the requisite power and
authority to carry on its business as now being conducted. Each FelCor
Subsidiary is duly qualified or licensed to do business and is in good standing
in each jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification or licensing necessary, other
than in such jurisdictions where the failure to be so qualified or licensed,
individually or in the aggregate, would not have a FelCor Material Adverse
Effect. Copies of the articles or certificates of incorporation, bylaws,
organizational documents and partnership, joint venture and operating agreements
of each FelCor Subsidiary, in each case as amended to the date of this
Agreement, have been previously delivered or made available to the MeriStar
Parties. Neither FelCor nor any of the FelCor Subsidiaries is in breach of any
provision of any agreement, document or contract governing its rights in or to
the interests owned or held by it other than breaches, which could not
reasonably be expected to have a FelCor Material Adverse Effect. To the
Knowledge of FelCor (as defined in Section 5.21), the other parties to such
agreements, documents or contracts are not in breach of any of their respective
obligations under such agreements, documents or contracts other than breaches,
which could not reasonably be expected to have a FelCor Material Adverse Effect.
5.3 FELCOR STRUCTURE.
(a) The authorized shares of stock of FelCor consist of 200,000,000 shares
of FelCor Common Stock and 20,000,000 shares of preferred stock, $0.01 par value
per share, of which 6,050,000 shares have been designated as $1.95 Series A
Cumulative Convertible Preferred Stock ("FelCor Series A Preferred Stock") and
57,500 shares have been designated as 9% Series B Cumulative Redeemable
Preferred Stock ("FelCor Series B Preferred Stock"). As of the date hereof, (i)
53,159,146 shares of FelCor Common Stock were issued and outstanding, (ii)
5,980,600 shares of FelCor Series A Preferred Stock were outstanding, (iii)
57,500 shares of FelCor Series B Preferred Stock were outstanding and
represented by 5,750,000 Depositary Receipts, each representing 1/100 of a share
of FelCor Series B Preferred Stock, (iv) 3,092,614 shares of FelCor Common Stock
have been reserved for issuance, and FelCor may propose an increase in the
number of shares reserved for issuance to an aggregate of 4,092,614 shares,
under FelCor's Restricted Stock and Stock Option Plans, as amended (the "FelCor
Plans"), (v) 1,737,111 shares of FelCor Common Stock were issuable upon exercise
of outstanding stock options (the "FelCor Options") to purchase shares of FelCor
Common Stock, (vi) 5,500 shares of Common Stock issuable pursuant to FelCor's
Deferred Compensation Plan, (vii) 9,014,046 shares of FelCor Common Stock were
reserved for issuance upon redemption of FelCor OP Units, and (viii) 4,636,161
shares of FelCor Common Stock were reserved for issuance upon conversion of the
FelCor Series A Preferred Stock. On the date hereof, except as set forth in this
Section 5.3 and the Schedules referenced in this Section 5.3, no shares of
FelCor Common Stock or other voting securities of FelCor were issued, reserved
for issuance or outstanding.
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(b) Set forth in Schedule 5.3(b) to the FelCor Disclosure Letter is a true
and complete list of the following: (i) each qualified or nonqualified option to
purchase shares of FelCor Common Stock granted under the FelCor Plans or any
other formal or informal stock-based compensation arrangement, (ii) each grant
of shares of FelCor Common Stock to employees which are subject to any risk of
forfeiture ("FelCor Restricted Stock Grants") and (iii) shares issuable pursuant
to the FelCor Deferred Compensation Plan ("FelCor Deferred Stock"). As of the
date of this Agreement, other than FelCor Options, FelCor Restricted Stock
Grants, and FelCor Deferred Stock, there were no outstanding warrants or other
rights to acquire stock, stock appreciation rights, phantom stock, dividend
equivalents, performance units and performance shares granted under the FelCor
Plans or rights to receive shares of FelCor Common Stock on a deferred basis
granted under the FelCor Plans. Schedule 5.3(b) to the FelCor Disclosure Letter
also sets forth for each FelCor Option the name of the grantee, the date of the
grant, status of the option as qualified or nonqualified under Section 422 of
the Code, the number of shares of FelCor Common Stock subject to such option,
the number of shares subject to options that are currently exercisable, the
exercise price per share, the expiration date and the number of such shares
subject to share appreciation rights. For each FelCor Restricted Stock Grant,
Schedule 5.3(b) to the FelCor Disclosure Letter sets forth the name of the
grantee, the date of the grant and the number of shares of FelCor Common Stock
granted and the date any risk of forfeiture with respect to such shares lapses.
(c) All outstanding shares of FelCor Common Stock are duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. There are no bonds, debentures, notes or other indebtedness of FelCor
having the right to vote (or that are convertible into, or exchangeable for,
securities having the right to vote) on any matters on which stockholders of
FelCor may vote.
(d) Except (i) as set forth in this Section 5.3, in Schedule 5.3(b) or
5.3(d) to the FelCor Disclosure Letter, or in the FelCor Operating Partnership
Agreement (as defined herein) and (ii) for FelCor OP Units held by partners in
the FelCor OP (which, subject to certain restrictions, may be redeemed by the
holders thereof for either cash or, at FelCor's option, shares of FelCor Common
Stock on a one-for-one basis), (A) there are no outstanding securities, options,
warrants, calls, rights, commitments, agreements, arrangements or undertakings
of any kind to which FelCor or any FelCor Subsidiary is a party or by which such
entity is bound, obligating FelCor or any FelCor Subsidiary to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of FelCor
Common Stock, voting securities or other ownership interests of FelCor or of any
FelCor Subsidiary or obligating FelCor or any FelCor Subsidiary to issue, grant,
extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking (other than to FelCor or a
FelCor Subsidiary), and (B) there are no outstanding obligations of FelCor or
any FelCor Subsidiary to repurchase, redeem or otherwise acquire any shares of
capital stock or ownership interest in FelCor or any FelCor Subsidiary.
5.4 ORGANIZATION, STANDING AND POWER OF FELCOR OP. FelCor OP is a limited
partnership duly organized and validly existing under the laws of Delaware and
has the requisite power and authority to carry on its business as now being
conducted. FelCor OP is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed, individually or in the aggregate, would not have a FelCor Material
Adverse Effect. FelCor has delivered to the MeriStar Parties complete and
correct copies of the FelCor Operating Partnership Agreement as amended or
supplemented to the date of this Agreement.
5.5 AUTHORITY; NONCONTRAVENTION; CONSENTS.
(a) FelCor has the requisite power to enter into this Agreement and,
subject to the requisite stockholder approval of the Merger (the "FelCor
Stockholder Approval" and, together with the MeriStar Stockholder Approval, the
"Stockholder Approvals"), to consummate the transactions contemplated by this
Agreement. Except as set forth in Schedule 5.5(a) to the FelCor Disclosure
Letter, FelCor OP has the requisite partnership power and authority to enter
into this Agreement, and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by the FelCor
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Parties and the consummation by the FelCor Parties of the transactions
contemplated by this Agreement have been duly authorized by all necessary action
on the part of the FelCor Parties, except for and subject to the FelCor
Stockholder Approval and the approvals set forth on Schedule 5.5(a) to the
FelCor Disclosure Letter. This Agreement has been duly executed and delivered by
the FelCor Parties and constitutes a valid and binding obligation of the FelCor
Parties, enforceable against the FelCor Parties in accordance with and subject
to its terms, subject to applicable bankruptcy, insolvency, moratorium or other
similar laws relating to creditors' rights and general principles of equity.
(b) Except as set forth in Schedule 5.5(b) to the FelCor Disclosure Letter,
the execution and delivery of this Agreement by the FelCor Parties do not, and
the consummation of the transactions contemplated by this Agreement, (including,
without limitation,) the Transactions, and compliance by the FelCor Parties with
the provisions of this Agreement will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any substantive obligation or to loss of a substantive benefit under, or result
in the creation of any Lien upon any of the properties or assets of the FelCor
Parties or any FelCor Subsidiary under, (i) the FelCor Charter, FelCor Bylaws or
the charter, organizational documents, limited liability company agreement,
partnership agreement or other governing document (as the case may be) of any
FelCor Subsidiary, each as amended or supplemented to the date of this
Agreement, (ii) any loan or credit agreement, note, bond, mortgage, indenture,
reciprocal easement agreement, lease or other agreement, instrument, permit,
concession, franchise or license applicable to FelCor or any FelCor Subsidiary
or their respective properties or assets or (iii) subject to the governmental
filings and other matters referred to in the following sentence, any Laws
applicable to FelCor or any FelCor Subsidiary or their respective properties or
assets, other than, in the case of clause (ii) or (iii), any such conflicts,
violations, defaults, rights, loss or Liens that individually or in the
aggregate would not (x) have a FelCor Material Adverse Effect or (y) prevent the
consummation of the transactions contemplated by this Agreement. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any Governmental Entity is required by or with respect to FelCor or any
FelCor Subsidiary in connection with the execution and delivery of this
Agreement or the consummation by the FelCor Parties of any of the transactions
contemplated by this Agreement, except for (i) the filing with the SEC of the
Registration Statement and the Proxy Statement, (ii) the acceptance for record
of the Articles of Merger by the Department and the filing of the Certificate of
Merger with the Delaware Secretary of State, (iii) such filings as may be
required in connection with the payment of any transfer and gains taxes, and
(iv) such other consents, approvals, orders, authorizations, registrations,
declarations and filings (A) as are set forth in Schedule 5.5(a) or (b) to the
FelCor Disclosure Letter or (B) as may be required under (y) federal, state or
local environmental or Tax laws or (z) the "blue sky" laws of various states, to
the extent applicable, or (C) which, if not obtained or made, would not prevent
or delay in any material respect the consummation of any of the transactions
contemplated by this Agreement or otherwise prevent the FelCor Parties from
performing their obligations under this Agreement in any material respect or
have, individually or in the aggregate, a FelCor Material Adverse Effect.
5.6 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. FelCor
has filed all required reports, schedules, forms, statements and other documents
with the SEC since July 28, 1994 through the date hereof (the "FelCor SEC
Documents"). All of the FelCor SEC Documents (other than preliminary material),
as of their respective filing dates, complied in all material respects with all
applicable requirements of the Securities Act and the Exchange Act and, in each
case, the rules and regulations promulgated thereunder applicable to such FelCor
SEC Documents. None of the FelCor SEC Documents (other than preliminary
materials) at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except to the extent such statements
have been modified or superseded by later FelCor SEC Documents filed and
publicly available prior to the date of this Agreement. The consolidated
financial statements of FelCor and the FelCor Subsidiaries included in the
FelCor SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, in the case of unaudited
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statements, as permitted by the applicable rules and regulations of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP and the applicable rules and regulations of the
SEC, the consolidated financial position, as of the dates thereof and the
consolidated results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments) of FelCor and the FelCor Subsidiaries. Except for liabilities and
obligations set forth in the FelCor SEC Documents or in Schedule 5.6 to the
FelCor Disclosure Letter, neither FelCor nor any FelCor Subsidiary has any
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise) which are required by GAAP to be set forth on a consolidated
balance sheet of FelCor or in the notes thereto and which, individually or in
the aggregate, would have a FelCor Material Adverse Effect.
5.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except for (i) matters
disclosed in the FelCor SEC Documents or in Schedule 5.7 to the FelCor
Disclosure Letter, and (ii) the Transactions and the dividends and distributions
contemplated by Section 2.2(c), and (iii) the transactions permitted by Section
6.4, since the date of the most recent audited financial statements included in
the FelCor SEC Documents (the "FelCor Financial Statement Date"), FelCor and the
FelCor Subsidiaries have conducted their business only in the ordinary and
normal course (taking into account prior practices, including the acquisition of
properties and issuance of securities) and there has not been, from the FelCor
Financial Statement Date through the date of this Agreement, (a) any material
adverse change in the business, financial condition or results of operations of
FelCor and the FelCor Subsidiaries taken as a whole, including, without
limitation, any increase in market rates of interest and related costs of
financing which results in yields for new issues of unsecured senior notes
issued by companies with a comparable debt rating to FelCor and MeriStar
exceeding an amount which the members of the Interim Transactions Committee (as
defined in Section 6.5) agree, in the exercise of their good faith business
judgment, makes the issuance of such debt not economically prudent (a "FelCor
Material Adverse Change"), (b) any occurrence or circumstance that with the
passage of time would reasonably be expected to result in a FelCor Material
Adverse Change, or (c) any action taken by FelCor or any FelCor Subsidiary
during the period from the FelCor Financial Statement Date through the date of
this Agreement that, if taken during the period from the date of this Agreement
through the Effective Time, would constitute a breach of Section 6.4.
5.8 LITIGATION. Except as disclosed in the FelCor SEC Documents or in
Schedule 5.8 to the FelCor Disclosure Letter, and other than personal injury and
other routine tort litigation arising from the ordinary course of operations of
FelCor and the FelCor Subsidiaries (a) which are covered by adequate insurance
or (b) for which all material costs and liabilities arising therefrom are
reimbursable pursuant to common area maintenance or similar agreements, there is
no suit, action or proceeding pending (in which service of process has been
received by an employee or agent of FelCor or a FelCor Subsidiary) or, to the
Knowledge of FelCor, threatened in writing against or affecting FelCor or any
FelCor Subsidiary that, individually or in the aggregate, could reasonably be
expected to have a FelCor Material Adverse Effect or to prohibit, restrict or
interfere with the consummation of any of the Transactions, nor is there any
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against FelCor or any FelCor Subsidiary having, or which,
insofar as reasonably can be foreseen, in the future could have, any such
Effect.
5.9 PROPERTIES.
(a) Schedule 5.9(a) to the FelCor Disclosure Letter sets forth a complete
and accurate list and the address of all real property owned or leased by FelCor
or any FelCor Subsidiary (collectively, and together with the land at each
address referenced in Schedule 5.9(a) to the FelCor Disclosure Letter and all
buildings, structures and other improvements and fixtures located on or under
such land and all easements, rights and other appurtenances to such land, the
"FelCor Properties"). FelCor or the FelCor Subsidiaries, owns or own, as the
case may be, good and insurable fee simple title (or, if so indicated in
Schedule 5.9(a) to the FelCor Disclosure Letter, leasehold title) to each of the
FelCor Properties, in each case free and clear of Encumbrances, except for such
mortgages as are set forth on Schedule 5.14(b) to
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the FelCor Disclosure Letter or for which no disclosure is required by Section
5.14(b), the Lien of real estate taxes not yet due and payable and such
Encumbrances as individually, and in the aggregate, could not reasonably be
expected to have a FelCor Material Adverse Effect. Except for such of the
following as individually, or in the aggregate, could not reasonably be expected
to have a FelCor Material Adverse Effect, policies of title insurance (or marked
title insurance commitments having the same force and effect as title insurance
policies) have been issued by national title insurance companies insuring the
fee simple or leasehold, as applicable, title of FelCor or its Subsidiaries, as
applicable, to each of the FelCor Properties in amounts at least equal to the
portion of the purchase price thereof allocated to real estate (the "FelCor
Title Policies"), and, to FelCor's Knowledge, the FelCor Title Policies are
valid and in full force and effect and no claim has been made under any such
policy (except claims which have previously been fully resolved).
(b) Except as set forth in Schedule 5.9(b) to the FelCor Disclosure Letter,
and except for matters which would not, individually or in the aggregate,
reasonably be expected to have a FelCor Material Adverse Effect or to materially
and adversely affect the use or occupancy (or, if applicable, any proposed
development) of the FelCor Properties, FelCor has no Knowledge that any
currently required certificate, permit or license (including building permits
and certificates of occupancy) from any Governmental Entity having jurisdiction
over any FelCor Property or any agreement, easement or other right which is
necessary to permit the lawful use, occupancy or operation of the existing
buildings, structures or other improvements which constitute a part of any of
the FelCor Properties has not been obtained or is not in full force and effect,
or of any pending modification or cancellation of any of the same.
(c) Schedule 5.9(c) to the FelCor Disclosure Letter sets forth a complete
and accurate list of all definitive agreements made or entered into by FelCor or
any FelCor Subsidiary as of the date hereof, which are scheduled to close or be
consummated after the date hereof, (x) to sell, mortgage, pledge, hypothecate,
lease or sublease any FelCor Property, which, individually or in the aggregate,
are material, (y) to enter into a material transaction in respect of the
ownership or financing of any FelCor Property, or (z) to purchase, lease or
otherwise acquire any real property.
(d) Except as set forth in Schedule 5.9(d) to the FelCor Disclosure Letter,
none of the FelCor Properties is subject to any outstanding purchase option,
right of first refusal, right of first offer or similar right other than such
rights as would not reasonably be expected to have a FelCor Material Adverse
Effect, nor has FelCor or any FelCor Subsidiary entered into any outstanding
contracts with others for the sale, mortgage, pledge, hypothecation, assignment,
sublease or lease of any material portion of any FelCor Property or other
transfer of all or any part of any FelCor Property as of the date hereof, which
are scheduled to close or be consummated after the date hereof, and no Person
has any right or option to acquire, or right of first refusal or right of first
offer with respect to, any interest of FelCor or any FelCor Subsidiary in any
FelCor Property or any material part thereof.
(e) Schedule 5.9(e) to the FelCor Disclosure Letter sets forth the capital
expenditure budget and schedule of FelCor and each FelCor Subsidiary for each
FelCor Property, describing the capital expenditures which FelCor or any FelCor
Subsidiary has budgeted for such FelCor Property for the period running through
December 31, 2001 (the "FelCor Budget and Schedule").
(f) The ground leases underlying the leased FelCor Properties
(collectively, the "FelCor Ground Leases") are listed on Schedule 5.9(f) to the
FelCor Disclosure Letter. Each of the FelCor Ground Leases is valid, binding and
in full force and effect as against FelCor or any FelCor Subsidiary and, to
FelCor's Knowledge, as against the other party thereto, except to the extent the
failure to be binding and in full force and effect would not reasonably be
expected to have a FelCor Material Adverse Effect. There does not exist under
any of the FelCor Ground Leases any default, and, to FelCor's Knowledge, no
event has occurred which, with notice or lapse of time or both, would constitute
such a default, except as would not, individually or in the aggregate,
reasonably be expected to result in a FelCor Material Adverse Effect.
(g) Schedule 5.9(g) to the FelCor Disclosure Letter sets forth a list of
the hotel franchise, license or other agreements relating to the names, marks or
systems (the "FelCor Franchise Agreements") under which each of the FelCor
Properties is being operated. Each of the FelCor Franchise Agreements is in full
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force and effect and, to the Knowledge of FelCor, there are no defaults
thereunder by either party thereto, nor have any events occurred which, with the
giving of notice or the passage of time or both, would constitute a default or
event of default thereunder, except for those which either individually or in
the aggregate would not constitute a FelCor Material Adverse Effect.
(h) Schedule 5.9(h) to the FelCor Disclosure Letter sets forth a list of
the hotel management agreements (the "FelCor Management Agreements") pursuant to
which each of the FelCor Properties is being managed. Each of the FelCor
Management Agreements is in full force and effect and, to the Knowledge of
FelCor, there are no defaults thereunder by either party thereto, nor have any
events occurred which, with the giving notice or the passage of time or both
would constitute a default or event of default thereunder, except for those
which either individually or in the aggregate would not constitute a FelCor
Material Adverse Effect.
5.10 EMPLOYEE BENEFIT PLANS; LABOR MATTERS.
(a) With respect to all FelCor Benefit Plans (as defined below), except for
such matters, as, individually or in the aggregate, could not reasonably be
expected to have a FelCor Material Adverse Effect, (a) each FelCor Benefit Plan
and any related trust intended to be qualified under Sections 401(a) and 501(a)
of the Code has received a favorable determination letter from the IRS that it
is so qualified and, to the Knowledge of FelCor, nothing has occurred since the
date of such letter that could reasonably be expected to materially adversely
affect the qualified status of such FelCor Benefit Plan or related trust, (b)
each FelCor Benefit Plan has been operated in all material respects in
accordance with its terms and the terms and requirements of applicable law and
all required returns and filings for each FelCor Benefit Plan have been timely
made, (c) neither FelCor nor any FelCor Subsidiary has incurred any tax, fine,
lien, penalty or other liability imposed under ERISA, the Code or other
applicable laws, rules and regulations, in connection with any FelCor Benefit
Plan, and no administrative investigation, audit or other administrative
proceeding by the Department of Labor, the Pension Benefit Guaranty Corporation,
the Internal Revenue Service or other governmental agencies are pending, in
progress or, to the Knowledge of FelCor or any FelCor Subsidiary, threatened,
and no fact or event exists that could reasonably be expected to give rise to
any such material liability, (d) all contributions due and payable on or before
the date hereof in respect of each FelCor Benefit Plan have been made in full
and in proper form, (e) neither FelCor nor any FelCor Subsidiary has ever
sponsored or been obligated to contribute to any "multiemployer plan" (as
defined in Section 3(37) of ERISA), any plan subject to Section 413 of the Code
or any "defined benefit plan" (as defined in Section 3(35) of ERISA), (f) except
as otherwise required under ERISA, the Code and applicable laws, no FelCor
Benefit Plan currently or previously maintained by FelCor or any FelCor
Subsidiary provides any post-employment health or life insurance coverage or
benefits except as required under Section 4980B of the Code; (g) neither FelCor,
nor any FelCor Subsidiary, is a member of a Controlled Group which has members
other than themselves, (h) all material reporting, disclosure and notice
obligations imposed under ERISA and the Code have been satisfied with respect to
each FelCor Benefit Plan, and (i) no benefit or amount payable, or which may
become payable in connection with the Transactions by FelCor or any FelCor
Subsidiary pursuant to any FelCor Benefit Plan, agreement or contract with any
employee, constitutes an "excess parachute payment" which would not be
deductible by reason of Section 280G of the Code. Schedule 5.10 to the FelCor
Disclosure Letter contains a complete list of each "employee benefit plan"
(within the meaning of Section 3(3) of ERISA, excluding "multiemployer plans"
within the meaning of ERISA Section 3(37)), and all stock purchase, stock
option, severance, employment, change-in-control, fringe benefit, collective
bargaining, bonus, incentive, deferred compensation and all other employee
benefit plans, agreements, programs, policies or other arrangements, whether or
not subject to ERISA (including any funding mechanism therefor now in effect or
required in the future as a result of the transaction contemplated by this
Agreement or otherwise), whether formal or informal, oral or written, legally
binding or not, under which any current or former employee, officer or director
of FelCor or any FelCor Subsidiary has any present or future right to benefits
sponsored or maintained by FelCor or any FelCor Subsidiary or under which FelCor
or any FelCor Subsidiary has had or has any present or could reasonably be
expected to have any future liability. All such plans, agreements, programs,
policies and arrangements shall be
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collectively referred to as the "FelCor Benefit Plans." With respect to each
FelCor Benefit Plan, FelCor has provided to MeriStar a current, accurate and
complete copy (or, to the extent no such copy exists, an accurate description)
thereof and, to the extent applicable: (i) any related trust agreement or other
funding instrument; (ii) the most recent determination letter, if applicable;
(iii) any summary plan description and other written communications (or a
description of any oral communications) by FelCor or any FelCor Subsidiary to
their employees concerning the extent of the benefits provided under a FelCor
Benefit Plan; and (iv) for the most recent year (A) the Form 5500 and attached
schedules, (B) audited financial statements, and (C) attorney's response to an
auditor's request for information.
(b) Neither FelCor, nor any FelCor Subsidiary, is delinquent in payments to
any of its employees or consultants for any wages, salaries, commissions,
bonuses, benefits or other compensation for any services or otherwise arising
under any policy, practice, agreement, plan, program or Law, which delinquency
would, in the aggregate, have a FelCor Material Adverse Effect. None of FelCor's
or any FelCor Subsidiary's employment policies or practices is currently being
audited or investigated by any Governmental Entity or court. There is no pending
or, to the Knowledge of FelCor, threatened litigation, unfair labor practice
charge, or other charge or inquiry against FelCor or any FelCor Subsidiary
brought by or on behalf of any employee, prospective employee, former employee,
retiree, labor organization or other representative of any of them with respect
to employment practices which could reasonably be expected to have a FelCor
Material Adverse Effect.
(c) Neither FelCor nor any FelCor Subsidiary is a party to, or otherwise
bound by, any consent decree with, or citation or other order by, any
Governmental Entity relating to employees or employment practices. FelCor and
each FelCor Subsidiary are in compliance in all material respects with all
applicable Laws, Contracts, and policies relating to employment, employment
practices, wages, hours, and terms and conditions of employment, including the
obligations of the WARN, and has not planned or implemented any early
retirement, separation or window program within the past five years.
5.11 TAXES.
(a) Each of FelCor and the FelCor Subsidiaries has timely filed or caused
to be timely filed all material Tax Returns required to be filed by it and for
any partnerships for which any of them is a general partner (after giving effect
to any filing extension properly granted by a Governmental Entity having
authority to do so) and has paid (or FelCor has paid on its behalf) all Taxes
required to be paid as shown on such returns and all such Tax Returns were, when
filed, complete and accurate in all material respects, except where the failure
to file such Tax Returns, the failure to pay such Taxes and the failure of such
Tax Returns to be complete and accurate in all material respects could not be
reasonably expected to have a FelCor Material Adverse Effect. No material
deficiencies for any Taxes have been or are currently being proposed, asserted
or assessed in writing, or to the Knowledge of FelCor, threatened in writing by
any taxing authority against FelCor or any FelCor Subsidiary. Neither FelCor nor
a FelCor Subsidiary has executed or filed with any taxing authority any
agreement now in effect extending the period for assessment of Taxes. No Tax
Returns of FelCor or any FelCor Subsidiary have been or are currently being
audited by any applicable taxing authority, and neither FelCor nor any FelCor
Subsidiary has received any written notice that such audit is contemplated.
There are no material Tax liens on any properties of FelCor or any FelCor
Subsidiary other than liens for current Taxes not yet due and payable. The most
recent audited financial statements contained in the FelCor SEC Documents
reflect an adequate accrual in accordance with GAAP for all Taxes and deferred
Taxes payable by FelCor and its Subsidiaries for all taxable periods and
portions thereof through the date of such financial statements. Except as would
not have a FelCor Material Adverse Effect, FelCor and each FelCor Subsidiary
have complied with all applicable Laws relating to the payment, collection,
withholding and deposit, as the case may be, of Taxes and, to the extent
required, have paid over to the appropriate governmental authorities or are
properly holding for such payment all taxes, unemployment insurance and other
amounts required by law to be withheld or collected.
(b) FelCor is not required to include in income any amount for an
adjustment pursuant to Section 481 of the Code, and except as set forth on
Schedule 5.11(b) to the FelCor Disclosure Letter, is
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neither a party to nor obligated under any agreement or other arrangement
providing for the payment of any amount that is not or would not be deductible
by FelCor by reason of Section 280G of the Code or Section 162(m) of the Code.
(c) Neither FelCor nor any FelCor Subsidiary has taken or will take any
action that would create a material risk that the Merger would not qualify as a
reorganization within the meaning of Section 368(a) of the Code.
(d) Neither FelCor nor any FelCor Subsidiary is a party to or has any
obligation under any Tax sharing agreements or similar contract or arrangement
that would have a FelCor Material Adverse Effect. No closing agreement pursuant
to Section 7121 of the Code (or any similar provision of state, local or foreign
law) has been entered into by FelCor or any FelCor Subsidiary that would have a
FelCor Material Adverse Effect.
(e) Except as set forth on Schedule 5.11(e) to the FelCor Disclosure
Letter, neither FelCor nor any FelCor Subsidiary has any material liability for
Taxes of any Person under Treasury Regulations Section 1.1502-6 (or any similar
provision of state, local or foreign law), as a transferee or successor, by
contract or otherwise, that would have a FelCor Material Adverse Effect.
(f) Since the FelCor Financial Statement Date, (i) FelCor has incurred no
material liability for Taxes under Section 857(b), 860(c) or 4981 of the Code,
including, without limitation, any Tax arising from a prohibited transaction
described in Section 857(b)(6) of the Code, and (ii) neither FelCor nor a FelCor
Subsidiary has incurred any material liability for Taxes other than in the
ordinary course of business except where such liability for Taxes could not
reasonably be expected to have a FelCor Material Adverse Effect. No event has
occurred, and no condition or circumstance exists, which presents a material
risk that any material Tax described in this paragraph (f) will be imposed upon
FelCor.
(g) FelCor (i) for all taxable years commencing with its taxable year
beginning July 28, 1994, and ended December 31, 1994, and through December 31,
2000, has been subject to taxation as a REIT and has satisfied all requirements
to qualify as a REIT for such years, and (ii) has operated, and intends to
continue to operate, in such manner as to qualify as a REIT for the taxable year
ending December 31, 2001 and subsequent taxable years. To FelCor's Knowledge, no
action, proceeding or investigation that could reasonably be expected to result
in the termination of FelCor's status as a REIT has been taken or omitted or is
pending or threatened.
(h) Except as set forth on Schedule 5.11(h) to the FelCor Disclosure
Letter, each of FelCor OP and each other subsidiary of FelCor that is organized
as a partnership, limited liability company or trust (including entities in
which FelCor directly or indirectly owns less than 50% of the equity ownership
interests) has been at all times since the date of its formation, and will be
through the Closing Date, treated for federal income tax purposes as either (i)
a partnership that is not either an association taxable as a corporation or a
publicly traded partnership under Section 7704 of the Code, (ii) a publicly
traded partnership that is eligible for partnership status under Section 7704(c)
of the Code or (iii) a disregarded entity.
(i) Except as set forth on Schedule 5.11(i) to the FelCor Disclosure
Letter, each of the corporations in which FelCor owns a direct or indirect
equity ownership interest has been at all times since the date of its formation,
and through the Closing Date will be, treated for federal income tax purposes as
either (i) a "qualified REIT subsidiary" within the meaning of Section 856(i) of
the Code or (ii) a "taxable REIT subsidiary" within the meaning of Section
856(l) of the Code.
(j) Schedule 5.11(j) to the FelCor Disclosure Letter sets forth a list of
the entities for which FelCor has made taxable REIT subsidiary elections under
Section 856(l) and the effective dates of such elections. FelCor has made a
taxable REIT subsidiary election for each entity that it intends to treat as a
taxable REIT subsidiary for its 2001 taxable year.
(k) Except as listed on Schedule 5.11(k) to the FelCor Disclosure Letter,
neither FelCor nor any FelCor Subsidiary has entered into or is subject,
directly or indirectly, to any "FelCor Tax Protection
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Agreements." As used herein, a FelCor Tax Protection Agreement is an agreement,
oral or written, (A) that has as one of its purposes to permit a Person to take
the position that such Person could defer federal taxable income that otherwise
might have been recognized upon a transfer of property to the FelCor OP or any
other FelCor Subsidiary that is treated as a partnership for federal income tax
purposes, and that (i) prohibits or restricts in any manner the disposition of
any assets of FelCor or any FelCor Subsidiary or requires FelCor or any FelCor
Subsidiary to indemnify or reimburse any Person for a loss of Tax deferral as a
result of any such asset disposition; (ii) requires that FelCor or any FelCor
Subsidiary maintain, put in place, or replace, indebtedness, whether or not
secured by one or more of the FelCor Properties, or (iii) requires that FelCor
or any FelCor Subsidiary offer to any Person at any time the opportunity to
guarantee or otherwise assume, directly or indirectly (including, without
limitation, through a "deficit restoration obligation," guarantee (including,
without limitation, a "bottom" guarantee), indemnification agreement,
reimbursement agreement or other similar arrangement), the risk of loss for
federal income tax purposes for indebtedness or other liabilities of FelCor or
any FelCor Subsidiary, (B) that specifies or relates to a method of taking into
account book-tax disparities under Section 704(c) of the Code or the Treasury
Regulations promulgated thereunder with respect to one or more assets of FelCor
or a FelCor Subsidiary, or (C) that requires a particular method for allocating
one or more liabilities of FelCor or any FelCor Subsidiary under Section 752 of
the Code or the Treasury Regulations promulgated thereunder. Except as would not
have a FelCor Material Adverse Effect, neither FelCor nor any FelCor Subsidiary
is in violation of or in default under any FelCor Tax Protection Agreement.
5.12 NO PAYMENTS TO EMPLOYEES, OFFICERS OR DIRECTORS. Except as set forth
on Schedule 5.12 to the FelCor Disclosure Letter, there are no cash or non-cash
payments which will become payable to any employee, officer or director of
FelCor or any FelCor Subsidiary as a result of the Merger and the Transactions
and there is no employment or severance contract, or other agreement requiring
payments, cancellation of indebtedness or other obligation to be made upon a
change of control or otherwise as a result of the consummation of any of the
transactions contemplated by this Agreement, with respect to any employee,
officer or director of FelCor or any FelCor Subsidiary.
5.13 BROKERS, FEES AND EXPENSES. No broker, investment banker, financial
advisor or other person, other than Deutsche Banc Alex. Brown and J.P. Morgan
Securities Inc., the fees and expenses of which are as described in their
engagement letters between Deutsche Banc Alex. Brown and FelCor, and J.P. Morgan
Securities Inc. and FelCor, respectively, a true and correct copy of each of
which has previously been delivered to the MeriStar Parties, is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated hereby, based upon arrangements
made by or on behalf of FelCor or any FelCor Subsidiary.
5.14 CONTRACTS; DEBT INSTRUMENTS.
(a) Except as set forth in Schedule 5.14(a) to the FelCor Disclosure
Letter, and except as, individually or in the aggregate, would not have a FelCor
Material Adverse Effect, neither FelCor nor any FelCor Subsidiary has received a
written notice that FelCor or any FelCor Subsidiary is in violation of or in
default under (nor to the Knowledge of FelCor does there exist any condition,
which upon the passage of time or the giving of notice or both, would cause such
a violation of or default under) any loan or credit agreement, note, bond,
mortgage, indenture, lease, permit, concession, franchise, license or any other
contract, agreement, arrangement or understanding, to which it is a party or by
which it or any of its properties or assets is bound, nor to the Knowledge of
FelCor does such a violation or default exist.
(b) Except for any of the following expressly identified in FelCor SEC
Documents, Schedule 5.14(b) to the FelCor Disclosure Letter sets forth a list of
each loan or credit agreement, note, bond, mortgage, indenture and any other
agreement and instrument pursuant to which any Indebtedness in excess of
$10,000,000 of FelCor or of any FelCor Subsidiary, other than such Indebtedness
payable to FelCor or a FelCor Subsidiary, is outstanding or may be incurred.
5.15 ENVIRONMENTAL MATTERS. Except as, individually or in the aggregate,
would not have a FelCor Material Adverse Effect and except as disclosed in the
FelCor SEC Documents filed prior to the date of this Agreement, none of FelCor,
any of the FelCor Subsidiaries or, to the Knowledge of FelCor,
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any other Person has caused or permitted (a) the unlawful presence of any
Hazardous Materials on any of the FelCor Properties or properties formerly owned
by FelCor or (b) any unlawful spills, releases, discharges or disposal of
Hazardous Materials to have occurred on FelCor Properties or properties formerly
owned by FelCor or be presently occurring on or from the FelCor Properties,
which presence or occurrence, individually or in the aggregate, could reasonably
be expected to have a FelCor Material Adverse Effect; and, in connection with
the construction on or operation and use of the FelCor Properties, neither
FelCor nor any FelCor Subsidiary has failed to comply in any material respect
with any applicable Environmental Laws, except to the extent such failure to
comply, individually or in the aggregate, could not be reasonably expected to
have a FelCor Material Adverse Effect. No notice, notification, demand, request
for information, citation, summons, complaint or order has been received by or
is pending, or to the Knowledge of FelCor, is threatened by, any Person against
FelCor or any FelCor Subsidiary, other than where such notice, notification,
demand, request for information, citation, summons, complaint or order has been
fully resolved, or, individually and in the aggregate, could not be reasonably
expected to result in a FelCor Material Adverse Effect. FelCor has previously
delivered or made available to MeriStar or its counsel true and complete copies
of all internally prepared or commissioned environmental studies, assessments
and reports in the possession or under the control of FelCor that relate to the
FelCor Properties and/or FelCor 's compliance with Environmental Laws.
5.16 COMPLIANCE WITH LAWS. Except as disclosed in the FelCor SEC
Documents, neither FelCor nor any FelCor Subsidiary has violated or failed to
comply with any Law, permit, judgment, decree or order of any Governmental
Entity applicable to its business, properties or operations, except to the
extent that such violation or failure could not reasonably be expected to have a
FelCor Material Adverse Effect.
5.17 OPINIONS OF FINANCIAL ADVISOR. The Board of Directors of FelCor has
received the opinions of Deutsche Banc Alex. Brown and J.P. Morgan Securities
Inc. dated the date of this Agreement, to the effect that, as of such date, the
Merger Consideration is fair, from a financial point of view, to FelCor.
5.18 MARYLAND TAKEOVER LAWS. The Maryland Business Combination Act and
the Maryland Control Share Acquisition Act will not apply to FelCor in
connection with this Agreement and the other transactions contemplated hereby.
The provisions of Article XIII of the FelCor Charter relating to the Maryland
Control Share Acquisition Act have not been rescinded or revoked.
5.19 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by FelCor specifically for inclusion or incorporation by reference in
(i) the Registration Statement, at the time the Registration Statement is filed
with the SEC or at the time it becomes effective under the Securities Act, or
(ii) the Proxy Statement, at the date it is first mailed to FelCor's
stockholders or at the time of the FelCor Stockholders Meeting, (as defined in
Section 7.1(e)) will contain any untrue statement of material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The Registration Statement and Proxy Statement will comply
in all material respects with the requirements of the Securities Act and the
Exchange Act, respectively, and the rules and regulations thereunder, except
that no representation or warranty is made by FelCor with respect to statements
made or incorporated by reference therein based on information supplied by
MeriStar specifically for inclusion or incorporated by reference in the Proxy
Statement or contained in any MeriStar SEC Documents incorporated by reference
in the Registration Statement or the Proxy Statement.
5.20 INVESTMENT COMPANY ACT OF 1940. Neither FelCor nor any FelCor
Subsidiary is, or at the Effective Time will be, required to be registered under
the 1940 Act.
5.21 DEFINITION OF KNOWLEDGE OF FELCOR. As used in this Agreement, the
phrase "Knowledge of FelCor" (or words of similar import) means the knowledge of
those individuals identified in Schedule 5.21 to the FelCor Disclosure Letter.
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5.22 VOTING REQUIREMENTS. The FelCor Stockholder Approvals, which shall
consist of the affirmative vote of holders of shares entitled to cast a majority
of all votes entitled to be cast on the matter at the FelCor Stockholders
Meeting, which shall be a duly convened meeting at which a quorum is present and
acting throughout, to approve the Merger, and the affirmative vote of the
holders of a majority of the outstanding FelCor OP Units to approve the OP
Merger, are the only votes of the holders of any class or series of FelCor's
stock or FelCor OP's partnership interests necessary to approve the Merger and
the other transactions contemplated by this Agreement.
ARTICLE 6
COVENANTS
The parties agree as follows with respect to the period from and after the
date of this Agreement to the Effective Time.
6.1 NO SOLICITATION BY MERISTAR.
(a) MeriStar shall not, nor shall it permit any of the MeriStar
Subsidiaries to, nor shall it authorize or permit any officer, director or
employee of or any investment banker, attorney, accountant, agent or other
advisor or representative of MeriStar or any MeriStar Subsidiary to, (i)
solicit, initiate or encourage the submission of, any MeriStar Acquisition
Proposal (as defined below), (ii) except to the extent permitted by paragraph
(b) enter into any agreement with respect to any MeriStar Acquisition Proposal,
or (iii) participate in any discussions or negotiations regarding, or furnish to
any person any information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any MeriStar Acquisition Proposal; provided,
however, that prior to the MeriStar Stockholder Meeting, to the extent required
by the duties of the Board of Directors of MeriStar under Maryland law, as
determined in good faith by a majority of the disinterested members thereof,
having received the advice of outside counsel, MeriStar may, in response to
unsolicited requests therefor, participate in discussions or negotiations with,
or furnish information pursuant to an appropriate confidentiality agreement to,
any Person that makes or expresses a bona fide intention to make an unsolicited
MeriStar Acquisition Proposal, if the Board of Directors of MeriStar first
determines in good faith, based on the vote of a majority of the disinterested
members thereof, that such Person has the ability to consummate a MeriStar
Superior Proposal (as defined below). Without limiting the foregoing, it is
understood that any violation of the restrictions set forth in the preceding
sentence by an officer, director or employee of or any investment banker,
attorney, accountant, agent or other advisor or representative of MeriStar or
any MeriStar Subsidiary, whether or not such person is purporting to act on
behalf of MeriStar, a MeriStar Subsidiary or otherwise, shall be deemed to be a
breach of this paragraph by MeriStar. For all purposes of this Agreement,
"MeriStar Acquisition Proposal" means any proposal, other than a proposal by
FelCor or FelCor OP, for a merger, consolidation, share exchange, business
combination or other similar transaction involving MeriStar or any of its
Significant Subsidiaries (as defined below) or any proposal or offer (including,
without limitation, any proposal or offer to stockholders of MeriStar), other
than a proposal or offer by FelCor or FelCor OP, to acquire in any manner,
directly or indirectly, more than a 10% equity interest in any voting securities
of, or 10% or more of the consolidated assets of, MeriStar or any of its
Significant Subsidiaries. MeriStar immediately shall cease and cause to be
terminated all existing discussions or negotiations with any persons conducted
heretofore with respect to, or that could reasonably be expected to lead to, any
MeriStar Acquisition Proposal. For all purposes of this Agreement, a
"Significant Subsidiary" means any Subsidiary that would constitute a
"significant subsidiary" within the meaning of Article 1, Rule 1-02 of
Regulation S-X of the SEC.
(b) Neither the Board of Directors of MeriStar nor any committee thereof
shall (i) withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to FelCor or FelCor OP, the approval or recommendation by the
Board of Directors of MeriStar or any committee thereof of this Agreement or the
Merger or (ii) approve or recommend, or propose to approve or recommend, any
MeriStar Acquisition Proposal. Notwithstanding the foregoing, the Board of
Directors of MeriStar, to the extent required by its duties under Maryland law,
as determined in good faith by a majority of the
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disinterested members thereof, having received the advice of outside counsel,
may approve or recommend (and, in connection therewith, withdraw or modify its
approval or recommendation of this Agreement or the Merger) a MeriStar Superior
Proposal (as defined below). For purposes of this Agreement, a "MeriStar
Superior Proposal" means a bona fide written proposal made by a third party to
acquire MeriStar or any of its Significant Subsidiaries pursuant to a tender or
exchange offer, a merger, a share exchange, a sale of all or substantially all
of its assets or otherwise, in any such case, on terms which a majority of the
disinterested members of the Board of Directors of MeriStar determines in their
good faith judgment (after consultation with independent financial advisors) to
be more favorable to MeriStar and its stockholders than the Merger and for which
financing, to the extent required, is then fully committed or which, in the good
faith judgment of a majority of such disinterested members (after consultation
with independent financial advisors), is reasonably capable of being financed by
such third party.
(c) MeriStar shall promptly advise FelCor orally and in writing of any
MeriStar Acquisition Proposal or any inquiry with respect to, or which could
reasonably be expected to lead to, any MeriStar Acquisition Proposal, the
material terms and conditions of such MeriStar Acquisition Proposal or inquiry
and the identity of the Person making any such MeriStar Acquisition Proposal or
inquiry. MeriStar will keep FelCor fully informed of the status and details of
any such MeriStar Acquisition Proposal or inquiry. MeriStar shall give FelCor at
least one day's advance notice of any information to be supplied to, and at
least three days' advance notice of any agreement to be entered into with, any
Person making a MeriStar Acquisition Proposal.
(d) Nothing contained in this Section 6.1 will prohibit MeriStar from
taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to
MeriStar's stockholders if the MeriStar Board of Directors determines that such
disclosure is necessary in order to comply with the MeriStar Board of Directors'
duties under Maryland law; provided, however, that neither MeriStar nor the
MeriStar Board of Directors nor any committee thereof may, except in accordance
with Section 6.1(b), withdraw or modify, or propose publicly to withdraw or
modify, its position with respect to this Agreement or the Merger or approve or
recommend, or propose publicly to approve or recommend, a MeriStar Acquisition
Proposal.
6.2 NO SOLICITATION BY FELCOR.
(a) FelCor shall not, nor shall it permit any of the FelCor Subsidiaries
to, nor shall it authorize or permit any officer, director or employee of or any
investment banker, attorney, accountant, agent or other advisor or
representative of FelCor or any FelCor Subsidiary to, (i) solicit, initiate or
encourage the submission of, any FelCor Acquisition Proposal (as defined below),
(ii) except to the extent permitted by paragraph (b), enter into any agreement
with respect to any FelCor Acquisition Proposal, or (iii) participate in any
discussions or negotiations regarding, or furnish to any person any information
with respect to, or take any other action to facilitate any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any FelCor Acquisition Proposal; provided, however, that prior to the FelCor
Stockholder Meeting, to the extent required by the duties of the Board of
Directors of FelCor under Maryland law, as determined in good faith by a
majority of the disinterested members thereof, having received the advice of
outside counsel, FelCor may, in response to unsolicited requests therefor,
participate in discussions or negotiations with, or furnish information pursuant
to an appropriate confidentiality agreement to, any Person that makes or
expresses a bona fide intention to make an unsolicited FelCor Acquisition
Proposal, if the Board of Directors of FelCor first determines in good faith,
based on the vote of a majority of the disinterested members thereof, that such
Person has the ability to consummate a FelCor Superior Proposal (as defined
below). Without limiting the foregoing, it is understood that any violation of
the restrictions set forth in the preceding sentence by an officer, director or
employee of or any investment banker, attorney, accountant, agent or other
advisor or representative of FelCor or any FelCor Subsidiary, whether or not
such person is purporting to act on behalf of FelCor, a FelCor Subsidiary or
otherwise, shall be deemed to be a breach of this paragraph by FelCor. For all
purposes of this Agreement, "FelCor Acquisition Proposal" means any proposal
other than a proposal by MeriStar or MeriStar OP, for a merger, consolidation,
share exchange, business combination or other similar transaction involving
FelCor or any of its Significant Subsidiaries or any proposal or offer
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(including, without limitation, any proposal or offer to stockholders of
FelCor), other than a proposal or offer by MeriStar or MeriStar OP, to acquire
in any manner, directly or indirectly, more than a 10% equity interest in any
voting securities of, or 10% or more of the consolidated assets of, FelCor or
any of its Significant Subsidiaries. FelCor immediately shall cease and cause to
be terminated all existing discussions or negotiations with any persons
conducted heretofore with respect to, or that could reasonably be expected to
lead to, any FelCor Acquisition Proposal.
(b) Neither the Board of Directors of FelCor nor any committee thereof
shall (i) withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to MeriStar or MeriStar OP, the approval or recommendation by the
Board of Directors of FelCor or any committee thereof of this Agreement or the
Merger or (ii) approve or recommend, or propose to approve or recommend, any
FelCor Acquisition Proposal. Notwithstanding the foregoing, the Board of
Directors of FelCor, to the extent required by its duties under Maryland law, as
determined in good faith by a majority of the disinterested members thereof
having received the advice of outside counsel, may approve or recommend (and, in
connection therewith, withdraw or modify its approval or recommendation of this
Agreement or the Merger) a FelCor Superior Proposal (as defined below). For
purposes of this Agreement, a "FelCor Superior Proposal" means a bona fide
written proposal made by a third party to acquire FelCor or any of its
Significant Subsidiaries pursuant to a tender or exchange offer, a merger, a
share exchange, a sale of all or substantially all of its assets or otherwise,
in any such case, on terms which a majority of the disinterested members of the
Board of Directors of FelCor determines in their good faith judgment (after
consultation with independent financial advisors) to be more favorable to FelCor
and its stockholders than the Merger and for which financing, to the extent
required, is then fully committed or which, in the good faith judgment of a
majority of such disinterested members (after consultation with independent
financial advisors), is reasonably capable of being financed by such third
party.
(c) FelCor shall promptly advise MeriStar orally and in writing of any
FelCor Acquisition Proposal or any inquiry with respect to, or which could
reasonably be expected to lead to, any FelCor Acquisition Proposal, the material
terms and conditions of such FelCor Acquisition Proposal or inquiry and the
identity of the Person making any such FelCor Acquisition Proposal or inquiry.
FelCor will keep MeriStar fully informed of the status and details of any such
FelCor Acquisition Proposal or inquiry. FelCor shall give MeriStar at least one
day's advance notice of any information to be supplied to, and at least three
days' advance notice of any agreement to be entered into with, any Person making
an FelCor Acquisition Proposal.
(d) Nothing contained in this Section 6.2 will prohibit FelCor from taking
and disclosing to its stockholders a position contemplated by Rule 14e-2(a)
promulgated under the Exchange Act or from making any disclosure to FelCor's
stockholders if the FelCor Board of Directors determines that such disclosure is
necessary in order to comply with the FelCor Board of Directors' duties under
Maryland law; provided, however, that neither FelCor nor the FelCor Board of
Directors nor any committee thereof may, except in accordance with Section
6.2(b), withdraw or modify, or propose publicly to withdraw or modify, its
position with respect to this Agreement or the Merger or approve or recommend,
or propose publicly to approve or recommend, a FelCor Acquisition Proposal.
6.3 CONDUCT OF MERISTAR'S BUSINESS PENDING MERGER. Prior to the Effective
Time, (i) except as expressly provided for in this Agreement, (ii) except as
consented to in writing by FelCor or approved by the Interim Transactions
Committee (as hereinafter defined), or (iii) except as otherwise set forth in
Schedule 6.3 to the MeriStar Disclosure Letter, MeriStar shall, and shall cause
each MeriStar Subsidiary to:
(a) conduct its business only in the usual, regular and ordinary
course and in substantially the same manner as heretofore conducted;
(b) preserve intact its business organization and goodwill and use its
reasonable efforts to keep available the services of its officers and
employees;
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(c) not acquire, enter into any option to acquire, or exercise any
option or contract to acquire, additional real property (including, without
limitation, any hotel property), incur additional indebtedness, encumber
assets or commence construction of, or enter into any agreement or
commitment to develop or construct, other real estate or hotel projects,
except that MeriStar may incur additional indebtedness under its revolving
credit facility as in effect on the date hereof;
(d) not amend the MeriStar Charter or MeriStar Bylaws, the MeriStar OP
Partnership Agreement, or other comparable organizational documents of any
MeriStar Subsidiary;
(e) (x) make no change in the number of shares of capital stock,
membership interests or units (or their equivalent) of partnership interest
issued and outstanding with respect to MeriStar or any MeriStar Subsidiary,
other than pursuant to (i) the exercise of options disclosed in Schedule
4.3(b) to the MeriStar Disclosure Letter, or (ii) any exchange, redemption
or conversion of the MeriStar OP Units or MeriStar Convertible Notes into
shares of MeriStar Common Stock in accordance with the existing agreements
governing same, and (y) not grant any rights, warrants or options to
acquire any such shares, membership or partnership interests;
(f) not (i) authorize, declare, set aside or pay any dividend or make
any other distribution or payment with respect to any shares of MeriStar
Common Stock or partnership interests in MeriStar OP except as contemplated
in Section 2.2(c) or (ii) directly or indirectly redeem, purchase or
otherwise acquire any shares of capital stock, membership interests or
units of partnership interest or any option, warrant or right to acquire,
or security convertible into, shares of capital stock, membership
interests, or units of partnership interest in MeriStar or any MeriStar
Subsidiary except for the exchange of MeriStar OP Units for shares of
MeriStar Common Stock pursuant to an exchange agreement in existence on the
date of this Agreement;
(g) not sell, lease, mortgage, subject to Lien or otherwise dispose of
any of the MeriStar Properties except for leases or subleases of long-term
stay rental units, newsstands, gift shops, rooftop antenna spaces and other
facilities customarily leased to third parties, that are entered into in
the ordinary and normal course of business with unrelated third parties and
that, individually or in the aggregate, are not material to the business or
operations of the MeriStar Property to which they relate;
(h) not enter into any commitment, contractual obligation, capital
expenditure or transaction (each, a "MeriStar Commitment") which may result
in total payments or liability by or to it in excess of $500,000 or
aggregate MeriStar Commitments in excess of $1,000,000, except for the
capital expenditures disclosed in the MeriStar Budget and Schedule, and not
make any capital expenditures except in conformance in all material
respects with the MeriStar Budget and Schedule;
(i) not settle any stockholder derivative or class action claims
arising out of, relating to or connected with any of the transactions
contemplated by this Agreement;
(j) not enter into or amend any MeriStar Commitment or employment,
compensation or severance agreement with any of its officers, directors,
employees or Affiliates (as defined herein), other than waivers by
employees of benefits under such agreements;
(k) confer on a regular basis with one or more representatives of
FelCor to report operational matters of a material nature and, subject to
Sections 6.1 and 6.5, any proposals to engage in material transactions;
(l) promptly notify FelCor of any material emergency or other material
change in its business, financial condition, results of operations or
prospects;
(m) maintain its books and records in accordance with GAAP,
consistently applied, and not change in any material manner any of its
methods, principles or practices of accounting in effect at the applicable
MeriStar Financial Statement Date, except as may be required by applicable
Law or GAAP;
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(n) not make or rescind any express or deemed election relative to
Taxes which would have a MeriStar Material Adverse Effect (unless required
by Law or necessary to preserve MeriStar's status as a REIT or the status
of any MeriStar Subsidiary as a partnership for Tax purposes or as a
qualified REIT subsidiary or a taxable REIT subsidiary under Section 856(i)
of the Code and Section 856(l) of the Code, respectively);
(o) not adopt any new employee benefit plan or amend any existing
plans or rights, except for changes which are required by Law or changes
which are not more favorable to participants than provisions presently in
effect;
(p) not amend any contract to which MeriStar or any MeriStar
Subsidiary is a party that is listed or identified in the MeriStar
Disclosure Letter, or any schedule thereto, in a manner adverse to FelCor
without obtaining the prior written consent of FelCor or the approval of
the Interim Transactions Committee (as defined herein);
(q) not change the ownership of any MeriStar Subsidiary;
(r) promptly notify FelCor of any action, suit, proceeding, claim or
audit pending or threatened against or with respect to MeriStar or any
MeriStar Subsidiary where there is a reasonable possibility of a
determination or decision which could have a MeriStar Material Adverse
Effect;
(s) continue to maintain and repair all of the MeriStar Properties in
a manner consistent with past practices;
(t) maintain all licenses and permits material to the conduct of
business at any MeriStar Property or as may be required by any Governmental
Entity administering Laws regulating the MeriStar Properties, and take
whatever action is reasonably necessary to maintain such licenses and
permits; and
(u) not make any loans, advances or capital contributions to, or
investments in, any other Person, except loans, advances and capital
contributions to MeriStar Subsidiaries in existence as of the date hereof
and ordinary course expense advances to employees and except in connection
with a transaction permitted by Section 6.3(c).
6.4 CONDUCT OF FELCOR'S BUSINESS PENDING MERGER. Prior to the Effective
Time, (i) except as expressly provided for in this Agreement, (ii) except as
consented to in writing by MeriStar or approved by the Interim Transactions
Committee or (iii) except as otherwise set forth in Schedule 6.4 to the FelCor
Disclosure Letter, FelCor shall, and shall cause each FelCor Subsidiary to:
(a) conduct its business only in the usual, regular and ordinary
course and in substantially the same manner as heretofore conducted;
(b) preserve intact its business organization and goodwill and use its
reasonable efforts to keep available the services of its officers and
employees;
(c) not acquire, enter into any option to acquire, or exercise any
option or contract to acquire, additional real property (including, without
limitation, any hotel property), incur additional indebtedness, encumber
assets or commence construction of, or enter into any agreement or
commitment to develop or construct, other real estate or hotel projects,
except that FelCor may incur additional indebtedness (x) in connection with
this Agreement and the Transactions contemplated herein and (y) under its
revolving credit facility as in effect on the date hereof;
(d) not amend the FelCor Charter or FelCor Bylaws, the FelCor OP
Partnership Agreement, or other comparable organizational documents of any
FelCor Subsidiary;
(e) (x) make no increase in the number of shares of stock of FelCor,
membership interests or units (or their equivalent) of partnership interest
issued and outstanding with respect to FelCor or any FelCor Subsidiary,
other than pursuant to (i) the exercise of options disclosed in Schedule
5.3(c) to the FelCor Disclosure Letter, or (ii) any exchange or redemption
of FelCor OP Units for shares of
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FelCor Common Stock in accordance with the existing agreements governing
same, and (y) not grant any rights, warrants or options to acquire any such
shares, membership or partnership interests;
(f) not (i) authorize, declare, set aside or pay any dividend or make
any other distribution or payment with respect to any shares of FelCor
Common Stock or partnership interests in FelCor OP except as contemplated
in Section 2.2(c) or (ii) directly or indirectly redeem, purchase or
otherwise acquire any shares of capital stock, membership interests or
units of partnership interest or any option, warrant or right to acquire,
or security convertible into, shares of capital stock, membership
interests, or units of partnership interest except for the exchange of
FelCor OP Units for shares of FelCor Common Stock pursuant to the FelCor OP
Partnership Agreement;
(g) not sell, lease, mortgage, subject to Lien or otherwise dispose of
any of the FelCor Properties except for leases or subleases of long-term
stay rental units, newsstands, gift shops, rooftop antenna spaces and other
facilities customarily leased to third parties, that are entered into in
the ordinary and normal course of business with unrelated third parties and
that, individually or in the aggregate, are not material to the business or
operations of the FelCor Property to which they relate;
(h) not enter into any commitment, contractual obligation, capital
expenditure or transaction (each, a "FelCor Commitment") which may result
in total payments or liability by or to it in excess of $500,000 or
aggregate FelCor Commitments in excess of $1,000,000, except for the
capital expenditures disclosed in the FelCor Budget and Schedule;
(i) not settle any stockholder derivative or class action claims
arising out of, relating to or connected with any of the transactions
contemplated by this Agreement;
(j) not enter into or amend any FelCor Commitment or employment,
compensation or severance agreement with any of its officers, directors,
employees or Affiliates, other than waivers by employees of benefits under
such agreements;
(k) confer on a regular basis with one or more representatives of
MeriStar to report operational matters of a material nature and, subject to
Sections 6.2 and 6.5, any proposals to engage in material transactions;
(l) promptly notify MeriStar of any material emergency or other
material change in its business, financial condition, results of operations
or prospects;
(m) maintain its books and records in accordance with GAAP,
consistently applied, and not change in any material manner any of its
methods, principles or practices of accounting in effect at the applicable
FelCor Financial Statement Date, except as may be required by applicable
Law or GAAP;
(n) not make or rescind any express or deemed election relative to
Taxes which would have a FelCor Material Adverse Effect (unless required by
Law or necessary to preserve FelCor's status as a REIT or the status of any
FelCor Subsidiary as a partnership for Tax purposes or as a qualified REIT
subsidiary or a taxable REIT subsidiary under Section 856(i) of the Code
and Section 856(l) of the Code, respectively);
(o) not change the ownership of any FelCor Subsidiary; and
(p) promptly notify MeriStar of any action, suit, proceeding, claim or
audit pending or threatened against or with respect to FelCor or any FelCor
Subsidiary where there is a reasonable possibility of a determination or
decision which could have a FelCor Material Adverse Effect.
6.5 INTERIM TRANSACTIONS COMMITTEE. Promptly following the execution of
this Agreement, MeriStar and FelCor will constitute and establish a committee
(the "Interim Transactions Committee") which will evaluate and consider any
proposed commitment, contractual obligation, capital expenditure or transaction
of the type referred to in Sections 6.3 or 6.4 of this Agreement, or the
settlement of any stockholder derivative or class action claims arising out of
or in connection with any of the transactions
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contemplated by this Agreement between the date hereof and the Effective Time.
The Interim Transactions Committee will consist of the President and Chief
Executive Officer of FelCor, or such other individual selected by FelCor who is
reasonably acceptable to MeriStar, and the Chairman and Chief Executive Officer
of MeriStar, or such other individual selected by MeriStar who is reasonably
acceptable to FelCor. The Interim Transactions Committee will act only by the
affirmative vote of both members thereof. The Interim Transactions Committee
will be abolished at the Effective Time.
6.6 COMPLIANCE WITH THE SECURITIES ACT. Prior to the Effective Time,
MeriStar shall cause to be prepared and delivered to FelCor a list (reasonably
satisfactory to counsel for FelCor) identifying all persons who, at the time of
the FelCor and MeriStar Stockholders Meetings, may be deemed to be "affiliates"
of MeriStar as that term is used in paragraphs (c) and (d) of Rule 145 under the
Securities Act (the "Affiliates"). MeriStar shall use its best efforts to cause
each person who is identified as an Affiliate in such list to deliver to FelCor
on or prior to the Effective Time a written agreement, in the form attached
hereto as Exhibit "C," that such Affiliate will not sell, pledge, transfer or
otherwise dispose of any FelCor Common Stock issued to such Affiliate pursuant
to the Merger, except pursuant to an effective registration statement under the
Securities Act, in compliance with paragraph (d) of Rule 145 or pursuant to an
exemption from the registration requirements of the Securities Act. FelCor shall
be entitled to place legends as specified in such written agreements on the
certificates representing any FelCor Common Stock to be received by such
Affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the FelCor Common Stock,
consistent with the terms of such agreements.
6.7 FILING OF CERTAIN REPORTS. The Surviving Corporation shall file the
reports required to be filed by it under the Exchange Act and the rules and
regulations adopted by the SEC thereunder, and it will take such further action
as any Affiliate of MeriStar or FelCor may reasonably request, all to the extent
required from time to time to enable such Affiliate to sell shares of stock of
the Surviving Corporation received by such Affiliate in the Merger without
registration under the Securities Act pursuant to (i) Rule 145(d)(1) under the
Securities Act, as such rule may be amended from to time, or (ii) any successor
rule or regulation hereafter adopted by the SEC.
6.8 OTHER ACTIONS. Each of MeriStar on the one hand and FelCor on the
other hand shall not, and shall use commercially reasonable efforts to cause
their respective Subsidiaries not to, take any action that would result in (i)
any of the representations and warranties of such party (without giving effect
to any "knowledge" qualification) set forth in this Agreement that are qualified
as to materiality becoming untrue, (ii) any of such representations and
warranties (without giving effect to any "knowledge" qualification) that are not
so qualified becoming untrue in any material respect or (iii) except as
contemplated by Section 6.1 or 6.2 (as the case may be), any of the conditions
to the Merger set forth in Article 8 not being satisfied.
ARTICLE 7
ADDITIONAL COVENANTS
The parties additionally agree as follows with respect to the period from
and after the date of this Agreement to the Effective Time.
7.1 PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY STATEMENT;
MERISTAR STOCKHOLDERS MEETING AND FELCOR STOCKHOLDERS MEETING.
(a) The parties shall cooperate and promptly prepare and FelCor shall file
with the SEC as soon as practicable a Registration Statement on Form S-4 under
the Securities Act (the "Registration Statement") covering the FelCor Common
Stock issuable in the Merger, a portion of which registration statement shall
also serve as the joint proxy statement with respect to the meetings of the
stockholders of FelCor and MeriStar in connection with the Merger (the "Proxy
Statement"). FelCor shall use commercially reasonable efforts, and MeriStar
shall use commercially reasonable efforts to cooperate with FelCor, to (i)
respond to any comments of the SEC and (ii) have the Registration Statement
declared
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effective under the Securities Act and the rules and regulations promulgated
thereunder as promptly as practicable after such filing and to keep the
Registration Statement effective as long as is necessary to consummate the
Merger and the transactions contemplated hereby. Each of MeriStar and FelCor
will use its reasonable best efforts to cause the Proxy Statement to be mailed
to its respective stockholders as promptly as practicable after the Registration
Statement is declared effective under the Securities Act. Each party agrees to
date its Proxy Statement as of the same date, which shall be the approximate
date of mailing to the stockholders of the respective parties. FelCor will
notify MeriStar promptly of the receipt of any comments from the SEC and of any
request by the SEC for amendments or supplements to the Registration Statement
or the Proxy Statement or for additional information and will supply MeriStar
with copies of all correspondence between such party or any of its
representatives and the SEC, with respect to the Registration Statement or the
Proxy Statement. Whenever any event occurs which is required to be set forth in
an amendment or supplement to the Registration Statement or the Proxy Statement,
MeriStar or FelCor, as the case may be, shall promptly inform the other of such
occurrences and cooperate in filing with the SEC and/or mailing to the
stockholders of MeriStar or FelCor such amendment or supplement to the
Registration Statement or Proxy Statement. Each party hereto shall also take
such action as may be reasonably required to cause the shares of FelCor Common
Stock issuable in connection with the Merger to be registered or to obtain an
exemption from registration under applicable state "blue sky" or securities
laws; provided, however, that no party shall be required to register or qualify
as a foreign corporation or to take other action which would subject it to
general service of process in any jurisdiction where the Surviving Corporation
will not be, following the Merger, so subject. Each of the parties hereto shall
furnish all information concerning itself which is required or customary for
inclusion in the Proxy Statement and Registration Statement. The MeriStar
Parties and the FelCor Parties also shall use commercially reasonable efforts to
cause their respective legal counsel designated in Section 8.1(f), (g) and (h)
to deliver any opinions, which opinions shall be filed as exhibits to the
Registration Statement, addressing federal income tax matters and other matters
as are required to be addressed in the Registration Statement and the Proxy
Statement under the applicable rules of the SEC. MeriStar OP shall promptly
complete the accounting audit of its financial statements for the 1998, 1999 and
2000 fiscal years so that such financial statements are available for inclusion
in any filings, reports or registration statements (including the Registration
Statement) if and to the extent such inclusion is required under applicable
regulations of the SEC. The information provided by any party hereto for use in
the Proxy Statement and Registration Statement shall be true and correct in all
material respects without omission of any material fact which is required to
make such information not false or misleading. No representation, covenant or
agreement is made by any party hereto with respect to information supplied by
any other party for inclusion in the Proxy Statement and Registration Statement.
(b) MeriStar shall use commercially reasonable efforts to cause to be
delivered to FelCor letters of KPMG Peat Marwick LLP, dated a date within two
business days before the date of the Proxy Statement and Registration Statement,
and addressed to FelCor, in form and substance reasonably satisfactory to FelCor
and customary in scope and substance for "cold comfort" letters delivered by
independent public accountants in connection with registration statements on
Form S-4.
(c) FelCor shall use commercially reasonable efforts to cause to be
delivered to MeriStar a letter of PricewaterhouseCoopers L.L.P., dated a date
within two business days before the date of the Proxy Statement and Registration
Statement, and addressed to MeriStar, in form and substance reasonably
satisfactory to MeriStar and customary in scope and substance for "cold comfort"
letters delivered by independent public accountants in connection with
registration statements on Form S-4.
(d) MeriStar will, as soon as practicable following the date of this
Agreement, duly call, give notice of, convene and hold (no sooner than 20
business days following the date the Proxy Statement is mailed to the
stockholders of MeriStar) a meeting of its stockholders (the "MeriStar
Stockholders Meeting") for the purpose of obtaining the MeriStar Stockholder
Approval. MeriStar will, through its Board of Directors, recommend to its
stockholders approval of this Agreement, the Merger and the other transactions
contemplated by this Agreement, which recommendation shall also be stated in the
Proxy Statement. Prior
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to the MeriStar Stockholders Meeting, such recommendation may be withdrawn,
modified or amended only in accordance with Section 6.1 of this Agreement.
(e) FelCor will, as soon as practicable following the date of this
Agreement, duly call, give notice of, convene and hold (no sooner than 20
business days following the date the Proxy Statement is mailed to the
stockholders of FelCor) a meeting of its stockholders (the "FelCor Stockholders
Meeting") for the purpose of obtaining the FelCor Stockholder Approval. FelCor
will, through its Board of Directors, recommend to its stockholders approval of
this Agreement, the Merger and the other transactions contemplated by this
Agreement, which recommendation shall also be stated in the Proxy Statement.
Prior to the FelCor Stockholders Meeting, such recommendation may be withdrawn,
modified or amended only in accordance with Section 6.2 of this Agreement.
(f) MeriStar and FelCor shall use commercially reasonable efforts to hold
their respective stockholder meetings on the same day, which day, subject to the
provisions of Section 7.1(d) and 7.1(e), shall be a day not later than 45 days
after the date the Proxy Statement is mailed.
(g) If on the date for the MeriStar Stockholders Meeting and the FelCor
Stockholders Meeting established pursuant to Section 7.1(d) and (e),
respectively, either MeriStar or FelCor has not received a sufficient number of
proxies to approve this Agreement, the Merger and the other transactions
contemplated by this Agreement, then both parties will adjourn their respective
stockholders meetings until the first to occur of (i) the date ten calendar days
after the originally scheduled date of the stockholders meetings or (ii) the
date on which the requisite number of proxies approving this Agreement, the
Merger and the other transactions contemplated by this Agreement has been
obtained.
7.2 ACCESS TO INFORMATION: CONFIDENTIALITY. Subject to the requirements
of confidentiality agreements with third parties, each of MeriStar and FelCor
shall, and shall cause each of its Subsidiaries to, afford to the other party
and to the officers, employees, accountants, counsel, financial advisors and
other representatives of such other party, reasonable access during normal
business hours prior to the Effective Time to all their respective properties,
books, contracts, commitments, personnel and records and, during such period,
each of MeriStar and FelCor shall, and shall cause each of its Subsidiaries to,
furnish promptly to the other party (a) a copy of each report, schedule,
registration statement and other document filed by it during such period
pursuant to the requirements of federal or state securities laws and (b) all
other information concerning its business, properties and personnel as such
other party may reasonably request. Each of MeriStar and FelCor shall cause its
Subsidiaries to, and shall use commercially reasonable efforts to cause its
officers, employees, accountants, counsel, financial advisors and other
representatives and affiliates to, hold any nonpublic information in confidence
to the extent required by, and in accordance with, and will comply with the
provisions of the letter agreement dated as of March 7, 2001 between MeriStar
and FelCor (the "Confidentiality Agreement"), the terms of which are
incorporated herein and made a part of this Agreement.
7.3 REGULATORY MATTERS. Each party hereto shall cooperate and use its
best efforts to promptly prepare and file all necessary documentation, to effect
all necessary applications, notices, petitions, filings and other documents, and
to use all commercially reasonable efforts to obtain all necessary permits,
consents, approvals and authorizations of all governmental authorities,
including, without limitation, the NYSE, National Association of Securities
Dealers or the American Stock Exchange (as applicable), necessary, proper or
appropriate to consummate and make effective the transactions contemplated by
this Agreement.
7.4 DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) MeriStar Indemnification. From and after the Effective Time, the
Surviving Corporation will provide indemnification for each individual who is
now or has been at any time prior to the date hereof, or who becomes prior to
the Effective Time, an officer or director of MeriStar or any MeriStar
Subsidiary (the "Indemnified Parties") which is the same as the indemnification
provided to the Indemnified Parties by MeriStar and the MeriStar Subsidiaries in
the MeriStar Charter and Bylaws or the applicable charter or other
organizational document of such MeriStar Subsidiary, as in effect on the date
hereof; provided,
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that such indemnification covers actions on or prior to the Effective Time,
including without limitation all transactions contemplated by this Agreement,
whether asserted before, at or after the Effective Time.
(b) Insurance. The Surviving Corporation shall obtain, at its expense,
so-called "tail insurance" providing for the extension of the directors and
officers liability insurance maintained by MeriStar for six years after the
Closing Date.
(c) Continuing Indemnification. The Surviving Corporation will continue in
force and effect after the Effective Time each indemnification agreement between
MeriStar or any MeriStar Subsidiary, on the one hand, and any Person, on the
other hand, which was in force and effect immediately prior to the date of this
Agreement.
(d) Successors. In the event the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other Person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any Person, then and in either such case, proper
provisions shall be made so that the successors and assigns of the Surviving
Corporation shall assume the obligations set forth in this Section 7.4.
(e) Benefit. The provisions of this Section 7.4 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, and his or her
heirs, representatives, administrators, successors and assigns.
7.5 PUBLIC ANNOUNCEMENTS. Subject to each party's disclosure obligations
imposed by law, MeriStar and FelCor will cooperate with each other in the
development and distribution of all news releases and other public information
disclosures with respect to this Agreement or any of the transactions
contemplated hereby and shall not issue any public announcement or statement
with respect hereto or thereto without the consent of the other party (which
consent shall not be unreasonably withheld or delayed). In this regard, the
parties shall comply with the requirements of any applicable rules and
regulations of the SEC, including Regulation FD and Rule 165. To the extent
required by such rules and regulations, the parties shall cooperate to make any
required filings or to issue any required public disclosures thereunder. It is
understood and agreed that this Section 7.5 is intended to address matters with
respect to this Agreement and the transactions contemplated hereby (e.g.,
status, terms, etc.), and is not intended to address disclosure of confidential
non-public information of a party obtained by the other party in connection with
this Agreement and the transactions contemplated hereby, which information is
subject to the Confidentiality Agreement and Section 7.2 hereof.
7.6 EMPLOYMENT AGREEMENTS AND WORKFORCE MATTERS.
(a) Prior to the Closing Date, FelCor, on behalf of the Surviving
Corporation, shall tender employment agreements or make offers of employment (as
applicable) to the MeriStar employees set forth on Schedule 7.6(a) to the FelCor
Disclosure Letter, upon the terms and subject to the conditions set forth on
such schedule. FelCor shall have the right, but not the obligation, to tender
offers of employment to other MeriStar employees as determined by FelCor in its
sole discretion.
(b) After the Effective Time, FelCor agrees to comply with and pay the
severance and bonus arrangements of former MeriStar or MeriStar OP employees, as
described on Schedule 7.6(b) to the MeriStar Disclosure Letter, if (i) such
employees continue in good faith to perform their duties as employees through
the Closing Date and (ii) except for prorated bonuses paid for the 2001 year,
such employees are not employed with the Surviving Corporation or with MeriStar
Hotels & Resorts or their Subsidiaries with substantially the same compensation
and duties as applicable to such employees as of the date hereof.
7.7 EMPLOYEE BENEFIT PLANS.
(a) MeriStar Benefit Plans. After the Effective Time, each employee of
MeriStar or any MeriStar Subsidiary who is employed by the Surviving Corporation
or the Surviving Partnership ("Continuing Employee") shall be eligible to
participate in each FelCor Benefit Plan for which FelCor, in its sole
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discretion, determines that such Continuing Employee participated in a similar
MeriStar Benefit Plan, at the level of similarly situated employees of the
Surviving Corporation or the Surviving Partnership; provided, however, if the
Surviving Corporation or the Surviving Partnership, in its sole discretion,
determines it is not practicable for such Continuing Employees to participate in
one or more FelCor Benefit Plans as described above, the Surviving Corporation
or Surviving Partnership shall adopt and continue the corresponding MeriStar
Benefit Plan, and continue such Continuing Employee's participation therein,
until such time as the Surviving Corporation or the Surviving Partnership
determines it is practicable to include such Continuing Employee in its
corresponding FelCor Benefit Plan; and provided, further, that the Surviving
Corporation or the Surviving Partnership may make such adjustments and impose
such conditions on such Continuing Employee's participation in any FelCor
Benefit Plan, or continued MeriStar Benefit Plan, as, in their sole discretion,
they shall reasonably determine as necessary or appropriate to insure that a
Continuing Employee shall not receive a duplicate benefit, or any benefit to
which an employee of FelCor would not have been entitled, under comparable
circumstances. FelCor shall have the right, exercisable in its sole discretion,
to instruct MeriStar and any MeriStar Subsidiary (i) to terminate MeriStar's
employee stock purchase plan effective at the end of the current option exercise
period (however denominated in such plan), and (ii) to terminate any one or more
MeriStar Benefit Plans prior to the Closing Date effective immediately prior to
the Effective Time.
(b) Credit for Past Services. Without limitation of the foregoing
provisions of this Section 7.7, each Continuing Employee shall receive credit
for service with MeriStar or any MeriStar Subsidiary, or their predecessors for
purposes of (i) eligibility to participate (including waiting periods and
without being subject to any subsequent entry date requirement for which the
waiting period has already been satisfied), vesting and eligibility to receive
benefits (including without pre-existing conditions limitations) under any
FelCor Benefit Plan, or continued MeriStar Benefit Plan, in which they are
designated by the Surviving Corporation as eligible to participate, and (ii)
benefit accrual under only the severance or vacation pay plan of the Surviving
Corporation or Surviving Partnership in which such Continuing Employee is
designated by the Surviving Corporation or Surviving Partnership as eligible to
participate, if any; and provided, however, that FelCor, in its sole discretion,
may adjust the crediting of service so as to insure that a Continuing Employee
shall not receive a duplicate benefit, or any benefit to which an employee of
FelCor would not have been entitled based on a comparable period of service.
With respect to any FelCor Benefit Plan which is a medical plan or a cafeteria
plan, where a Continuing Employee is designated as eligible to participate in
the corresponding FelCor Benefit Plan(s), the Surviving Corporation and
Surviving Partnership shall cause to be waived any pre-existing condition
limitation to the same extent such pre-existing condition was waived under the
corresponding MeriStar Benefit Plan, and shall give effect, in determining any
deductible and maximum out-of-pocket limitations, the claims incurred and
amounts paid by, and amounts reimbursed to, such Continuing Employee with
respect to the similar plans maintained by MeriStar or a MeriStar Subsidiary
immediately prior to the Closing Date; provided, further, and without
limitation, that FelCor, in its sole discretion, may adjust the benefits under
such FelCor Benefit Plan(s) so as to insure that a Continuing Employee shall not
receive a duplicate benefit, or any benefit to which an employee of FelCor would
not have been entitled, under comparable circumstances.
7.8 STOCK OPTION AND OTHER STOCK PLANS.
(a) Exchange of Stock Options. As of the Effective Time, each option to
purchase shares of MeriStar Common Stock (a "MeriStar Stock Option") which is
outstanding as of the Effective Time shall be assumed (or a substitute option
granted) by the Surviving Corporation and shall continue as an option ("Assumed
Option") to purchase the number of shares of FelCor Common Stock (rounded up to
the nearest whole share) equal to the number of shares of MeriStar Common Stock
subject to such option multiplied by the Exchange Ratio, at an exercise price
per share of FelCor Common Stock (rounded down to the nearest penny) equal to
the former exercise price per share of MeriStar Common Stock under such MeriStar
Stock Option immediately prior to the Effective Time minus the Cash
Consideration. Each Assumed Option will be in the form determined by FelCor, and
furnished to MeriStar at least 10 days prior to the Closing Date; provided,
however, that the provisions of each such Assumed Option shall not differ from
the provisions of the corresponding MeriStar Stock Option except to the extent
such provisions
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could have been added, or changed, by amendment under the terms of the MeriStar
Incentive Plan and the MeriStar Stock Option without the consent of option
holders. Without limiting the generality of the forgoing, FelCor shall not be
required to offer employment to an employee of MeriStar, or MeriStar OP,
including, without limitation, a person set forth on Schedule 7.6(a), unless
such employee furnishes FelCor with a written waiver, in a form acceptable to
FelCor, of any acceleration in the vesting of his MeriStar Stock Option(s) which
otherwise would occur as a result of the Merger.
(b) Adoption of the MeriStar Incentive Plan. In its sole discretion, and
without limiting the generality of the forgoing provisions of this Section 7.8,
FelCor shall have the right to assume the MeriStar Incentive Plan.
(c) Other Actions. As soon as practicable after the Effective Time, the
Surviving Corporation shall deliver the Assumed Options to the holders of
MeriStar Stock Options upon surrender of the corresponding MeriStar Stock
Options. On, or as soon as practicable after, the Effective Time, the Surviving
Corporation will cause to be filed one or more registration statements on Form
S-3 or Form S-8 under the Securities Act (or any successor or other appropriate
forms), in order to register those shares of FelCor Common Stock subject to
Assumed Options ("Assumed Option Shares") not previously registered, or
post-effective amendments on Form S-3 or Form S-8 to the Registration Statement,
to the extent permitted by applicable law, to describe and cover the Assumed
Option Shares. The Surviving Corporation shall use its best efforts to maintain
the effectiveness of such registration statements (and maintain the current
status of the prospectuses contained therein) for so long as such Assumed
Options remain outstanding. FelCor shall use its best efforts to cause such
registration statements (or post-effective amendments) on Form S-3 to become
effective within 60 days after the date of filing. At or prior to the Effective
Time, the Surviving Corporation shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of FelCor Common Stock for
delivery in connection with (i) the Assumed Options, (ii) the exchange of
MeriStar OP Units and (iii) the conversion of the outstanding MeriStar
Convertible Notes. The Surviving Corporation shall take all corporate action
necessary or appropriate to obtain stockholder approval with respect to the
Assumed Options to the extent, if any, such approval is required for purposes of
the Code or other applicable law. With respect to the those individuals who
subsequent to the Merger will be subject to the reporting requirements under
Section 16(a) of the Exchange Act with respect to equity securities of the
Surviving Corporation, the Surviving Corporation shall administer such Assumed
Options, where applicable, in a manner that complies with Rule 16b-3 promulgated
under the Exchange Act.
7.9 REGISTRATION STATEMENTS.
(a) Shelf Registration. As soon as practicable after the date hereof, the
Surviving Corporation shall cause to be filed a registration statement (a "Shelf
Registration") on Form S-3 or any other appropriate form under the Securities
Act for an offering to be made on a delayed or continuous basis pursuant to Rule
415 thereunder or any similar rule that may be adopted by the SEC and permitting
sales in ordinary course brokerage or dealer transactions not involving an
underwritten public offering covering all shares of FelCor Common Stock issuable
after the Effective Time to former holders of MeriStar OP Units. The Surviving
Corporation shall use its reasonable best efforts to have such Shelf
Registration declared effective on or prior to the Closing Date and remain
effective until all shares registered thereunder are sold or are eligible to be
sold under Rule 144(k) promulgated under the Securities Act. The Surviving
Corporation shall pay all registration expenses (other than sales commission and
discounts) incurred in connection with the Shelf Registration. In lieu of the
Shelf Registration, if permitted under applicable SEC regulations, FelCor may
elect to include such offering by the former holders of MeriStar OP Units as
part of the Registration Statement.
(b) Exchange Registration. As soon as practicable after the date hereof,
each of MeriStar and FelCor shall cause to be filed a registration statement (an
"Exchange Registration") on Form S-4 or any other appropriate form under the
Securities Act, registering the offer to exchange (i) in the case of MeriStar,
$300 million in principal amount of new Series A and Series B 9% Senior Notes
Due 2008 and $200 million in principal amount of new Series C and Series D
9 1/8% Senior Notes Due 2011, for
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$300 million in principal amount of outstanding old Series A and Series B 9%
Senior Notes Due 2008 and $200 million in principal amount of outstanding old
Series C and Series D 9 1/8% Senior Notes Due 2011, in each case, which had been
issued without registration under the Securities Act, and (ii) in the case of
FelCor, $100 million in principal amount of new 9 1/2% Senior Notes Due 2008 for
$100 million in principal amount of outstanding old 9 1/2% Senior Notes Due 2008
which had been issued without registration under the Securities Act. In each
case, MeriStar or FelCor, as applicable, shall use commercially reasonable
efforts to have such Exchange Registration declared effective, and to have its
respective exchange offer completed, on or prior to the Closing Date. Each of
MeriStar and FelCor shall pay all registration expenses incurred in connection
with its respective Exchange Registration.
7.10 REORGANIZATION STATUS. Each party hereto agrees, as to itself and to
each of its Subsidiaries, that after the date hereof and prior to the Effective
Time or earlier termination of this Agreement, except as expressly contemplated
or permitted in this Agreement, neither party hereto shall, nor shall either
party hereto permit any of its Subsidiaries or any employees, officers or
directors of such party or of any of its Subsidiaries to, take any actions which
would, or would be reasonably likely to, adversely affect the ability of the
Merger to qualify as a reorganization under Section 368(a)(1)(A) of the Code,
and each party hereto shall use all reasonable efforts to achieve such result
and to obtain the opinions of counsel described in Section 8.1(h).
7.11 NYSE LISTING. FelCor shall use commercially reasonable efforts to
cause the shares of FelCor Common Stock to be issued in the Merger to be
approved for listing on the NYSE, subject to official notice of issuance, prior
to the Effective Time.
7.12 TRANSFER TAXES. MeriStar and FelCor shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees or any similar taxes which become payable in
connection with the Transactions that are required or permitted to be filed on
or before the Effective Time.
7.13 PAYMENT OF MERISTAR DEBT. MeriStar and FelCor agree that immediately
prior to, or upon, the Effective Time, the Surviving Corporation shall pay to
the applicable MeriStar lenders the amount necessary to discharge and terminate
MeriStar's $1.0 billion Senior Secured Credit Facility.
7.14 RESIGNATIONS. On the Closing Date, MeriStar shall cause the
directors, managers and officers of each MeriStar Subsidiary to submit their
resignations from such positions, effective as of the Effective Time.
7.15 ASSUMPTION OF DEBT. With respect to the debt issued by MeriStar or
the MeriStar OP under indentures qualified under the Trust Indenture Act of 1939
(the "Indentures"), FelCor, as to debt issued by MeriStar, and FelCor OP, as to
debt issued by MeriStar OP, shall execute and deliver to the trustees under the
respective Indentures, Supplemental Indentures, in form satisfactory to the
respective trustees, expressly assuming the obligations of MeriStar or MeriStar
OP with respect to the due and punctual payment of the principal of and
interest, if any, on all debt securities issued by MeriStar or MeriStar OP under
the respective Indentures and the due and punctual performance of all the terms,
covenants and conditions of the respective Indentures to be kept or performed by
MeriStar or MeriStar OP, and shall deliver such Supplemental Indentures to the
respective trustees under the Indentures.
7.16 TAX PROVISION. Except as otherwise required under the agreements
listed in Schedule 4.13(l) to the MeriStar Disclosure Letter with respect to the
properties previously contributed to MeriStar OP, FelCor OP shall use the
traditional method contained in the Treasury Regulations promulgated under
Section 704(c) of the Code with respect to all properties contributed by
MeriStar OP to FelCor OP in the OP Merger.
7.17 FINANCING. The MeriStar Parties acknowledge that a portion of the
financing to be obtained by the FelCor Parties in order to consummate the
Transactions may be secured by assets of the MeriStar Parties. The MeriStar
Parties shall use all reasonable commercial efforts to provide such information
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regarding MeriStar, the MeriStar Subsidiaries and the MeriStar Properties as may
be reasonably requested by the Persons (or their representatives or agents)
providing such financing, to answer inquiries by such Persons and to otherwise
cooperate in any reasonable manner to assist the FelCor Parties in obtaining
such financing.
7.18 RELATIONSHIP WITH MERISTAR HOTELS & RESORTS.
(a) The MeriStar Parties shall deliver to the FelCor Parties, on or before
the Closing Date, a fully executed agreement with MeriStar Hotels & Resorts and
any of its Subsidiaries, in form reasonably satisfactory to the FelCor Parties,
that amends that certain Revolving Credit Agreement between MeriStar OP and
MeriStar H&R Operating Company, L.P., dated August 3, 1998, as amended February
29, 2000, to reflect the agreements set forth in the Term Sheet attached as
Schedule 7.18 hereto. The MeriStar Parties shall use best efforts to obtain on
or before May 21, 2001 any necessary consents or approvals of any lenders of
MeriStar Hotels & Resorts to such amendment agreement.
(b) The MeriStar Parties shall request and obtain, under the MeriStar
Management Agreements, an estoppel certificate, dated as of a date within ten
(10) days prior to the Closing Date, from MeriStar Hotels & Resorts or any
subsidiary of MeriStar Hotels & Resorts that is a party to any such agreement
with respect to the status of the MeriStar Management Agreements, (i) confirming
that such agreements are in full force and effect, (ii) confirming that there
are no defaults, and no facts or circumstances that could reasonably be expected
to give rise to a default, thereunder, and (iii) acknowledging the amount of the
Aggregate New Management Credits, as defined in the MeriStar Management
Agreements.
7.19 COMPLETION OF CAPITAL PROJECTS. Each of MeriStar and FelCor will
continue in the ordinary and normal course of business to pursue the completion
of existing capital expenditure projects in accordance with the MeriStar Budget
and Schedule and FelCor Budget and Schedule, respectively. Any significant
deviations from the MeriStar Budget and Schedule or the FelCor Budget and
Schedule for any particular project shall be reported in writing to the Interim
Transactions Committee as soon as practicable after such party becomes aware of
the possibility of such deviation.
7.20 COMMERCIALLY REASONABLE EFFORTS AND COOPERATION. Upon the terms and
subject to the conditions of this Agreement, each of the parties hereto will use
all commercially reasonable efforts to take, or cause to be taken, all actions,
and to do, or cause to be done, and to permit and cooperate with the other
parties in doing, all things necessary, proper or advisable to consummate or
make effective, in the most expeditious manner practicable, the Merger and the
other transactions contemplated by this Agreement, including without limitation,
(i) obtaining all consents, approvals and waivers from third parties prior to
the Effective Time, (ii) defending any lawsuits or other legal proceedings,
whether judicial or administrative, challenging this Agreement or the
consummation of the transactions contemplated hereby, including seeking to have
any adverse order entered by any court or other Governmental Entity vacated or
reversed and (iii) executing and delivering any additional instruments necessary
to consummate the transactions contemplated by, and to carry out fully, the
purposes of this Agreement. In addition, and without limiting the generality of
the foregoing, MeriStar will cooperate with FelCor to ensure that FelCor
continues to qualify as a REIT following the Effective Time.
7.21 FINANCING COMMITMENT. FelCor will deliver to MeriStar, within 30
days after the date of this Agreement, either (i) a commitment for financing
issued by Deutsche Bank Alex. Brown, J.P. Morgan Securities Inc., or another
comparable investment or commercial banking firm or firms, for an aggregate
amount of at least $500 million and for a term of not less than seven years, and
with such other terms and provisions as may be reasonably acceptable to FelCor
and MeriStar, or (ii) evidence reasonably satisfactory to MeriStar that the
holders of a majority of the aggregate outstanding principal amount of
MeriStar's Series A and Series B 9% Senior Notes Due 2008 and Series C and
Series D 9 1/8% Senior Notes Due 2011 (collectively, the "Senior Notes") have
waived their right to be offered the opportunity to tender their Senior Notes
following the Merger pursuant to a Change of Control Offer as defined in the
Indenture governing the Senior Notes.
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ARTICLE 8
CONDITIONS
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
obligations of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) Stockholder Approvals. Each of the Stockholder Approvals will
have been obtained.
(b) Listing of Shares. The NYSE shall have approved for listing the
shares of FelCor Common Stock to be issued in the Merger, subject to
official notice of issuance.
(c) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger or any of the other transactions
contemplated hereby shall be in effect.
(e) Blue Sky Laws. The Surviving Corporation shall have received all
state securities or "blue sky" permits and other authorizations necessary
to issue shares of FelCor Common Stock to the stockholders of MeriStar.
(f) Tax Opinions Relating to REIT Status of FelCor and Partnership
Status of FelCor OP. The FelCor Parties and the MeriStar Parties shall have
received an opinion of Hunton & Williams, reasonably satisfactory to the
FelCor Parties and the MeriStar Parties, that (i) commencing with its
taxable year ended December 31, 1994, FelCor was organized and has operated
in conformity with the requirements for qualification as a REIT under the
Code, (ii) FelCor OP has been since its formation in 1994, and continues to
be, treated for federal income tax purposes as a partnership and not as a
corporation or association taxable as a corporation, and (iii) the
Transactions will not prevent FelCor from continuing to operate in
conformity with the requirements for qualification as a REIT under the Code
(with customary exceptions, assumptions and qualifications and based upon
customary representations).
(g) Tax Opinions Relating to REIT Status of MeriStar and Partnership
Status of MeriStar OP. The FelCor Parties and the MeriStar Parties shall
have received an opinion of Paul, Weiss, Rifkind, Wharton & Garrison,
reasonably satisfactory to the FelCor Parties and the MeriStar Parties,
that (i) commencing with its taxable year ended December 31, 1996, MeriStar
or its predecessor was organized and has operated in conformity with the
requirements for qualification, as a REIT under the Code, and (ii) MeriStar
OP has been since its formation in 1996, and continues to be, treated for
federal income tax purposes as a partnership and not as a corporation or
association taxable as a corporation (with customary exceptions,
assumptions and qualifications and based upon customary representations).
(h) Tax Opinion Relating to Merger. The FelCor Parties shall have
received an opinion dated the Closing Date from Jenkens & Gilchrist, P.C.
("J&G") reasonably satisfactory to the FelCor Parties, and the MeriStar
Parties shall have received an opinion dated the Closing Date from Paul,
Weiss, Rifkind, Wharton & Garrison ("Paul Weiss"), reasonably satisfactory
to the MeriStar Parties, based upon certificates and letters, which letters
and certificates are in the form agreed upon by the parties and dated the
Closing Date, to the effect that the Merger will qualify as a
reorganization under the provisions of Section 368(a)(1)(A) of the Code.
(i) Change in Tax Laws. There shall not have been any federal
legislative or regulatory change that would cause FelCor or MeriStar to
cease to qualify as a REIT for federal income tax purposes.
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8.2 CONDITIONS TO OBLIGATIONS OF THE MERISTAR PARTIES. The obligation of
the MeriStar Parties to effect the Merger and to consummate the other
transactions contemplated to occur on the Closing Date is further subject to the
following conditions, any one or more of which may be waived by the MeriStar
Parties:
(a) Representations and Warranties. The representations and
warranties of the FelCor Parties set forth in this Agreement that are
qualified as to materiality shall be true and correct, and the
representations and warranties of the FelCor Parties that are not so
qualified shall be true and correct in all material respects, in each case,
as of the date of this Agreement and as of the Closing Date, as though made
on and as of the Closing Date, except to the extent the representation or
warranty is expressly limited by its terms to another date, and the
MeriStar Parties shall have received a certificate (which certificate may
be qualified by Knowledge to the same extent as the representations and
warranties of the FelCor Parties contained herein are so qualified) signed
on behalf of the FelCor Parties by the chief executive officer and the
chief financial officer or principal accounting officer of FelCor, in such
capacity, to such effect.
(b) Performance of Obligations of the FelCor Parties. Each of the
FelCor Parties shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior
to the Effective Time, and the MeriStar Parties shall have received a
certificate of the FelCor Parties signed on behalf of the FelCor Parties by
the chief executive officer and the chief financial officer or principal
accounting officer of FelCor, in such capacity, to such effect.
(c) Material Adverse Change. Since the date of this Agreement, there
shall have been no FelCor Material Adverse Change, and the MeriStar Parties
shall have received a certificate of the chief executive officer and chief
financial officer or principal accounting officer of FelCor, in such
capacity, certifying to such effect.
(d) Consents. All consents and waivers (including, without
limitation, waivers of rights of first refusal) from third parties
necessary in connection with the consummation of the Transactions shall
have been obtained, other than such consents and waivers from third
parties, which, if not obtained, would not result, individually or in the
aggregate, in a FelCor Material Adverse Effect or a MeriStar Material
Adverse Effect, and all consents and waivers from franchisors and ground
lessors of the MeriStar Properties and lenders of MeriStar debt necessary
in connection with the consummation of the Transactions shall have been
obtained.
8.3 CONDITIONS TO OBLIGATIONS OF THE FELCOR PARTIES. The obligations of
the FelCor Parties to effect the Merger and to consummate the other transactions
contemplated to occur on the Closing Date are further subject to the following
conditions, any one or more of which may be waived by the FelCor Parties:
(a) Representations and Warranties. The representations and
warranties of the MeriStar Parties set forth in this Agreement that are
qualified as to materiality shall be true and correct, and the
representations and warranties of the MeriStar Parties that are not so
qualified shall be true and correct in all material respects, in each case,
as of the date of this Agreement and as of the Closing Date, as though made
on and as of the Closing Date, except to the extent the representation or
warranty is expressly limited by its terms to another date, and the FelCor
Parties shall have received a certificate (which certificate may be
qualified by Knowledge to the same extent as the representations and
warranties of the MeriStar Parties contained herein are so qualified)
signed on behalf of the MeriStar Parties by the chief executive officer and
the chief financial officer or principal accounting officer of MeriStar, in
such capacity, to such effect. Notwithstanding the foregoing, MeriStar
shall not be deemed to be in breach of Section 4.13(f) regarding Sections
857(b) and 4981 of the Code with respect to the period ending on the
Closing Date so long as it complies with the provisions of Section
2.2(c)(i) and (ii).
(b) Performance of Obligations of the MeriStar Parties. Each of the
MeriStar Parties shall have performed in all material respects all
obligations required to be performed by it under this
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Agreement at or prior to the Effective Time, and the FelCor Parties shall
have received a certificate signed on behalf of the MeriStar Parties by the
chief executive officer and the chief financial officer or principal
accounting officer of MeriStar, in such capacity, to such effect.
(c) Material Adverse Change. Since the date of this Agreement, there
shall have been no MeriStar Material Adverse Change, and the FelCor Parties
shall have received a certificate of the chief executive officer and chief
financial officer or principal accounting officer of MeriStar, in such
capacity, certifying to such effect.
(d) Consents. All consents and waivers (including, without
limitation, waivers of rights of first refusal) from third parties
necessary in connection with the consummation of the Transactions shall
have been obtained, other than such consents and waivers from third
parties, which, if not obtained, would not result, individually or in the
aggregate, in a FelCor Material Adverse Effect or a MeriStar Material
Adverse Effect, and all consents and waivers from franchisors and ground
lessors of the MeriStar Properties and lenders of MeriStar debt necessary
in connection with the consummation of the Transactions shall have been
obtained.
(e) Affiliates Letter. Each of the Affiliates referred to in Section
6.6 shall have delivered to FelCor the written agreement contemplated by
Section 6.6.
(f) Relationship with MeriStar Hotels & Resorts. The MeriStar Parties
shall have fully performed their obligations set forth in Section 7.18.
8.4 FRUSTRATION OF CLOSING CONDITIONS. Neither the MeriStar Parties nor
the FelCor Parties may rely on the failure of any condition set forth in Section
8.1, 8.2 or 8.3, as the case may be, to be satisfied if such failure was caused
by such party's failure to use commercially reasonable efforts to commence or
complete the Merger and the other transactions contemplated by this Agreement.
ARTICLE 9
TERMINATION, AMENDMENT AND WAIVER
9.1 TERMINATION. This Agreement may be terminated at any time prior to
the filing of the Articles of Merger with the Department, whether before or
after either of the Stockholder Approvals are obtained:
(a) by mutual written consent duly authorized by both the Board of
Directors of FelCor and the Board of Directors of MeriStar;
(b) by FelCor, upon a breach of any representation, warranty,
covenant, obligation or agreement on the part of the MeriStar Parties set
forth in this Agreement, in either case such that the conditions set forth
in Section 8.3(a) or Section 8.3(b), as the case may be, would be incapable
of being satisfied by October 31, 2001 (or as otherwise extended);
(c) by MeriStar, upon a breach of any representation, warranty,
covenant, obligation or agreement on the part of the FelCor Parties set
forth in this Agreement, in either case such that the conditions set forth
in Section 8.2(a) or Section 8.2(b), as the case may be, would be incapable
of being satisfied by October 31, 2001 (or as otherwise extended);
(d) by either FelCor or MeriStar, if any judgment, injunction, order,
decree or action by any Governmental Entity of competent authority
preventing the consummation of the Merger shall have become final and
nonappealable;
(e) by either FelCor or MeriStar, if the Merger shall not have been
consummated before October 31, 2001; provided, that a party may not
terminate pursuant to this clause (e) if the terminating party shall have
breached in any material respect its obligations under this Agreement in
any manner that shall have proximately contributed to the occurrence of the
failure referred to in this clause;
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(f) by either FelCor or MeriStar if, upon a vote at a duly held
MeriStar Stockholders Meeting or any adjournment thereof, the MeriStar
Stockholder Approval shall not have been obtained as contemplated by
Section 7.1;
(g) by either FelCor or MeriStar if, upon a vote at a duly held FelCor
Stockholders Meeting or any adjournment thereof, the FelCor Stockholder
Approval shall not have been obtained as contemplated by Section 7.1;
(h) by MeriStar, if prior to the MeriStar Stockholders Meeting, the
Board of Directors of MeriStar shall have withdrawn or modified, in
accordance with Section 6.1 hereof, in any manner adverse to FelCor, its
approval or recommendation of the Merger or this Agreement in connection
with, or approved or recommended, a MeriStar Superior Proposal; provided
that such termination pursuant to this clause (h) shall not be effective
until MeriStar has made payment of the Break-Up Fee (as defined below)
required by Section 9.2(c) hereof;
(i) by FelCor, if prior to the FelCor Stockholders Meeting, the Board
of Directors of FelCor shall have withdrawn or modified, in accordance with
Section 6.2 hereof, in any manner adverse to MeriStar, its approval or
recommendation of the Merger or this Agreement in connection with, or
approved or recommended, any FelCor Superior Proposal; provided that such
termination pursuant to this clause (i) shall not be effective until FelCor
has made payment of the Break-Up Fee required by Section 9.2(b) hereof;
(j) by FelCor if (i) prior to the MeriStar Stockholders Meeting, the
Board of Directors of MeriStar shall have withdrawn or modified, in any
manner adverse to FelCor, its approval or recommendation of the Merger or
this Agreement in connection with, or approved or recommended, any MeriStar
Acquisition Proposal, (ii) prior to the MeriStar Stockholders Meeting,
MeriStar shall have entered into any agreement with respect to a MeriStar
Acquisition Proposal (other than a confidentiality agreement as
contemplated and permitted by Section 6.1(a)) or (iii) the Board of
Directors of MeriStar shall have resolved to do any of the foregoing;
(k) by MeriStar if (i) prior to the FelCor Stockholders Meeting, the
Board of Directors of FelCor shall have withdrawn or modified, in any
manner adverse to MeriStar, its approval or recommendation of the Merger or
this Agreement in connection with, or approved or recommended, any FelCor
Acquisition Proposal, (ii) prior to the FelCor Stockholders Meeting, FelCor
shall have entered into any agreement with respect to a FelCor Acquisition
Proposal (other than a confidentiality agreement as contemplated and
permitted by Section 6.2(a)) or (iii) the Board of Directors of FelCor
shall have resolved to do any of the foregoing; and
(l) by either FelCor or MeriStar if, during any ten consecutive
trading days between the date hereof and the Closing Date, the average
Closing Price (as defined below) of the FelCor Common Stock is less than
$18.40, and the party desiring such termination provides notice to the
other party within three business days after the end of such ten
trading-day period. For purposes hereof, "Closing Price" shall mean the
last reported sale price per share of FelCor Common Stock as reported on
the NYSE consolidated tape on the trading day in question.
9.2 CERTAIN FEES AND EXPENSES.
(a) Except as otherwise specified in this Agreement or agreed in writing by
the parties, all out-of-pocket costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby (including, without
limitation, all expenses relating to the transfer of any hotel franchises) shall
be paid by the party incurring such cost or expense.
(b) FelCor agrees that if this Agreement shall be terminated pursuant to
Section 9.1(c), (i) or (k), then FelCor will pay as directed by MeriStar a fee
in an amount equal to the Break-Up Fee (as defined below). In the event of a
termination pursuant to Section 9.1(g), FelCor shall pay as directed by MeriStar
an amount equal to the Break-Up Expenses (as defined below). Payment of any of
such amounts shall be made, as directed by MeriStar, by wire transfer of
immediately available funds immediately upon the
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occurrence of the event giving rise to the payment of such fee or expenses. The
payment of the Break-Up Fee shall be full compensation for the loss suffered by
MeriStar as a result of the failure of the Merger to be consummated under the
circumstances giving rise to the payment of such fee, and to avoid the
difficulty of determining damages under such circumstances, and neither party
shall have any other liability to the other, other than the payment of the
Break-Up Fee, under such circumstances. The payment of the Break-Up Expenses
shall be full compensation for the loss suffered by MeriStar as the result of
the failure of the Merger to be consummated under the circumstances giving rise
to the payment of such expenses, and to avoid the difficulty of determining
damages under such circumstances, and neither party shall have any other
liability to the other, other than the payment of the Break-Up Expenses, under
such circumstances.
(c) MeriStar agrees that if this Agreement shall be terminated pursuant to
Section 9.1(b), (h) or (j), then MeriStar will pay as directed by FelCor a fee
in an amount equal to the Break-Up Fee. In the event of a termination pursuant
to Section 9.1(f), then MeriStar will pay, as directed by FelCor, an amount
equal to the Break-Up Expenses. Payment of any of such amounts shall be made, as
directed by FelCor, by wire transfer of immediately available funds immediately
upon the occurrence of the event giving rise to payment of such fee or expenses.
The payment of the Break-Up Fee shall be full compensation for the loss suffered
by FelCor as a result of the failure of the Merger to be consummated under the
circumstances giving rise to the payment of such fee, and to avoid the
difficulty of determining damages under the circumstances, and neither party
shall have any other liability to the other, other than the payment of the
Break-Up Fee. The payment of the Break-Up Expenses shall be full compensation
for the loss suffered by FelCor as the result of the failure of the Merger to be
consummated under the circumstances giving rise to the payment of such expenses,
and to avoid the difficulty of determining damages under such circumstances, and
neither party shall have any other liability to the other, other than the
payment of the Break-Up Expenses, under such circumstances.
(d) As used in this Agreement, "Break-Up Fee" shall be an amount equal to
$35 million plus Break-Up Expenses (the "Base Amount"); provided, however, that
such fee shall not exceed the sum of (A) the maximum amount that can be paid to
FelCor or MeriStar, as the case may be (the "Recipient") without causing it to
fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
determined as if the payment of such amount did not constitute income described
in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code ("Qualifying
Income"), as determined by independent accountants to the Recipient, and (B) in
the event the Recipient receives an opinion from outside counsel (a "Break-Up
Fee Tax Opinion") or a ruling from the IRS (a "Break-Up Fee Ruling"), in either
case holding that the Recipient's receipt of the Base Amount would either
constitute Qualifying Income or would be excluded from gross income within the
meaning of Sections 856(c)(2) and (3) of the Code (the "REIT Requirements") or
that the receipt by the Recipient of the remaining balance of the Base Amount
following the receipt of and pursuant to such ruling or opinion would not be
deemed constructively received prior thereto, the Base Amount less the amount
payable under clause (A) above; provided, however, that, if the Break-Up Fee Tax
Opinion or the Break-Up Fee Ruling is based on the absence of constructive
receipt, the amount that will be paid upon the receipt of the Break-Up Fee Tax
Opinion or the Break-Up Fee Ruling will be the maximum amount that can be paid
at that time without causing the Recipient to fail the REIT Requirements, as
determined by the Recipient's independent accountants based on the Break-Up Fee
Tax Opinion or Break-Up Fee Ruling, and any remaining amount payable to the
Recipient pursuant to clause (B) shall be paid as soon as it shall be possible
to do so without causing the Recipient to fail the REIT Requirements, as
determined by the Recipient's independent accountants based on the Break-Up Fee
Tax Opinion or Break-Up Fee Ruling. The other party's obligation to pay (the
"Payor") any unpaid portion of the Break-Up Fee shall terminate five years from
the date of this Agreement. In the event that the Recipient is not able to
receive the full Base Amount, the Payor shall place the unpaid amount in escrow
and shall not release any portion thereof to the Recipient unless and until the
Payor receives either a Break-Up Fee Tax Opinion or a Break-Up Fee Ruling, in
which event the Payor shall pay to the Recipient the unpaid Base Amount;
provided, however, that, if the Break-Up Fee Tax Opinion or the Break-Up Fee
Ruling is based on the absence of constructive receipt, the amount that will be
paid upon the receipt of the Break-Up Fee Tax Opinion or the Break-Up Fee Ruling
will be the
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maximum amount that can be paid at that time without causing the Recipient to
fail the REIT Requirements, as determined by the Recipient's independent
accountants based on the Break-Up Fee Tax Opinion or Break-Up Fee Ruling, and
any remaining amount payable to the Recipient shall be paid as soon as it shall
be possible to do so without causing the Recipient to fail the REIT
Requirements, as determined by the Recipient's independent accountants based on
the Break-Up Fee Tax Opinion or Break-Up Fee Ruling.
(e) The "Break-Up Expenses" payable to the Recipient shall be an amount
equal to the lesser of (i) $5 million and (ii) the Recipient's out-of-pocket
expenses incurred in connection with this Agreement and the transactions
contemplated hereby (including, without limitation, all attorneys',
accountants', commercial bankers' and investment bankers' fees and expenses);
provided, however, such expenses shall not exceed the sum of (A) the maximum
amount that can be paid to the Recipient without causing it to fail to meet the
requirements of Sections 856(c)(2) and (3) of the Code determined as if the
payment of such amount did not constitute Qualifying Income, as determined by
independent accountants to the Recipient, and (B) in the event the Recipient
receives a Break-Up Fee Tax Opinion or a Break-Up Fee Ruling holding that the
Recipient's receipt of the Break-Up Expenses would either constitute Qualifying
Income or would be excluded from gross income within the meaning of the REIT
Requirements or that receipt by the Recipient of the remaining balance of the
Break-Up Expenses following the receipt of and pursuant to such ruling or
opinion would not be deemed constructively received prior thereto, the Break-Up
Expenses less the amount payable under clause (A) above; provided, however,
that, if the Break-Up Fee Tax Opinion or Break-Up Fee Ruling is based on the
absence of constructive receipt, the amount that will be paid upon the receipt
of the Break-Up Fee Tax Opinion or the Break-Up Fee Ruling will be the maximum
amount that can be paid at that time without causing the Recipient to fail the
REIT Requirements, as determined by the Recipient's independent accountants
based on the Break-Up Fee Tax Opinion or Break-Up Fee Ruling, and any remaining
amount payable to the Recipient pursuant to clause (B) shall be paid as soon as
it shall be possible to do so without causing the Recipient to fail the REIT
Requirements, as determined by the Recipient's independent accountants based on
the Break-Up Fee Tax Opinion or Break-Up Fee Ruling. The obligation of the Payor
to pay any unpaid portion of the Break-Up Expenses shall terminate five years
from the date of this Agreement. In the event that the Recipient is not able to
receive the full Break-Up Expenses, the Payor shall place the unpaid amount in
escrow and shall not release any portion thereof to the Recipient unless and
until the Payor receives either a Break-Up Fee Tax Opinion or a Break-Up Fee
Ruling with respect to the Break-Up Expenses, in which event the Payor shall pay
to the Recipient the unpaid Break-Up Expenses; provided, however, if the
Break-Up Fee Tax Opinion or the Break-Up Fee Ruling is based on the absence of
constructive receipt, the amount that will be paid upon the receipt of the
Break-Up Fee Tax Opinion or the Break-Up Fee Ruling will be the maximum amount
that can be paid at that time without causing the Recipient to fail the REIT
Requirements, as determined by the Recipient's independent accountants based on
the Break-Up Fee Tax Opinion or Break-Up Fee Ruling, and any remaining amount
payable to the Recipient shall be paid as soon as it shall be possible to do so
without causing the Recipient to fail the REIT Requirements, as determined by
the Recipient's independent accountants based on the Break-Up Fee Tax Opinion or
Break-Up Fee Ruling.
9.3 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either MeriStar or FelCor as provided in Section 9.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of FelCor, or MeriStar, other than pursuant to the last sentence of
Section 7.2, Section 9.2, this Section 9.3 and Article 10.
9.4 AMENDMENT. This Agreement may be amended by the parties in writing by
action of their respective Board of Directors at any time before or after any
Stockholder Approvals are obtained and prior to the filing of the Articles of
Merger with the Department; provided, however, that, after the Stockholder
Approvals are obtained, no such amendment, modification or supplement shall be
made which by law requires the further approval of stockholders without
obtaining such further approval. The parties agree to amend this Agreement in
the manner provided in the immediately preceding sentence to the extent
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required to (a) continue the status of FelCor or MeriStar as a REIT or (b)
preserve the Merger as a reorganization under Section 368 of the Code.
9.5 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other party, (b) waive any inaccuracies in the representations
and warranties of the other party contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
9.4, waive compliance with any of the agreements or conditions of the other
party contained in this Agreement. Any agreement on the part of a party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.
ARTICLE 10
GENERAL PROVISIONS
10.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement confirming the representations and warranties in this
Agreement shall survive the Effective Time. This Section 10.1 shall not limit
any covenant or agreement of the parties which by its terms contemplates
performance after the Effective Time.
10.2 NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be delivered
personally, sent by overnight courier (providing proof of delivery) to the
parties or sent by telecopy (providing confirmation of transmission) at the
following addresses or telecopy numbers (or at such other address or telecopy
number for a party as shall be specified by like notice):
(a) if to FelCor, to:
FelCor Lodging Trust Incorporated
545 E. John Carpenter Frwy., Ste. 1300
Irving, TX 75062-3933
Attention: President and CEO
Fax No. (972) 444-4949
with a copy to:
Jenkens & Gilchrist, a Professional Corporation
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202
Attention: Robert W. Dockery, Esq.
Fax No. (214) 855-4300
(b) if to MeriStar, to:
MeriStar Hospitality Corporation
1010 Wisconsin Ave., N.W.
Washington, D.C. 20007
Attention: Chairman of the Board and CEO
Fax No. (202) 295-2248
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with copies to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: Richard S. Borisoff, Esq.
Fax No. (212) 757-3990
and
DeCampo, Diamond & Ash
805 Third Avenue
New York, New York 10022
Attention: William H. Diamond, Esq.
Fax No. (212) 758-1728
All notices shall be deemed given only when actually received.
10.3 INTERPRETATION. When a reference is made in this Agreement to a
Section or Exhibits, such reference shall be to a Section or Exhibit of this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation."
10.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
10.5 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. Except as provided
in Section 7.4, this Agreement, the MeriStar Disclosure Letter, the FelCor
Disclosure Letter, the Confidentiality Agreement and the other agreements
entered into in connection with the Merger or OP Merger constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral, between the parties with respect to the subject matter of this
Agreement and are not intended to confer upon any person other than the parties
hereto any rights or remedies.
10.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, REGARDLESS OF THE LAWS THAT
MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF LAWS THEREOF
(OTHER THAN SECTION 5-1401 OF NEW YORK'S GENERAL OBLIGATIONS LAWS), EXCEPT TO
THE EXTENT THAT THE LAWS OF THE STATE OF MARYLAND OR DELAWARE ARE MANDATORILY
APPLICABLE.
10.7 ASSIGNMENT. Neither this Agreement nor any of the rights, interests
or obligations under this Agreement shall be assigned or delegated, in whole or
in part, by operation of law or otherwise by any of the parties without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be enforceable
by, the parties and their respective successors and assigns.
10.8 ENFORCEMENT. The parties agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any federal court located in the
Southern District of New York or in any state court located in New York, this
being in addition to any other remedy to which they are entitled at law or in
equity. In addition, each of the parties hereto (a) consents to submit itself
(without making such submission exclusive) to the personal jurisdiction of any
federal court located in the Southern District of
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New York or any state court located in New York in the event any dispute arises
out of this Agreement or any of the transactions contemplated by this Agreement
and (b) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court.
10.9 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the FelCor Parties and the MeriStar Parties have caused
this Agreement to be signed by their respective officers thereunto duly
authorized all as of the date first written above.
ATTEST: FELCOR LODGING TRUST INCORPORATED,
a Maryland corporation
By: /s/ LAWRENCE D. ROBINSON By: /s/ THOMAS J. CORCORAN, JR.
---------------------------------------------- --------------------------------------------
Name: Thomas J. Corcoran, Jr.
Title: President and Chief Executive Officer
FELCOR LODGING LIMITED PARTNERSHIP
a Delaware limited partnership
By: FelCor Lodging Trust Incorporated,
its general partner
By: /s/ LAWRENCE D. ROBINSON By: /s/ THOMAS J. CORCORAN, JR.
---------------------------------------------- --------------------------------------------
Name: Thomas J. Corcoran, Jr.
Title: President and Chief Executive Officer
ATTEST: MERISTAR HOSPITALITY CORPORATION,
a Maryland corporation
By: /s/ CHRISTOPHER L. BENNETT By: /s/ PAUL W. WHETSELL
---------------------------------------------- --------------------------------------------
Name: Paul W. Whetsell
Title: Chief Executive Officer
MERISTAR HOSPITALITY OPERATING PARTNERSHIP,
L.P., a Delaware limited partnership
By: MeriStar Hospitality Corporation,
its general partner
By: /s/ CHRISTOPHER L. BENNETT By: /s/ PAUL W. WHETSELL
---------------------------------------------- --------------------------------------------
Name: Paul W. Whetsell
Title: Chief Executive Officer
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FORM OF
FIRST AMENDMENT
TO AGREEMENT AND PLAN OF MERGER
This First Amendment to Agreement and Plan of Merger (the "First
Amendment") is dated as of July 18, 2001, and entered into by and among FELCOR
LODGING TRUST INCORPORATED, a Maryland corporation ("FelCor"), FELCOR LODGING
LIMITED PARTNERSHIP, a Delaware limited partnership ("FelCor OP" and, together
with FelCor, the "FelCor Parties"), MERISTAR HOSPITALITY CORPORATION, a Maryland
corporation ("MeriStar"), MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P., a
Delaware limited partnership ("MeriStar OP" and, together with MeriStar, the
"MeriStar Parties"), and FELCOR MERGESUB, L.L.C., a Delaware limited liability
Company ("FelCor Mergesub").
RECITALS:
A. The FelCor Parties and the MeriStar Parties have previously entered into
that certain Agreement and Plan of Merger dated as of May 9, 2001 (the "Merger
Agreement").
B. The FelCor Parties and the MeriStar Parties desire to amend the Merger
Agreement in the manner set forth herein.
C. FelCor Mergesub desires to enter into the Merger Agreement by executing
this First Amendment in order to provide for the merger of FelCor Mergesub with
and into MeriStar OP in lieu of the OP Merger currently contemplated by the
Merger Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the parties hereto hereby agree to amend the
Merger Agreement as follows:
1. The third sentence in Section 4.2(a) of the Merger Agreement shall
be amended to read in its entirety as follows:
"There are issued and outstanding (i) an aggregate of 47,349,101
MeriStar Common Units, (ii) an aggregate of 964,227 MeriStar Class C
Units, (iii) an aggregate of 392,157 MeriStar Class D Units, and (iv) an
aggregate of 802,292 MeriStar POP Units."
2. Section 5.22 of the Merger Agreement shall be amended to read in
its entirety as follows:
"5.22 VOTING REQUIREMENTS. The FelCor Stockholder Approvals, which
shall consist of the affirmative vote of holders of shares entitled to
cast a majority of all votes entitled to be cast on the matter at the
FelCor Stockholders Meeting, which shall be a duly convened meeting at
which a quorum is present and acting throughout, to approve the Merger,
are the only votes of the holders of any class or series of FelCor's
stock or FelCor OP's partnership interests necessary to approve the
Merger and the other transactions contemplated by this Agreement."
3. The first sentence of Section 7.8(a) of the Merger Agreement shall
be amended to read in its entirety as follows:
"As of the Effective Time, each option to purchase shares of MeriStar
Common Stock (a "MeriStar Stock Option") which is outstanding as of the
Effective Time shall be assumed (or a substitute option granted) by the
Surviving Corporation and shall continue as an option ("Assumed Option")
to purchase the number of shares of FelCor Common Stock (rounded up to
the nearest whole share) equal to the number of shares of MeriStar
Common Stock subject to such option multiplied by the Exchange Ratio, at
an exercise price per share of FelCor Common Stock (rounded down to the
nearest penny) equal to (A) the former exercise price per share of
MeriStar Common Stock under such MeriStar Stock Option immediately prior
to the Effective Time minus the Cash Consideration, divided by (B)
0.784."
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4. Section 7.16 of the Merger Agreement shall be amended to read in
its entirety of follows:
"7.16 TAX PROVISION. Except as otherwise required under existing
agreements with respect to the properties previously contributed to
MeriStar OP, MeriStar OP shall use the traditional method contained in
the Treasury Regulations promulgated under Section 704(c) of the Code
with respect to all of the properties that it owns immediately after the
OP Merger."
5. In Section 7.18(a) of the Merger Agreement, the date "May 21, 2001"
set forth in the last sentence shall be amended to read "July 12, 2001."
6. In Section 7.21 of the Merger Agreement, the phrase "within 30 days
after the date of this Agreement" shall be deleted, and the phrase "on or
before July 12, 2001" shall be substituted in lieu thereof.
7. Recital D on page 1 of the Merger Agreement shall be amended to
read in its entirety as follows:
"D. Immediately following the Merger, MeriStar OP and the FelCor Parties
will effect a merger of FelCor Mergesub with and into MeriStar OP, with
MeriStar OP as the survivor (the "OP Merger"), and FelCor will
contribute to FelCor OP its interests in MeriStar OP in several
transactions, as contemplated by Article 3 of this Agreement (the
Merger, together with the other transactions, including without
limitation the OP Merger, contemplated by this Agreement, being referred
to collectively herein as the "Transactions")."
8. Article 3 of the Merger Agreement shall be amended to read in its
entirety as follows:
"ARTICLE 3
CERTAIN TRANSACTIONS RELATING TO THE MERISTAR OP
3.1 INITIAL CONTRIBUTION BY FELCOR OF COMMON UNITS. Immediately after the
Effective Time and prior to the OP Merger effectiveness, FelCor shall transfer,
as a capital contribution, to FelCor OP each of the units of partnership
interest in MeriStar OP known as "OP Units" (herein called "MeriStar Common
Units") that it owns as successor limited partner to MeriStar by virtue of the
Merger, other than the units of partnership interest owned by FelCor as
successor general partner in MeriStar OP (the "MeriStar GP Interest") by virtue
of succeeding MeriStar as general partner, in exchange for, in respect of each
such unit, (i) the number of units of partnership interest in FelCor OP known as
"Partnership Units" or "Common Units" (herein called "FelCor Common Units")
equal to the Exchange Ratio, and (ii) the right to receive from FelCor OP cash
in an amount equal to the Cash Consideration, without interest. The transaction
described in this Section 3.1 shall be herein called the "Initial Contribution."
3.2 MERGER OF MERISTAR OP AND FELCOR MERGESUB. Immediately following the
Initial Contribution, FelCor shall cause FelCor Mergesub to merge with and into
MeriStar OP in accordance with the Delaware Revised Uniform Limited Partnership
Act ("DRULPA"), the Delaware Limited Liability Company Act ("DLLCA"), the
partnership agreement of MeriStar OP and the limited liability company agreement
of FelCor Mergesub, with MeriStar OP as the surviving entity. The effects and
consequences of the OP Merger are set forth in this Article 3, the DRULPA and
the DLLCA. MeriStar OP, after the effectiveness of the OP Merger, is sometimes
referred to herein as the "Surviving Partnership."
3.3 SUBSEQUENT CONTRIBUTIONS BY FELCOR OF GENERAL PARTNER UNITS.
(a) FelCor will become the sole general partner of MeriStar OP by virtue of
the Merger as successor to MeriStar. Immediately following the effectiveness of
the OP Merger, FelCor shall transfer, as capital contributions, (i) 1% of the
MeriStar GP Interest to a newly formed taxable REIT subsidiary ("TRS") of FelCor
and (ii) 99% of the MeriStar GP Interest to a newly formed limited partnership
(the "Successor MeriStar OP General Partner"), the sole partners in which will
be TRS as the 1% general partner and
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FelCor as the 99% limited partner. In forming Successor MeriStar OP General
Partner, the FelCor Parties shall cause TRS to transfer, as a capital
contribution, its MeriStar GP Interest to the Successor MeriStar OP General
Partner. Successor MeriStar OP General Partner will be admitted as the successor
general partner of MeriStar OP, and FelCor shall withdraw as general partner of
MeriStar OP.
(b) Immediately following effectiveness of the contributions required by
(a) above, FelCor will transfer, as a capital contribution, all of the equity
interests in TRS and Successor MeriStar OP General Partner to FelCor OP in
exchange for (i) the number of FelCor Common Units equal to (x) the Exchange
Ratio times (y) the total number of units of partnership interest comprising the
MeriStar GP Interest, and (ii) the right to receive cash in an amount equal to
(s) the Cash Consideration, without interest, times (t) the total number of
units of partnership interest comprising the MeriStar GP Interest. The
transactions described in Section 3.3(a) and this Section 3.3(b) shall be herein
called the "Subsequent Contributions."
(c) Promptly following the effectiveness of the OP Merger and the
Subsequent Contributions, FelCor OP shall, or shall cause one of its
wholly-owned subsidiaries that is disregarded for federal income tax purposes
to, incur one or more borrowings that are nonrecourse liabilities within the
meaning of Treasury Regulations section 1.752-1(a)(2) (collectively, the
"Nonrecourse Borrowing") and shall use the proceeds of the Nonrecourse Borrowing
to pay (i) all of the Cash Consideration due to holders of MeriStar Common Units
other than FelCor or FelCor OP (the "MeriStar LP Cash Amount") and (ii) as much
of the cash due to FelCor in connection with the Initial Contribution and the
Subsequent Contributions as possible without causing FelCor to recognize any
gain for federal income tax purposes (the "FelCor Nonrecourse Cash Amount" and,
together with the MeriStar LP Cash Amount, the "Nonrecourse Cash Amounts").
FelCor OP shall pay the Nonrecourse Cash Amounts to the respective recipients
within 90 days of incurring the Nonrecourse Borrowing and shall segregate the
proceeds of the Nonrecourse Borrowing that are used to pay the Nonrecourse Cash
Amounts so that such proceeds are allocable to the Nonrecourse Cash Amounts
under Treasury Regulations section 1.163-8T. If the aggregate cash amount due to
FelCor in connection with the Initial Contribution and the Subsequent
Contributions exceeds the FelCor Nonrecourse Amount, FelCor OP shall promptly
pay such excess to FelCor from whatever sources FelCor OP deems appropriate.
3.4 CLOSING AND EFFECTIVENESS. The closing (the "OP Transactions
Closing") of the Initial Contribution, the OP Merger and the Subsequent
Contributions (collectively, the "OP Transactions") shall take place at the same
time and place as the Closing. All of the documents and transactions relating to
the OP Transactions Closing shall be deemed to be part of the Closing. The OP
Transactions shall be conditioned upon prior effectiveness of the Merger and
shall be effective immediately following the Effective Time of the Merger. At
the OP Transactions Closing, MeriStar OP and FelCor Mergesub shall execute the
Certificate of Merger (the "OP Merger Articles") in the form attached hereto as
Exhibit "B," which certificate shall then be filed with the Delaware Secretary
of State.
3.5 EFFECTS OF OP MERGER. The OP Merger shall have the effects set forth
in the DRULPA and DLLCA.
3.6 CERTIFICATE OF LIMITED PARTNERSHIP AND PARTNERSHIP AGREEMENT. The
certificate of limited partnership of MeriStar OP as in effect immediately prior
to the Effective Time (the "MeriStar OP Certificate") shall be the certificate
of limited partnership of the Surviving Partnership. The limited partnership
agreement of MeriStar OP as amended and restated in a form reasonably
satisfactory to the parties (the "Restated MeriStar OP Partnership Agreement")
shall be the limited partnership agreement of the Surviving Partnership after
completion of the transactions contemplated by this Article 3, until thereafter
amended as provided by applicable law or therein. The Restated MeriStar OP
Partnership Agreement and the MeriStar OP Certificate shall be amended in
connection with the Subsequent Contributions to reflect the change in general
partner from MeriStar to Successor MeriStar OP General Partner. The limited
partnership agreement of FelCor OP as amended and restated in a form reasonably
satisfactory to the parties (the "Restated Partnership Agreement") shall be the
limited partnership
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agreement of FelCor OP after completion of the transactions contemplated by this
Article 3, until thereafter amended as provided by applicable law or therein.
3.7 EFFECT OF THE OP MERGER ON PARTNERSHIP INTERESTS.
(a) Common Units of MeriStar OP. As of the effectiveness of the OP Merger,
by virtue of the OP Merger and without any action on the part of any holder of
MeriStar Common Units, each outstanding MeriStar Common Unit, other than those
held by FelCor or FelCor OP, shall be converted into the right to receive (i)
the number of FelCor Common Units equal to the Exchange Ratio, and (ii) cash in
an amount equal to the Cash Consideration, without interest.
(b) Class B Units of MeriStar OP. As of the effectiveness of the OP
Merger, there shall be no holders of the partnership interests in MeriStar OP
known as "Class B Units" (herein called "MeriStar Class B Units").
(c) Class C Units of MeriStar OP. As of the effectiveness of the OP
Merger, by virtue of the OP Merger and without any action on the part of any
holder of the partnership interests in MeriStar OP known as "Class C Units"
(herein called "MeriStar Class C Units"), each outstanding MeriStar Class C Unit
shall be converted into the right to receive (i) the number of units of
partnership interest in FelCor OP known as "Series C Preferred Units" (herein
called "FelCor Series C Units") equal to the Exchange Ratio, and (ii) cash in an
amount equal to the Cash Consideration, without interest.
(d) Class D Units of MeriStar OP. As of the effectiveness of the OP
Merger, by virtue of the OP Merger and without any action on the part of any
holder of the partnership interests in MeriStar OP known as "Class D Units"
(herein called "MeriStar Class D Units"), each outstanding MeriStar Class D Unit
shall be converted into the right to receive one unit of partnership interest in
FelCor OP known as "Series D Preferred Units" (herein called "FelCor Series D
Units").
(e) POP Units of MeriStar OP. As of the effectiveness of the OP Merger, by
virtue of the OP Merger and without any action on the part of any holder of the
partnership interests in MeriStar OP known as "Profits-Only Partnership Units"
(herein called "MeriStar POP Units"), each outstanding MeriStar POP Unit that is
Vested (as defined below) shall be converted into the right to receive (i) the
number of FelCor Common Units equal to the Exchange Ratio and (ii) cash in an
amount equal to the Cash Consideration, without interest. The term "Vested"
means those MeriStar POP Units that are fully vested and not subject to
forfeiture as of the Effective Time, assuming the Merger was completed, under
the respective Restricted Unit Agreements (as defined in the MeriStar
Profits-Only Operating Partnership Units Plan (the "POP Unit Plan")) dated
effective as of March 29, 2000 and April 16, 2001 between MeriStar, MeriStar OP
and each of the respective holders of such MeriStar POP Units. As of the
effectiveness of the OP Merger, by virtue of the OP Merger and without any
action on the part of any holder of the POP Units, each outstanding MeriStar POP
Unit that is not Vested shall be cancelled and cease to exist, and no
consideration shall be issued or delivered in exchange therefor.
(f) Interests of FelCor in MeriStar OP. As of the effectiveness of the OP
Merger, by virtue of the OP Merger and without any action on the part of FelCor
and FelCor OP, all MeriStar Common Units and the MeriStar GP Interest owned by
FelCor or FelCor OP in MeriStar OP as a result of the Merger or the Initial
Contribution shall remain outstanding and shall not be otherwise cancelled or
converted.
(g) Effect on MeriStar OP Units. All MeriStar Common Units (other than
those held by FelCor or FelCor OP), MeriStar Class B Units, MeriStar Class C
Units, MeriStar Class D Units, and MeriStar POP Units (collectively, the
"MeriStar OP Units") shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each such MeriStar OP Unit
shall thereafter represent the right to receive, upon making the deliveries
required by Section 3.8(a), such number of whole FelCor Common Units, FelCor
Series C Units, and FelCor Series D Units (collectively the "New FelCor OP
Units"), and certificates representing such FelCor OP Units, into which such
MeriStar OP Units were converted in accordance with Section 3.7(a)-(e) plus any
applicable Cash Consideration, without interest. The holders of such MeriStar OP
Units outstanding immediately prior to the Effective Time shall cease to have
any rights with respect to such MeriStar OP Units except as otherwise provided
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herein or by law. No fractional New FelCor OP Units shall be issued, and, in
lieu thereof, a cash payment, without interest, shall be made pursuant to
Section 3.8(c).
3.8 ISSUANCE OF NEW CERTIFICATES FOR FELCOR OP UNITS.
(a) Delivery Procedures. As soon as practicable after the effectiveness of
the OP Merger, FelCor OP shall mail to each holder of record of a MeriStar OP
Unit (a "MeriStar OP Unit Holder"), other than FelCor or FelCor OP, a
ratification and joinder agreement (a "Ratification Agreement") by which the
MeriStar OP Unit Holder ratifies and agrees to be bound by the Restated
Partnership Agreement, waives any rights they have under their exchange rights
agreements with MeriStar and MeriStar OP, and is admitted as a limited partner
in FelCor OP as a holder of the respective New FelCor OP Units which the
MeriStar OP Unit Holder is entitled to receive by virtue of the OP Merger. The
Ratification Agreement to be executed by holders of MeriStar POP Units will also
contain a waiver of any rights they have under the agreements by which their POP
Units were granted or under the POP Unit Plan. Without limitation to the rights
under Section 3.8(b), upon delivery to FelCor OP of a duly executed Ratification
Agreement, together with such other customary documents as FelCor OP may
require, the MeriStar OP Unit Holder shall be entitled to receive, with respect
to such MeriStar OP Units (i) a certificate or certificates representing that
number of whole New FelCor OP Units which such MeriStar OP Unit Holder has the
right to receive pursuant to Section 3.7, (ii) a check in payment of the Cash
Consideration, if any, without interest, which such MeriStar OP Unit Holder has
the right to receive pursuant to Section 3.7, and (iii) a check in payment of
the cash in lieu of fractional New FelCor OP Units, without interest, which such
holder is entitled to receive pursuant to Section 3.8(c). FelCor OP shall cause
all FelCor OP Units issued pursuant to the OP Merger to be duly authorized,
validly issued, fully paid and non-assessable and not subject to preemptive
rights.
(b) Distributions After Effective Time. No distributions declared or made
after the Effective Time with respect to New FelCor OP Units with a record date
after the Effective Time shall be paid to any MeriStar OP Unit Holder with
respect to New FelCor OP Units until such MeriStar OP Unit Holder executes and
delivers to FelCor OP a Ratification Agreement. Subject to the effect of
unclaimed property, escheat and other applicable laws, following delivery to
FelCor OP of any such Ratification Agreement, in addition to the consideration
required by Section 3.7, there shall be paid to the holder of the certificates
representing whole New FelCor OP Units issued in consideration therefor, without
interest, (i) at the time of such delivery, the amount of distributions with a
record date after the Effective Time theretofore paid with respect to such whole
New FelCor OP Units and (ii) at the appropriate payment date, the amount of
distributions with a record date after the Effective Time but prior to delivery
and a payment date subsequent to delivery payable with respect to such whole New
FelCor OP Units.
(c) No Fractional FelCor OP Units. Notwithstanding any other provision
hereof, no fractional New FelCor OP Units will be issued in connection with the
OP Merger. In lieu of issuance of a fractional New FelCor OP Unit, FelCor OP
shall pay each MeriStar OP Unit Holder who would otherwise be entitled to
receive a fraction of a New FelCor OP Unit, an amount in cash, without interest,
equal to the Market Price determined as of the Closing Date multiplied by the
fraction of a New FelCor OP Unit to which such holder would otherwise be
entitled.
(d) Withholding Rights. FelCor OP shall be entitled to deduct and withhold
from the consideration otherwise payable under Section 3.7 to any holder of
MeriStar OP Units, such amounts as FelCor OP is required to deduct and withhold
with respect to the making of such payment under the Code, or any provision of
state, local or foreign tax law. To the extent that amounts are so withheld by
FelCor OP, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of the MeriStar OP Units, in respect
of which such deduction and withholding was made by FelCor OP."
9. Section 7.6(b) of the Merger Agreement shall be amended to read in
its entirety as follows:
(b) Promptly after the Effective Time, FelCor shall comply with and
pay the severance and bonus arrangements of former MeriStar and MeriStar
OP employees, as described on Schedule 7.6(b) to the MeriStar Disclosure
Letter, except with respect to (i) employees who do not
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continue in good faith to perform their duties as employees through the
Closing Date and (ii) employees who are employed with the Surviving
Corporation or MeriStar Hotels & Resorts or their Subsidiaries with
substantially the same compensation and duties applicable to such
employees as of May 9, 2001; provided that FelCor shall pay prorated
bonuses for the 2001 year to employees described in clause (ii) above.
10. The parties agree to amend Section 9.5 of the Merger Agreement to
add at the end thereof the following sentence: "The parties agree that the
conditions set forth in Section 8.1 (f), (g) and (h) may not be waived."
11. Schedule 1.6(a) to the Merger Agreement is amended to read in its
entirety as set forth in the Schedule 1.6(a) attached hereto.
12. The FelCor Parties, jointly and severally, represent and warrant
to the MeriStar Parties with respect to FelCor Mergesub as follows:
(a) FelCor Mergesub is a limited liability company duly organized
and validly existing under the laws of the State of Delaware and has
conducted no business and will conduct no business prior to the Closing.
FelCor OP is the record and beneficial owner of all of the issued and
outstanding membership interests of FelCor Mergesub, free and clear of
all Liens. Copies of the organizational documents and operating
agreement for FelCor Mergesub have been previously delivered to the
MeriStar Parties.
(b) FelCor Mergesub is not a party to any other agreement, document
or contract.
(c) There are no outstanding securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any
kind to which FelCor Mergesub is a party or by which it is bound
obligating it to issue, deliver or sell, or cause to be issued,
delivered or sold, any ownership interests in FelCor Mergesub or
obligating it to issue, grant, extend or enter into any such security,
option, warrant, call, right, commitment, agreement, arrangement or
undertaking. There is no outstanding obligation of FelCor Mergesub to
repurchase, redeem or otherwise acquire any ownership interest in it.
(d) All membership interests in FelCor Mergesub have been duly
authorized, validly issued, fully paid and nonassessable and are not
subject to any preemptive rights.
(e) FelCor Mergesub has no debts or other obligations.
(f) FelCor Mergesub has the requisite power to enter into this
First Amendment and to consummate the OP Merger. The execution and
delivery of this First Amendment and the consummation of the Merger have
been duly authorized by all necessary action on the part of FelCor
Mergesub. This First Amendment has been duly executed and delivered by
FelCor Mergesub and constitutes a valid and binding obligation of FelCor
Mergesub, enforceable against FelCor Mergesub in accordance with and
subject to its terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights and
general principles of equity.
(g) FelCor Mergesub has not elected, and will not elect, to be
taxed as a corporation for federal income tax purposes under Treasury
Regulations Section 301.7701-3(c).
12. Any capitalized terms not defined in this First Amendment shall
have the meaning assigned to them in the Merger Agreement.
13. The Merger Agreement, as amended hereby, shall continue in full
force and effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the FelCor Parties, the MeriStar Parties and FelCor
Mergesub have caused this First Amendment to be signed by their respective
officers thereunto duly authorized all as of the date first written above.
ATTEST: FELCOR LODGING TRUST INCORPORATED, a Maryland
corporation
By: ------------------------------------------------- By: -------------------------------------------------
Name:
Title:
FELCOR LODGING LIMITED PARTNERSHIP, a Delaware
limited partnership
By: FelCor Lodging Trust Incorporated, its general
partner
By: ------------------------------------------------- By: -------------------------------------------------
Name:
Title:
ATTEST: MERISTAR HOSPITALITY CORPORATION, a Maryland
corporation
By: ------------------------------------------------- By: -------------------------------------------------
Name:
Title:
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MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P., a
Delaware limited partnership
By: MeriStar Hospitality Corporation , its general
partner
By: ------------------------------------------------- By: -------------------------------------------------
Name:
Title:
ATTEST: FELCOR MERGESUB, L.L.C.
By: ------------------------------------------------- By: -------------------------------------------------
Name:
Title:
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SCHEDULE 1.6(a)
DIRECTORS OF SURVIVING CORPORATION
CLASS I (TERMS EXPIRING IN 2004)
- Melinda J. Bush
- Charles A. Ledsinger, Jr.
- Robert H. Lutz, Jr.
- Michael D. Rose
- Paul W. Whetsell
CLASS II (TERMS EXPIRING IN 2002)
- Thomas J. Corcoran, Jr.
- Thomas A. McChristy
- Donald J. McNamara
- Richard C. North
CLASS III (TERMS EXPIRING IN 2003)
- Richard S. Ellwood
- Richard O. Jacobson
- Charles N. Mathewson
- Steven D. Jorns
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APPENDIX B
[LETTERHEAD OF DEUTSCHE BANC ALEX. BROWN INC.]
May 9, 2001
Board of Directors
FelCor Lodging Trust Incorporated
545 East John Carpenter Freeway
Suite 1300
Irving, TX 75062
Lady and Gentlemen:
Deutsche Banc Alex. Brown Inc. ("DBAB") has acted as financial advisor to
FelCor Lodging Trust Incorporated ("Client") in connection with the proposed
acquisition of MeriStar Hospitality Corporation (the "Company") pursuant to the
Agreement and Plan of Merger, dated as of May 9, 2001 (the "Merger Agreement"),
among Client, a Maryland corporation, and FelCor Lodging Limited Partnership, a
Delaware limited partnership ("FelCor OP" and together with Client, the "FelCor
Parties"), on the one hand, and the Company, a Maryland corporation, and
MeriStar Hospitality Operating Partnership L.P., a Delaware limited partnership
("MeriStar OP" and together with Company, the "MeriStar Parties"), on the other
hand, which provides, among other things, for the merger of the Company with and
into Client (the "Merger") and the merger of MeriStar OP with and into FelCor OP
(the "OP merger") and together with the Merger, (the "Transaction"). As set
forth more fully in the Merger Agreement, as a result of the Merger, each share
of the Common Stock, par value $0.01 per share, of the Company ("Company Common
Stock") not owned directly or indirectly by the Company or Client will be
converted into the right to receive (i) cash in the amount of $4.60 and (ii)
0.784 of one fully paid and nonassessable share of common stock par value $0.01
per share, of FelCor (together, the "Merger Consideration"). As a result of the
OP Merger, the partnership interests in MeriStar OP will be converted into
partnership interests in FelCor OP or a combination of partnership interests in
FelCor OP and cash, as provided in the Merger Agreement. The terms and
conditions of the Transaction are more fully set forth in the Merger Agreement.
You have requested DBAB's opinion, as investment bankers, as to the
fairness, from a financial point of view, to Client of the Merger Consideration
payable to the holders of Company common stock.
In connection with DBAB's role as financial advisor to Client, and in
arriving at its opinion, DBAB has reviewed certain publicly available financial
and other information concerning the Company and Client and certain internal
analyses and other information furnished to it by the Company and Client. DBAB
has also held discussions with members of the senior managements of the Company
and Client regarding the businesses and prospects of their respective companies
and the joint prospects of a combined company. In addition, DBAB has (i)
reviewed the reported prices and trading activity for Company Common Stock and
Client Common Stock, (ii) compared certain financial and stock market
information for the Company and Client with similar information for certain
other companies whose securities are publicly traded, (iii) reviewed the
financial terms of certain recent business combinations which it deemed
comparable in whole or in part, (iv) reviewed the terms of the Merger Agreement
and (v) performed such other studies and analyses and considered such other
factors as it deemed appropriate.
DBAB has not assumed responsibility for independent verification of, and
has not independently verified, any information, whether publicly available or
furnished to it, concerning the Company or Client, including, without
limitation, any financial information, forecasts or projections considered in
connection with the rendering of its opinion. Accordingly, for purposes of its
opinion, DBAB has assumed and relied upon the accuracy and completeness of all
such information and DBAB has not conducted a physical inspection of any of the
properties or assets, and has not prepared or obtained any independent
evaluation or appraisal of any of the assets or liabilities, of the Company or
Client. With respect to the financial forecasts and projections, including the
analyses and forecasts of certain cost savings, operating efficiencies,
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FelCor Lodging Trust Incorporated
May 9, 2001
Page 2
revenue effects and financial synergies expected by Client and the Company to be
achieved as a result of the Transaction (collectively, the "Synergies"), made
available to DBAB and used in its analyses, DBAB has assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the management of the Company or Client, as the case may be, as
to the matters covered thereby. In rendering its opinion, DBAB expresses no view
as to the reasonableness of such forecasts and projections, including the
Synergies, or the assumptions on which they are based. DBAB's opinion is
necessarily based upon economic, market and other conditions as in effect on,
and the information made available to it as of, the date hereof.
For purposes of rendering its opinion, DBAB has assumed that, in all
respects material to its analysis, the representations and warranties of the
FelCor Parties, and the MeriStar Parties contained in the Merger Agreement are
true and correct, the FelCor Parties and the MeriStar Parties will each perform
all of the covenants and agreements to be performed by them under the Merger
Agreement and all conditions to the obligations of each of the FelCor Parties
and the MeriStar Parties to consummate the Transaction will be satisfied without
any waiver thereof. DBAB has also assumed that all material governmental,
regulatory or other approvals and consents required in connection with the
consummation of the Transaction will be obtained and that in connection with
obtaining any necessary governmental, regulatory or other approvals and
consents, or any amendments, modifications or waivers to any agreements,
instruments or orders to which either FelCor or MeriStar is a party or is
subject or by which it is bound, no limitations, restrictions or conditions will
be imposed or amendments, modifications or waivers made that would have a
material adverse effect on FelCor or MeriStar or materially reduce the
contemplated benefits of the Transaction to FelCor.
This opinion is addressed to, and for the use and benefit of, the Board of
Directors of Client and is not a recommendation to the stockholders of Client to
approve the Transaction. This opinion is limited to the fairness, from a
financial point of view, to Client of the Merger Consideration payable to the
holders of Company common stock, and DBAB expresses no opinion as to the merits
of the underlying decision by Client to engage in the Transaction.
DBAB will be paid a fee for its services as financial advisor to Client in
connection with the Transaction, a portion of which is contingent upon
consummation of the Transaction. We are an affiliate of Deutsche Bank AG
(together with its affiliates, the "DB Group"). One or more members of the DB
Group have, from time to time, provided investment banking, commercial banking
(including extension of credit) and other financial services to Client and the
Company or their affiliates. One or more members of the DB Group have agreed to
provide financing to Client in connection with the Merger. In the ordinary
course of business, members of the DB Group may actively trade in the securities
and other instruments and obligations of Client and the Company for their own
accounts and for the accounts of their customers. Accordingly, the DB Group may
at any time hold a long or short position in such securities, instruments and
obligations.
Based upon and subject to the foregoing, it is DBAB's opinion as investment
bankers that the Merger Consideration payable to the holders of Company Common
Stock is fair, from a financial point of view, to Client.
Very truly yours,
DEUTSCHE BANC ALEX. BROWN INC.
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APPENDIX C
[LETTERHEAD OF JPMORGAN]
May 9, 2001
The Board of Directors
FelCor Lodging Trust Incorporated
545 E. John Carpenter Freeway
Suite 1300
Irving, TX 75062-3933
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point
of view, to FelCor Lodging Trust Inc. (the "Company") of the consideration to be
paid by the Company in the proposed merger (the "Merger") of the Company with
MeriStar Hospitality Corporation (the "Merger Partner"). Pursuant to the
Agreement and Plan of Merger, dated as of May 9, 2001 (the "Agreement"), between
the Company and the Merger Partner, the Merger Partner will merge with and into
the Company, with the Company being the surviving corporation, and each
outstanding share of common stock, par value $0.01 per share, of the Merger
Partner (the "Merger Partner Common Stock"), other than shares of Merger Partner
Common Stock held in treasury or owned by the Company and its affiliates, will
be converted into the right to receive $4.60 per share in cash and 0.784 shares
of the Company's common stock, par value $0.01 per share (the "Company Common
Stock"). We understand that concurrent with the Merger, the Company and the
Merger Partner will effect a merger of MeriStar Hospitality Operating
Partnership (the "MeriStar OP") with and into FelCor Lodging Limited Partnership
(the "FelCor OP"), with the FelCor OP being the survivor, and each outstanding
partnership interest in MeriStar OP will be converted into the right to receive
$4.60 in cash and 0.784 partnership interests in FelCor OP. Class D units of the
MeriStar OP, however, will be convertible one-for-one into units of FelCor OP.
In arriving at our opinion, we have (i) reviewed a draft of the Agreement
dated May 9, 2001; (ii) reviewed certain publicly available business and
financial information concerning the Merger Partner and the Company and the
industries in which they operate; (iii) compared the proposed financial terms of
the Merger with the publicly available financial terms of certain transactions
involving companies we deemed relevant and the consideration received for such
companies; (iv) compared the financial and operating performance of the Merger
Partner and the Company with publicly available information concerning certain
other companies we deemed relevant and reviewed the current and historical
market prices of the Merger Partner Common Stock and the Company Common Stock
and certain publicly traded securities of such other companies; (v) reviewed
certain internal financial analyses and forecasts prepared by the managements of
the Merger Partner and the Company relating to their respective businesses, as
well as the estimated amount and timing of the cost savings and related expenses
and synergies expected to result from the Merger (the "Synergies"); and (vi)
performed such other financial studies and analyses and considered such other
information as we deemed appropriate for the purposes of this opinion.
In addition, we have held discussions with certain members of the
management of the Company with respect to certain aspects of the Merger, and the
past and current business operations of the Merger Partner and the Company, the
financial condition and future prospects and operations of the Merger Partner
and the Company, the effects of the Merger on the financial condition and future
prospects of the Company, and certain other matters we believed necessary or
appropriate to our inquiry.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was furnished to us by the Merger Partner and the Company or
otherwise reviewed by us, and we have not assumed any responsibility or
liability therefor. We have not conducted any valuation or appraisal of any
assets or
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liabilities, nor have any such valuations or appraisals been provided to us. In
relying on financial analyses and forecasts provided to us, including the
Synergies, we have assumed that they have been reasonably prepared based on
assumptions reflecting the best currently available estimates and judgments by
management as to the expected future results of operations and financial
condition of the Merger Partner and the Company to which such analyses or
forecasts relate. We have also assumed that the Merger will have the tax
consequences described in discussions with, and materials furnished to us by,
representatives of the Company, and that the other transactions contemplated by
the Agreement will be consummated as described in the Agreement. We have relied
as to all legal matters relevant to rendering our opinion upon the advice of
counsel. We have also assumed that the definitive Agreement will not differ in
any material respects from the draft thereof furnished to us. We have further
assumed that all material governmental, regulatory or other consents and
approvals necessary for the consummation of the Merger will be obtained without
any adverse effect on the Merger Partner or the Company or on the contemplated
benefits of the Merger.
Our opinion is necessarily based on economic, market and other conditions
as in effect on, and the information made available to us as of, the date
hereof. It should be understood that subsequent developments may affect this
opinion and that we do not have any obligation to update, revise, or reaffirm
this opinion. Our opinion is limited to the fairness, from a financial point of
view, to the Company of the consideration to be paid in the proposed Merger and
we express no opinion as to the underlying decision by the Company to engage in
the Merger. We are expressing no opinion herein as to the price at which the
Company Common Stock will trade at any future time.
We have acted as financial advisor to the Company with respect to the
proposed Merger and will receive a fee from the Company for our services. Please
be advised that we are administrative agent for the Company's revolving credit
facility, and have in the past acted as the Company's lead agent for various
corporate debt facilities, corporate bonds, and asset-level debt securities
(i.e. CMBS). In the ordinary course of our businesses, we and our affiliates may
actively trade the debt and equity securities of the Company or the Merger
Partner for our own account or for the accounts of customers and, accordingly,
we may at any time hold long or short positions in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the
date hereof that the consideration to be paid by the Company in the proposed
Merger is fair, from a financial point of view, to the Company.
This letter is provided to the Board of Directors of the Company in
connection with and for the purposes of its evaluation of the Merger. This
opinion does not constitute a recommendation to any shareholder of the Company
as to how such shareholder should vote with respect to the Merger or any other
matter. This opinion may not be disclosed, referred to, or communicated (in
whole or in part) to any third party for any purpose whatsoever except with our
prior written approval. This opinion may be reproduced in full in any proxy or
information statement mailed to shareholders of the Company but may not
otherwise be disclosed publicly in any manner without our prior written
approval.
Very truly yours,
J.P. MORGAN SECURITIES, INC.
/s/ J.P. MORGAN SECURITIES, INC.
J.P. Morgan Securities, Inc.
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APPENDIX D
[LETTERHEAD OF SALOMON SMITH BARNEY INC.]
May 9, 2001
The Board of Directors
MeriStar Hospitality Corporation
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the common stock of MeriStar Hospitality Corporation
("MeriStar") of the Merger Consideration (defined below) provided for in the
Agreement and Plan of Merger, dated as of May 9, 2001 (the "Merger Agreement"),
by and among FelCor Lodging Trust Incorporated ("FelCor"), FelCor Lodging
Limited Partnership ("FelCor OP"), MeriStar and MeriStar Hospitality Operating
Partnership, L.P. ("MeriStar OP"). As more fully described in the Merger
Agreement, (i) MeriStar will be merged with and into FelCor (the "Merger") and
(ii) each outstanding share of the common stock, par value $0.01 per share, of
MeriStar ("MeriStar Common Stock") will be converted into the right to receive
(x) $4.60 in cash without interest (the "Cash Consideration") and (y) 0.784 of a
share of the common stock, par value $0.01 per share, of FelCor ("FelCor Common
Stock" and, the number of shares of FelCor Common Stock into which shares of
MeriStar Common Stock will be so converted, together with the Cash
Consideration, the "Merger Consideration"). The Merger Agreement also provides
that, concurrently with the Merger, MeriStar OP will merge with and into FelCor
OP (the "OP Merger" and, together with the Merger, the "Transaction").
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of MeriStar and certain senior officers and other representatives
and advisors of FelCor concerning the businesses, operations and prospects of
MeriStar and FelCor. We examined certain publicly available business and
financial information relating to MeriStar and FelCor as well as certain
financial forecasts and other information and data for MeriStar and FelCor which
were provided to or otherwise discussed with us by the managements of MeriStar
and FelCor, including certain information relating to the potential strategic
implications and operational benefits anticipated by the managements of MeriStar
and FelCor to result from the Transaction. We reviewed the financial terms of
the Transaction as set forth in the Merger Agreement in relation to, among other
things: current and historical market prices and trading volumes of MeriStar
Common Stock and FelCor Common Stock; the historical and projected operating
data of MeriStar and FelCor; and the financial condition and capitalization of
MeriStar and FelCor. We analyzed certain financial, stock market and other
publicly available information relating to the businesses of other companies
whose operations we considered relevant in evaluating those of MeriStar and
FelCor. In addition to the foregoing, we conducted such other analyses and
examinations and considered such other financial, economic and market criteria
as we deemed appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial forecasts and other information
and data provided to or otherwise reviewed by or discussed with us, we have been
advised by the managements of MeriStar and FelCor that such forecasts and other
information and data were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of MeriStar and
FelCor as to the future financial performance of MeriStar and FelCor and the
potential strategic implications and operational benefits anticipated to result
from the Transaction. We have assumed, with your consent, that the Transaction
will be consummated in accordance with its terms, without waiver, modification
or amendment of any material term, condition or agreement. We also have
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The Board of Directors
MeriStar Hospitality Corporation
May 9, 2001
Page 2
assumed that the Merger will be treated as a reorganization for federal income
tax purposes. We further have assumed, with your consent, that MeriStar and
FelCor were organized and have operated in conformity with the requirements for
qualification as a real estate investment trust ("REIT") for federal income tax
purposes and that the Transaction will not adversely affect the REIT status or
operations of MeriStar or FelCor. We are not expressing any opinion as to what
the value of the FelCor Common Stock actually will be when issued in the
Transaction or the prices at which the FelCor Common Stock will trade or
otherwise be transferable at any time. We have not made or been provided with an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of MeriStar or FelCor nor have we made any physical inspection of the
properties or assets of MeriStar or FelCor. In connection with our engagement,
we were not requested to, and we did not, solicit third party indications of
interest in the possible acquisition of all or a part of MeriStar. We express no
view as to, and our opinion does not address, the relative merits of the
Transaction as compared to any alternative business strategies that might exist
for MeriStar or the effect of any other transaction in which MeriStar might
engage. Our opinion is necessarily based upon information available to us, and
financial, stock market and other conditions and circumstances existing and
disclosed to us, as of the date hereof.
Salomon Smith Barney Inc. has acted as financial advisor to MeriStar in
connection with the proposed Transaction and will receive a fee for such
services, a significant portion of which is contingent upon the consummation of
the Transaction. We also will receive a fee upon delivery of this opinion. We
and our affiliates in the past have provided, and are currently providing,
services to MeriStar and its affiliates unrelated to the proposed Transaction,
for which services we and our affiliates have received and will receive
compensation. We and our affiliates also in the past have provided services to
FelCor unrelated to the proposed Transaction, for which services we and our
affiliates have received compensation. In the ordinary course of our business,
we and our affiliates may actively trade or hold the securities of MeriStar and
FelCor for our own account or for the account of our customers and, accordingly,
may at any time hold a long or short position in such securities. In addition,
we and our affiliates (including Citigroup Inc. and its affiliates) may maintain
relationships with MeriStar, FelCor and their respective affiliates.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of MeriStar in its evaluation of the
proposed Transaction, and our opinion is not intended to be and does not
constitute a recommendation to any stockholder as to how such stockholder should
vote on the proposed Transaction or as to any other matters relating to the
Transaction. Based upon and subject to the foregoing, our experience as
investment bankers, our work as described above and other factors we deemed
relevant, we are of the opinion that, as of the date hereof, the Merger
Consideration is fair, from a financial point of view, to the holders of
MeriStar Common Stock.
Very truly yours,
/s/ SALOMON SMITH BARNEY INC.
SALOMON SMITH BARNEY INC.
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APPENDIX E
FELCOR LODGING TRUST INCORPORATED
2001 RESTRICTED STOCK AND STOCK OPTION PLAN
237
FELCOR LODGING TRUST INCORPORATED
2001 RESTRICTED STOCK AND STOCK OPTION PLAN
TABLE OF CONTENTS
Section 1. Establishment, Purpose, and Effective Date of
Plan...................................................... E-2
1.1 Establishment........................................ E-2
1.2 Purpose.............................................. E-2
1.3 Effective Date....................................... E-2
Section 2. Definitions...................................... E-2
2.1 Definitions.......................................... E-2
2.2 Gender and Number.................................... E-3
Section 3. Eligibility and Participation.................... E-3
3.1 Eligibility and Participation........................ E-3
Section 4. Administration................................... E-3
4.1 Administration....................................... E-3
Section 5. Stock Subject to Plan............................ E-3
5.1 Number............................................... E-3
5.2 Lapsed Awards........................................ E-3
5.3 Adjustment in Capitalization......................... E-3
Section 6. Shareholder Approval and Duration of Plan........ E-4
6.1 Shareholder Approval................................. E-4
6.2 Duration of Plan..................................... E-4
Section 7. Stock Options.................................... E-4
7.1 Grant of Options..................................... E-4
7.2 Option Agreement..................................... E-4
7.3 Option Price......................................... E-4
7.4 Duration of Options.................................. E-4
7.5 Exercise of Options.................................. E-5
7.6 Payment.............................................. E-5
7.7 Restrictions on Stock Transferability................ E-5
7.8 Termination of Employment Due to Death or
Disability............................................. E-5
7.9 Termination of Employment Other than for Death or
Disability............................................. E-5
7.10 Nontransferability of Options........................ E-5
7.11 Cancellation......................................... E-5
Section 8. Restricted Stock................................. E-6
8.1 Grant of Restricted Stock............................ E-6
8.2 Transferability...................................... E-6
8.3 Other Restrictions................................... E-6
8.4 Voting Rights........................................ E-6
8.5 Dividends and Other Distributions.................... E-6
8.6 Termination of Employment............................ E-6
Section 9. Rights of Employees.............................. E-6
9.1 Employment........................................... E-6
Section 10. Amendment, Modification and Termination of
Plan...................................................... E-6
10.1 Amendment, Modification, and Termination of Plan..... E-6
Section 11. Miscellaneous Provisions........................ E-6
11.1 Tax Withholding...................................... E-6
11.2 Stock Withholding Elections.......................... E-7
11.3 Severability......................................... E-7
11.4 Notice............................................... E-7
Section 12. Indemnification................................. E-7
12.1 Indemnification...................................... E-7
Section 13. Requirements of Law............................. E-8
13.1 Requirements of Law.................................. E-8
13.2 Governing Law........................................ E-8
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FELCOR LODGING TRUST INCORPORATED
2001 RESTRICTED STOCK AND STOCK OPTION PLAN
SECTION 1. Establishment, Purpose, and Effective Date of Plan
1.1 Establishment. FelCor Lodging Trust Incorporated, a Maryland
corporation, hereby establishes the "FELCOR LODGING TRUST INCORPORATED 2001
RESTRICTED STOCK AND STOCK OPTION PLAN" (THE "PLAN") for Independent Directors,
executive officers and key employees. The Plan permits the grant of stock
options and restricted stock as a payout media for payments under the plan.
1.2 Purpose. The purpose of the Plan is to advance the interests of the
Company, by encouraging and providing for the acquisition of an equity interest
in the success of the Company by Independent Directors, executive officers and
key employees, by providing additional incentives and motivation toward superior
performance of the Company, and by enabling the Company to attract and retain
the services of Independent Directors, executive officers and key employees upon
whose judgment, interest, and special effort the successful conduct of its
operations is largely dependent.
1.3 Effective Date. The Plan shall become effective immediately upon its
adoption by the Board of Directors of the Company ("Effective Date"), although
it is subject to shareholder approval as provided in Section 6.1.
SECTION 2. Definitions
2.1 Definitions. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "Award" means, collectively, each Option, or Restricted Stock,
granted under this Plan except that where it shall be appropriate to
identify the specific type of Award, reference shall be made to the
specific type of Award.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Compensation Committee of the Board;
provided, however, that for any grant to an Independent Director, the
remaining members of the Board shall serve as the Compensation Committee
with respect to such grant, including, but not limited to, the approval of
the grant. The Board, as a whole, may take any action which the Committee
is authorized to take hereunder.
(e) "Company" means FelCor Lodging Trust Incorporated, a Maryland
corporation.
(f) "Disability" means an individual who is unable to engage in any
substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
which has lasted, or can be expected to last, for a continuous period of
not less than twelve (12) months.
(g) "Employee" means an employee (including officers and directors who
are also employees) of the Company or its subsidiaries, affiliates
(including partnerships) or any branch or division thereof.
(h) "Fair Market Value" of a share of Stock means the reported closing
sales price of the Stock on the New York Stock Exchange Composite Tape on
that date, or if no closing price is reported on that date, on the last
preceding date on which such closing price of the Stock was so reported. If
the Stock is not traded on the New York Stock Exchange at the time a
determination of its Fair Market Value is required to be made hereunder,
its Fair Market Value shall be deemed to be equal to the average between
the closing bid and asked prices of the Stock on the most recent date on
which the Stock was publicly traded. In the event the Stock is not publicly
traded at the time a determination of
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its value is required to be made hereunder, the determination of its Fair
Market Value shall be made by the Committee in such manner as it deems
appropriate.
(i) "Independent Director" means a director of the Company who is not
an Employee.
(j) "Option" means the right to purchase Stock at a stated price for a
specified period of time. For purposes of the Plan, an Option may be either
(i) an "incentive stock option" within the meaning of Section 422 of the
Code or (ii) a "nonstatutory stock option."
(k) "Participant" means any Employee or Independent Director
designated by the Committee to participate in the Plan.
(l) "Period of Restriction" means the period during which the transfer
of shares of Restricted Stock is restricted pursuant to Section 8 of the
Plan.
(m) "Restricted Stock" means Stock granted to a Participant pursuant
to Section 8 of the Plan.
(n) "Stock" means the common stock of the Company, par value of $.01.
2.2 Gender and Number. Except when otherwise indicated by the context,
words in the masculine gender when used in the Plan shall include the feminine
gender, the singular shall include the plural, and the plural shall include the
singular.
SECTION 3. Eligibility and Participation
3.1 Eligibility and Participation. Participants in the Plan shall be
selected by the Committee from among the Independent Directors and Employees
who, in the opinion of the Committee, are in a position to contribute materially
to the Company's continued growth and development and to its long-term financial
success.
SECTION 4. Administration
4.1 Administration. The Committee shall be responsible for the
administration of the Plan. The Committee, by majority action thereof, is
authorized to interpret the Plan, to prescribe, amend, and rescind rules and
regulations relating to the Plan, to provide for conditions and assurances
deemed necessary or advisable to protect the interests of the Company, and to
make all other determinations necessary or advisable for the administration of
the Plan. Determinations, interpretations, or other actions made or taken by the
Committee pursuant to the provisions of the Plan shall be final and binding and
conclusive for all purposes and upon all persons whomsoever.
SECTION 5. Stock Subject to Plan
5.1 Number. The total number of shares of Stock subject to Awards under
the Plan may not exceed 1,000,000, subject to adjustment upon the occurrence of
any of the events indicated in Section 5.3 hereof. The shares to be delivered
under the Plan may consist, in whole or in part, of authorized but unissued
Stock or treasury Stock, not reserved for any other purpose. Without limitation,
no officer of the Company or other person whose compensation may be subject to
the limitations on deductibility under Section 162(m) of the Code shall be
eligible to receive Awards pursuant to this Plan in excess of 250,000 shares of
Common Stock in any fiscal year (the "Section 162(m) Maximum").
5.2 Lapsed Awards. If any Award granted under the Plan terminates,
expires, lapses or is canceled for any reason, any shares of Stock subject to
such Award again shall be available for the grant of an Award hereunder. Without
limitation, the Committee, with the consent of the affected Optionee, shall have
the authority to effect the cancellation of any or all outstanding Options of
such Optionee, and to grant, in substitution, to such Optionee new Options
covering the same or different number of Shares.
5.3 Adjustment in Capitalization. In the event of any change in the
outstanding shares of Stock that occurs after the Effective Date by reason of a
Stock dividend or split, recapitalization, merger,
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consolidation, combination, exchange of shares, or other similar corporate
change, the aggregate number of shares of Stock subject to the Plan and to each
Award hereunder, and to the stated Option price (if any) of each Award, shall be
adjusted appropriately by the Committee or the Board, whose determination shall
be conclusive; provided, however, that fractional shares shall be rounded to the
nearest whole share. In such event, the Committee or the Board also shall have
discretion to make appropriate adjustments in the number and type of shares
subject to an Award of Restricted Stock under the Plan pursuant to the terms of
such an Award. In the event of a merger or consolidation where the Company is
not the surviving corporation, the surviving corporation shall be required to
assume the outstanding Awards which have not been canceled, and the Committee,
in its sole discretion, shall adjust the number of shares, and the Option price
(if any), so as to neither reduce or enlarge the rights of the Participant,
including, but not limited to, dividing the shares and the Option price (if any)
by the exchange ratio.
SECTION 6. Shareholder Approval and Duration of Plan
6.1 Shareholder Approval. All Awards granted under this Plan are subject
to, and may not be exercised before, and will be rescinded and become void in
the absence of, the approval of this Plan by a majority of the shareholders
voting thereon at a meeting of shareholders, at which a quorum is present, held
prior to the first anniversary date of the Board meeting held to approve this
Plan.
6.2 Duration of Plan. The Plan shall remain in effect, subject to the
Board's right to earlier terminate pursuant to Section 10 hereof, until all
Stock subject to it shall have been purchased or acquired pursuant to the
provisions hereof. Notwithstanding the foregoing, no Option may be granted under
the Plan on or after the tenth (10th) Anniversary of the Effective Date.
SECTION 7. Stock Options
7.1 Grant of Options. Subject to the provisions of Sections 5 and 6,
Options may be granted to Participants at any time and from time to time as
shall be determined by the Committee, and for all purposes hereof, the date of
such grant shall be the date on which the Committee takes formal action to grant
an Option, provided that it is followed, as soon as reasonably practicable, by
written notice to the person receiving the Option. The Committee shall have
complete discretion in determining the number of Options granted to each
Participant and the terms and provisions thereof. The Committee may grant any
type of Option to purchase Stock that is permitted by law at the time of grant;
provided, however, that the aggregate Fair Market Value (determined at the time
the Option is granted) of the Stock, with respect to which all incentive stock
options granted under any plan of the Company are exercisable for the first time
by a Participant during any calendar year, may not exceed $100,000. Nothing in
this Section 7 of the Plan shall be deemed to prevent the grant of nonstatutory
stock options in amounts that exceed the maximum established by Section 422 of
the Code.
7.2 Option Agreement. Each Option shall be evidenced by an Option
agreement that shall specify the type of Option granted, the Option price, the
duration of the Option, the number of shares of Stock to which the Option
pertains, and such other provisions as the Committee shall determine.
7.3 Option Price. The Option price of each share of Stock subject to each
Option granted pursuant to this Plan shall be determined by the Committee at the
time the Option is granted and, in the case of incentive stock options, shall
not be less then 100% of the Fair Market Value of a share of Stock on the date
the Option is granted, as determined by the Committee. In the case of incentive
stock options granted to any person who owns, directly or indirectly, Stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of Stock ("Ten Percent Owner"), the Option price shall not be less than
110% of the Fair Market Value of a share of Stock on the date the Option is
granted. The Option price of each share of Stock subject to a nonstatutory stock
option under this Plan shall be determined by the Committee, in its sole
discretion, prior to granting the Option.
7.4 Duration of Options. Each Option shall expire at such time as the
Committee shall determine at the time it is granted, provided, however, that no
incentive stock option shall be exercisable later than
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ten (10) years from the date of its grant, and no incentive stock option granted
to a Ten Percent Owner shall be exercisable later than five (5) years from the
date of its grant.
7.5 Exercise of Options. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, which need not be the same for all
Participants. Unless otherwise expressly provided in the Option, no Option may
be exercised within six (6) months after the date of grant. Each Option that is
intended to qualify as an incentive stock option pursuant to Section 422 of the
Code shall comply with the applicable provisions of the Code pertaining to such
Options. Without limitation, the Committee may, in its sole discretion,
accelerate the date on which any Option may be exercised, or on which
restrictions on Restricted Stock shall lapse.
7.6 Payment. The Option price of Stock acquired upon exercise of any
Option, and applicable withholding as described in Sections 11.1 and 11.2, shall
be paid in full on the date of exercise, by certified or cashier's check, by
wire transfer, by money order, through a broker assisted exercise, with Stock
(but with Stock only if expressly permitted by the terms of the Option), or by a
combination of the above. If the Option Price is permitted to be, and is, paid
in whole or in part with Stock, the value of the Stock surrendered shall be its
Fair Market Value on the date surrendered. The proceeds from payment of Option
prices shall be added to the general funds of the Company and shall be used for
general corporate purposes. For purposes of this Section 7.6, "broker assisted
exercise" shall mean a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable written instructions to (a)
a Committee designated brokerage firm to effect the immediate sale of the shares
and remit to the Company, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate Option price plus all applicable
withholding and employment taxes required, and (b) the Committee to deliver the
certificates for the shares directly to such brokerage firm in order to complete
the sale.
7.7 Restrictions on Stock Transferability. The Committee shall impose
such restrictions on any shares of Stock acquired pursuant to the exercise of an
Option under the Plan as it may deem advisable, including, without limitation,
restrictions under applicable federal securities law, under the requirements of
any stock exchange upon which such shares of Stock are then listed, and under
any blue sky or state securities laws applicable to such shares.
7.8 Termination of Employment Due to Death or Disability. Unless
otherwise expressly provided in the Option, if the employment of a Participant
is terminated by reason of death or Disability, the rights under any then
outstanding Option shall terminate upon the first to occur of (i) the expiration
date of the Option or (ii) the first anniversary of such date of termination of
employment.
7.9 Termination of Employment Other than for Death or Disability. Unless
otherwise expressly provided in the Option, if the employment of the Participant
shall terminate for any reason other than death or Disability, the rights under
any then outstanding Option shall terminate upon the first to occur of (i) the
expiration date of the Option or (ii) ninety (90) days after such date of
termination of employment.
7.10 Nontransferability of Options. Unless otherwise expressly provided
in the Option, no Option granted under the Plan may be sold, transferred
pledged, assigned, or otherwise alienated or hypothecated, otherwise than by
will or by the laws of descent and distribution. Further, all Options granted to
a Participant under the Plan shall be exercisable during his lifetime only by
such Participant.
7.11 Cancellation. Unless otherwise expressly provided in the Option of
reference, in the event of a merger or consolidation where the Company is not
the surviving corporation (or survives only as the 80% or greater owned
subsidiary of another corporation), the Committee, in its sole discretion may
cancel, by giving written notice (a "Cancellation Notice"), effective
immediately prior to the consummation of such transaction, all or any of the
vested portion of any, or all, Options that remain unexercised on such date.
Such Cancellation Notice shall be given a reasonable period of time (but not
less than 15 days) prior to
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the proposed date of such cancellation, and may be given either before or after
shareholder approval (if any is required) of the transaction.
SECTION 8. Restricted Stock
8.1 Grant of Restricted Stock. Subject to the provisions of Sections 5
and 6, the Committee, at any time and from time to time, may grant shares of
Restricted Stock under the Plan to such Participants and in such amounts as it
shall determine. Each grant of Restricted Stock shall be evidenced by a
Restricted Stock agreement. Without limitation, the Committee may accelerate the
date on which restrictions lapse with respect to any Restricted Stock.
8.2 Transferability. Except as provided in Sections 8.6 and 8.7 hereof,
the shares of Restricted Stock granted hereunder may not be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated for such period of
time as shall be determined by the Committee and shall be specified in the
Restricted Stock agreement, or upon earlier satisfaction of other conditions as
specified by the Committee in its sole discretion and set forth in the
Restricted Stock agreement.
8.3 Other Restrictions. The Committee may impose such other restrictions
on any shares of Restricted Stock granted pursuant to the Plan as it may deem
advisable including, without limitation, restrictions under applicable federal
or state securities laws, and may legend the certificates representing
Restricted Stock to give appropriate notice of such restrictions.
8.4 Voting Rights. Participants holding shares of Restricted Stock
granted hereunder may exercise full voting rights with respect to those shares
during the Period of Restriction.
8.5 Dividends and Other Distributions. During the Period of Restriction,
Participants holding shares of Restricted Stock granted hereunder shall be
entitled to receive all cash dividends distributed with respect to those shares
while they are so held.
8.6 Termination of Employment. Unless otherwise expressly provided in the
Restricted Stock agreement, in the event that a Participant terminates his
employment with the Company for any reason during the Period of Restriction
(including death), then any shares of Restricted Stock still subject to
restrictions at the date of such termination automatically shall be forfeited.
SECTION 9. Rights of Employees
9.1 Employment. Nothing in the Plan shall interfere with or limit in any
way the right of the Company to terminate any Participant's employment at any
time, nor confer upon any Participant any right to continue in the employ of the
Company.
SECTION 10. Amendment, Modification and Termination of Plan
10.1 Amendment, Modification, and Termination of Plan. The Board at any
time may terminate, and from time to time may amend or modify the Plan, and may
amend or modify Awards hereunder; provided, however, that no amendment of the
Plan or of any Award hereunder, without approval of the shareholders within one
year after the adoption of such amendment, may (a) increase the aggregate number
of shares of Stock that may be issued under the Plan; (b) extend the term of the
Plan; or (e) materially modify the requirements as to eligibility to receive
Awards under the Plan. No amendment, modification, or termination of the Plan
shall in any manner adversely affect any Award theretofore granted under the
Plan, without the consent of the affected Participant(s).
SECTION 11. Miscellaneous Provisions
11.1 Tax Withholding. Without limitation, on the date an Award is taken
into a Participant's income, the Company shall have the right to withhold, or to
require a Participant to remit to the Company, an amount sufficient to satisfy
the Company's resulting federal, state, and local withholding and employment tax
requirements with respect to such Award.
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11.2 Stock Withholding Elections. With the consent of the Committee, or
as expressly provided under the terms of the Award, a Participant may make an
irrevocable election to (a) have shares of Stock otherwise issuable thereunder
withheld, or (b) tender to the Company shares of Stock then held by the
Participant (whether received pursuant to (i) or (ii) or in any other
transaction) having an aggregate Fair Market Value sufficient to satisfy the
Company's minimum total federal, state and local income and employment tax
withholding obligations associated with the transaction. Such elections, if
available, must be made by a Participant on or prior to the tax date.
11.3 Severability. If any provision of this Plan, or any Award, is held
to be illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining provisions of this Plan or any Award, but such provision
shall be fully severable, and the Plan or Award, as applicable, shall be
construed and enforced as if the illegal or invalid provision had never been
included in the Plan or Award, as applicable.
11.4 Notice. Whenever any notice is required or permitted under this
Plan, such notice must be in writing and personally delivered or sent by mail or
delivery by a nationally recognized courier service. Any notice required or
permitted to be delivered under this Plan shall be deemed to be delivered on the
date on which it is personally delivered, or, if mailed, whether actually
received or not, on the third Business Day after it is deposited in the United
States mail, certified or registered, postage prepaid, addressed to the person
who is to receive it at the address that such person has previously specified in
accordance with this Subsection, or, if by courier, seventy-two (72) hours after
it is sent, addressed as described in this Subsection. The Company or the
Participant may change, at any time and from time to time, by written notice to
the other, the address that it or he had previously specified for receiving
notices; provided further, that a Participant who is not an Employee must file
such written notice with the Committee. Until changed in accordance with this
Plan, the Company and the Participant shall be deemed to have specified as its
and his address for receiving notices (i) as to the Company, the principal
executive offices of the Company, and (ii) as to the Participant, (A) where the
Participant is an Employee, the most current address of the Participant set
forth in the Company's employment records, and (B) where Participant is not an
Employee, the address set forth in the most recent notice. Any person entitled
to notice under this Plan may waive such notice. Without limiting the generality
of the foregoing, for all purposes hereof, the address of the Company shall be
the address of the Committee.
SECTION 12. Indemnification
12.1 Indemnification. Each person who is or shall have been a member of
the Committee or of the Board shall be indemnified and held harmless by the
Company against and from any loss, cost, liability or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit or proceeding to which he may be a party or in which he
may be involved by reason of any action taken or failure to act under the Plan
made in good faith and against and from any and all amounts paid by him in
settlement thereof, with the Company's approval, or paid by him in satisfaction
of any judgment in any such action, suit or proceeding against him, provided he
shall give the Company an opportunity, at its own expense, to handle and defend
the same before he undertakes to handle and defend it on his own behalf. The
foregoing right of indemnification shall not apply to any acts of willful
misconduct by any member of the Committee or the Board. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification to
which such persons may be entitled under the Company's Charter or Bylaws, as a
matter of law, or otherwise, or any power that the Company may have to indemnify
them or hold them harmless.
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244
SECTION 13. Requirements of Law
13.1 Requirements of Law. The granting of Awards and the issuance of
shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
13.2 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Maryland.
FELCOR LODGING TRUST INCORPORATED
By:
------------------------------------
Name: Lawrence D. Robinson
Title: Executive Vice President &
General Counsel
E-8
245
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING ANY
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 20, 2001
PROSPECTUS SUPPLEMENT
(TO JOINT PROXY STATEMENT/PROSPECTUS DATED JULY 20, 2001)
FELCOR LODGING LIMITED PARTNERSHIP
COMMON UNITS OF LIMITED PARTNERSHIP INTEREST
SERIES C PREFERRED UNITS OF LIMITED PARTNERSHIP INTEREST
SERIES D PREFERRED UNITS OF LIMITED PARTNERSHIP INTEREST
This prospectus supplement relates to the issuance by us, FelCor Lodging
Limited Partnership, or FelCor Partnership, of units of limited partnership
interest to holders of units of limited partnership interest in MeriStar
Hospitality Operating Partnership, L.P., or MeriStar Partnership. This issuance
will result from the merger of one of our wholly-owned subsidiaries with and
into MeriStar Partnership under a merger agreement. After this partnership
merger, we will own, either directly or indirectly, all of the interests in
MeriStar Partnership. MeriStar Partnership will be renamed "FelCor Hospitality
Operating Partnership, L.P."
The partnership merger is conditioned on the completion of the merger of
MeriStar Partnership's general partner, MeriStar Hospitality Corporation, or
MeriStar, with and into our general partner, FelCor Lodging Trust Incorporated,
or FelCor, under the same merger agreement. The completion of that merger and
the partnership merger are subject to satisfaction of a number of conditions,
including the approvals of the common stockholders of both FelCor and MeriStar.
FelCor and MeriStar have mailed to their common stockholders the accompanying
joint proxy statement/prospectus to obtain their approval of the merger
agreement and the merger. No vote or consent of our limited partners or of the
limited partners of MeriStar Partnership is required or being solicited to
complete the merger or the partnership merger.
In the partnership merger:
- each common unit in MeriStar Partnership, other than units held by FelCor
and its subsidiaries, will be exchanged for $4.60 in cash and 0.784 of
our common units;
- each Class C preferred unit in MeriStar Partnership will be exchanged for
$4.60 in cash and 0.784 of our Series C preferred units;
- each Class D preferred unit in MeriStar Partnership will be exchanged for
one of our Series D preferred units;
- each profits-only partnership unit in MeriStar Partnership, other than
unvested units, will be exchanged for $4.60 in cash and 0.784 of our
common units, and any unvested units will be canceled;
- each common unit in MeriStar held by FelCor and its subsidiaries will
remain outstanding; and
- cash will be paid instead of issuing fractional units.
There is currently no established trading market for any of our units of
limited partnership interest. We do not expect that a trading market for the
units will develop following the completion of the merger.
WE ENCOURAGE YOU TO READ THIS ENTIRE PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS CAREFULLY.
---------------------
FOR A DISCUSSION OF MATERIAL RISK FACTORS, SEE "SUPPLEMENTAL RISK FACTORS"
BEGINNING ON PAGE S-16 OF THIS SUPPLEMENT AND "RISK FACTORS" BEGINNING ON PAGE
27 OF THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this prospectus supplement is , 2001.
246
TABLE OF CONTENTS
PAGE
----
Summary..................................................... S-1
The Partnerships.......................................... S-1
The Partnership Merger.................................... S-2
Unaudited Pro Forma Condensed Combined Financial Data..... S-8
Selected Historical Consolidated Financial Information.... S-10
Equivalent Per Unit Data.................................. S-14
Requests for Incorporated Information....................... S-15
Supplemental Risk Factors................................... S-16
Management's Discussion and Analysis of Financial Condition
and Results of Operations of FelCor Partnership........... S-19
Business of FelCor Partnership.............................. S-19
Management's Discussion and Analysis of Financial Condition
and Results of Operations of MeriStar Partnership......... S-20
General................................................... S-20
Financial Condition....................................... S-21
Results of Operations..................................... S-21
Liquidity and Capital Resources........................... S-25
Business of MeriStar Partnership............................ S-27
General................................................... S-27
Acquisition Strategy...................................... S-27
The Intercompany Agreement................................ S-28
Competition............................................... S-29
Employees................................................. S-29
Franchises................................................ S-29
Governmental Regulation................................... S-30
Properties................................................ S-31
Legal Proceedings......................................... S-36
Management................................................ S-36
The Partnership Merger...................................... S-37
General................................................... S-37
Contributions by FelCor................................... S-37
Treatment of MeriStar Partnership Units in the Partnership
Merger................................................. S-37
Issuance of Our Units and Payment of Cash Consideration... S-38
Distributions Prior to Closing............................ S-38
Regulatory Approvals...................................... S-39
Accounting Treatment...................................... S-39
Restrictions on Resales by Affiliates..................... S-39
No Appraisal Rights....................................... S-39
Comparative Distribution Information........................ S-40
Unaudited Pro Forma Combined Financial Information.......... S-42
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PAGE
----
Description of the Partnership Agreement and Units of FelCor
Partnership............................................... S-60
Management................................................ S-60
Transferability of Interests.............................. S-60
Capital Contributions..................................... S-60
Operations................................................ S-60
Term...................................................... S-61
Capitalization............................................ S-61
Issuance of Partnership Interests......................... S-61
Outstanding Units of FelCor Partnership................... S-61
New Series C and D Preferred Units........................ S-64
Indemnification........................................... S-66
Comparison of Unitholder Rights............................. S-66
Issuance of Additional Partnership Interests.............. S-67
Distributions............................................. S-67
Redemption................................................ S-68
Transfers................................................. S-69
Amendment of the Partnership Agreements................... S-70
Sale of Substantially All of the Partnership Assets....... S-72
Meetings.................................................. S-72
United States Federal Income Tax Considerations............. S-73
Overview.................................................. S-73
Tax Status of FelCor Partnership and MeriStar
Partnership............................................ S-74
Tax Consequences of the Partnership Merger to MeriStar
Unitholders............................................ S-75
Tax Consequences of the Partnership Merger to FelCor
Partnership and MeriStar Partnership................... S-83
Effect of Subsequent Events on Holders of FelCor
Partnership Units...................................... S-83
Tax Consequences of Ownership of FelCor Partnership Units
After the Partnership Merger........................... S-85
Legal Matters............................................... S-91
Experts..................................................... S-91
Where Can You Find More Information......................... S-92
Incorporation of Documents by Reference................... S-92
What Information You Should Rely On......................... S-93
Index to Financial Statements of MeriStar Partnership....... F-1
This prospectus supplement contains registered trademarks and servicemarks
owned or licensed by companies other than MeriStar Partnership or us, including
but not limited to Best Western(R), Bristol House(R), Courtyard by Marriott(R),
Crowne Plaza(R), Disney(R), Doral(R), Doubletree(R), Doubletree Guest Suites(R),
Embassy Suites(R), Fairfield Inn(R), Four Points by Sheraton(R), Hampton Inn(R),
Hampton Inn & Suites(R), Harvey Hotel(R), Hilton(R), Hilton HHonors(R), Holiday
Inn(R), Holiday Inn Express(R), Holiday Inn Select(R), Homewood Suites(R) by
Hilton, Howard Johnson(R), Inter-Continental(R), Marriott(R), Radisson(R),
Ramada(R), Renaissance(R), Sheraton(R), Sheraton Suites(R), Walt Disney
World(R), Westin(R) and Wyndham(R).
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248
SUMMARY
This summary highlights selected information from this prospectus
supplement and the accompanying joint proxy statement/prospectus. This summary
does not contain all of the information that may be important to you. We
encourage you to carefully read this entire prospectus supplement, the
accompanying joint proxy statement/prospectus and the documents to which we
refer you. Unless otherwise specified, references to "we," "us" or "our" refer
to FelCor Lodging Limited Partnership, and references to "MeriStar Partnership"
refer to MeriStar Hospitality Operating Partnership, L.P. "On a pro forma basis"
refers to the pro forma adjustments set forth in the "Unaudited Pro Forma
Combined Financial Information" beginning on page S-42 of this prospectus
supplement. For more information about us, see "Where You Can Find More
Information" beginning on page S-92. Some items in this summary refer to the
pages where that subject is discussed more fully.
THE PARTNERSHIPS
FELCOR LODGING LIMITED PARTNERSHIP
545 E. John Carpenter Frwy., Suite 1300
Irving, Texas 75062
Telephone: (972) 444-4900
FelCor Lodging Limited Partnership, a Delaware limited partnership,
principally is engaged in acquiring, owning, and leasing hotels and, on June 30,
2001, had ownership interests in 185 hotels in the United States and Canada,
with nearly 50,000 rooms and suites. Of these hotels, we own a 100% interest in
160 hotels, a 90% or greater interest in entities owning seven hotels, a 60%
interest in entities owning two hotels and a 50% interest in separate entities
owning 16 hotels. Fifteen of our hotels have been designated as held for sale.
We own the largest number of Embassy Suites, Crowne Plaza, Holiday Inn and
independently-owned Doubletree-branded hotels in the world. The controlling
interest in us is owned by FelCor Lodging Trust Incorporated, our sole general
partner. FelCor is one of the nation's largest hotel real estate investment
trusts and owns substantially all of its assets and conducts all of its
operations through us.
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Telephone: (202) 965-4455
MeriStar Hospitality Operating Partnership, L.P., a Delaware limited
partnership, owns a portfolio of primarily upscale, full-service hotels,
diversified geographically as well as by franchise and brand affiliations, in
the United States and Canada. MeriStar Partnership is the operating partnership
of MeriStar Hospitality Corporation, a real estate investment trust, which
operates all of its business through this operating partnership. MeriStar is the
sole general partner of, and controls, MeriStar Partnership. As of June 30,
2001, MeriStar Partnership owned 113 hotels with 28,877 rooms. The hotels are
located in major metropolitan areas or rapidly growing secondary markets and are
well located within these markets. A majority of the hotels are operated under
nationally recognized brand names such as Hilton, Sheraton, Westin, Marriott,
Radisson, Doubletree and Embassy Suites.
THE COMBINED PARTNERSHIPS
Following the partnership merger, on a consolidated basis, we and our new
subsidiary, MeriStar Partnership, will have ownership interests in 298 hotels
and approximately 78,000 rooms located in 39 states and Canada. Based on the per
share closing price of FelCor's common stock on , 2001, the lastest
practicable date before the mailing of this prospectus supplement, we, on a
consolidated basis subsequent to the partnership merger, are expected to have an
implied equity market capitalization of approximately $ billion, with total
debt of approximately $ billion. After the partnership merger, we have
geographic concentrations in Texas with 54 hotels, Florida with 37 hotels and
California with 32 hotels.
S-1
249
THE PARTNERSHIP MERGER
GENERAL
This prospectus supplement relates to the issuance of our units of limited
partnership interest to the unitholders of MeriStar Partnership as a result of
the merger of our wholly-owned subsidiary with and into MeriStar Partnership.
MeriStar Partnership will survive the partnership merger as one of our
subsidiaries. After the partnership merger, we will own all of the interests in
MeriStar Partnership, either directly or through intervening subsidiaries.
The partnership merger is governed by a merger agreement among FelCor,
MeriStar, MeriStar Partnership and us, a copy of which is attached as Appendix A
to the accompanying joint proxy statement/prospectus. We urge you to read
carefully the merger agreement.
The partnership merger is conditioned on the completion of the merger of
MeriStar with and into FelCor under the merger agreement. The completion of that
merger and the partnership merger are subject to satisfaction of a number of
conditions, including the approvals of the common stockholders of both FelCor
and MeriStar. The boards of directors of FelCor and MeriStar have approved and
recommended the merger agreement and the merger for adoption by the common
stockholders of FelCor and MeriStar. They have also caused MeriStar and FelCor,
acting as general partners of MeriStar Partnership and us, to approve the
partnership merger. No vote or approval of our limited partners or the limited
partners of MeriStar Partnership is required or being solicited to complete the
partnership merger.
FelCor and MeriStar have mailed to their respective common stockholders the
accompanying joint proxy statement/prospectus to obtain their approval of the
merger agreement and the merger. You should carefully review the joint proxy
statement/prospectus for additional information relating in particular to
FelCor, MeriStar, the merger and the merger agreement.
WHAT MERISTAR UNITHOLDERS WILL RECEIVE (SEE PAGE S-37)
The terms of the partnership merger, including the partnership merger
consideration, were determined through an arms-length negotiation. In the
partnership merger:
- each common unit in MeriStar Partnership, other than units held by FelCor
and its subsidiaries, will be exchanged for $4.60 in cash and 0.784 of
our common units;
- each Class C preferred unit in MeriStar Partnership will be exchanged for
$4.60 in cash and 0.784 of our Series C preferred units;
- each Class D preferred unit in MeriStar Partnership will be exchanged for
one of our Series D preferred units;
- each profits-only partnership unit in MeriStar Partnership, other than
unvested units, will be exchanged for $4.60 in cash and 0.784 of our
common units, and any unvested units will be cancelled;
- each common unit in MeriStar held by FelCor and its subsidiaries will
remain outstanding; and
- cash will be paid instead of issuing fractional units.
There is currently no established trading market for any of our units of
limited partnership. We do not expect that a trading market for the units will
develop following the completion of the merger. Our limited partnership
agreement prohibits transfers of our units of limited partnership interest
without the consent of FelCor, our general partner.
S-2
250
SUMMARY OF THE TERMS OF OUR UNITS (SEE PAGE S-60)
Following the partnership merger, we will be governed by our Second Amended
and Restated Agreement of Limited Partnership.
COMMON UNITS
Units to be Issued.................. 2,769,305 of our common units of
limited partnership interest will be
issued in the partnership merger.
Cash Distributions.................. Holders of common units will be
entitled to receive distributions in an
amount per unit equal to the cash
dividends paid per share of FelCor
common stock. We will pay these
distributions simultaneously with
dividends on FelCor common stock. Our
current quarterly distribution rate is
$0.55 per common unit. On a pro forma
basis, this rate would equal $0.43 for
each 0.784 of our common units issued
in the partnership merger in exchange
for an outstanding common unit of
MeriStar Partnership. MeriStar
Partnership's current quarterly
distribution rate is $0.505 per common
unit.
Optional Redemption................. Holders of common units will be
entitled to have us redeem each common
unit issued to them in the partnership
merger for an amount of cash equal to
the then average market price of a
share of FelCor common stock, or, at
FelCor's option, one share of FelCor
common stock.
Voting Rights....................... Management authority is vested in
FelCor, the sole general partner. The
holders of common units will only be
entitled to vote under limited
circumstances.
SERIES C PREFERRED UNITS
Units to be Issued.................. 755,954 of our Series C preferred units
of limited partnership interest
Cash Distributions.................. As is the case with current holders of
MeriStar Partnership Class C units,
holders of Series C preferred units
will be entitled to receive a quarterly
non-cumulative preferred distribution
equal to $0.5575 per unit until the
distribution rate on our common units
exceeds $0.5575 per unit. On a pro
forma basis, this distribution rate
would equal $0.437 for each 0.784 of
our Series C preferred units issued in
the partnership merger in exchange for
an outstanding Class C unit of MeriStar
Partnership.
Liquidation Preference.............. Holders of Series C preferred units
will not be entitled to preferred
distributions upon our liquidation,
dissolution or winding-up.
Optional Redemption................. Holders of Series C preferred units
will be entitled to have us redeem each
Series C preferred unit issued to them
in the partnership merger for an amount
of
S-3
251
cash equal to the then average market
price of a share of FelCor common
stock, or, at FelCor's option, for one
share of FelCor common stock.
Automatic Conversion................ Once the dividend rate on our common
units exceeds $0.5575 per unit, the
Series C preferred units will
automatically convert into common units
on a one-for-one basis.
Voting Rights....................... Management authority is vested in
FelCor, the sole general partner. The
holders of Series C preferred units
will only be entitled to vote under
limited circumstances.
SERIES D PREFERRED UNITS
Units to be Issued.................. 392,157 of our Series D preferred units
of limited partnership interest
Cash Distributions.................. Holders of the Series D preferred units
will be entitled to a 6.5% cumulative
annual preferred return on $22.16 per
unit, compounded quarterly to the
extent not paid on a current basis. On
a pro forma basis, this quarterly
distribution rate of $0.3601 per unit
would be the same as that for a
currently outstanding Class D unit of
MeriStar Partnership.
Liquidation Preference.............. Holders of Series D preferred units
will not be entitled to preferred
distributions upon our liquidation,
dissolution or winding-up.
Mandatory Redemption................ We may redeem each Series D preferred
unit at any time at a price of $22.16
in cash or, at our option, for $22.16
worth of FelCor common stock.
Optional Redemption................. Holders of Series D preferred units
have the option to require us to redeem
each Series D preferred unit at any
time after April 1, 2004 at a price of
$22.16 in cash or, at the holder's
option, for $22.16 worth of FelCor
common stock.
Voting Rights....................... Management authority is vested in
FelCor, the sole general partner. The
holders of Series D preferred units
will only be entitled to vote under
limited circumstances.
ISSUANCE OF OUR UNITS AND PAYMENT OF CASH CONSIDERATION (SEE PAGE S-38)
Under the merger agreement, MeriStar Partnership unitholders must sign
ratification and joinder agreements as a condition to receiving the unit
certificates and cash consideration to be paid or issued by us to them in the
partnership merger. We will mail these agreements to record holders of MeriStar
Partnership units promptly after the effectiveness of the partnership merger. In
these agreements, the MeriStar Partnership unitholders:
- ratify and agree to be bound by our amended and restated partnership
agreement, which becomes effective upon completion of the partnership
merger;
S-4
252
- are admitted as our limited partners with respect to the units which they
are entitled to receive because of the partnership merger; and
- waive any rights they have under their exchange rights agreements with
MeriStar and MeriStar Partnership.
Upon our receipt of a properly signed ratification and joinder agreement,
together with other customary documents as we may require, from a MeriStar
unitholder, we will send to the unitholder a certificate representing the whole
number of units and any cash payments which the unitholder is entitled to
receive as a result of the partnership merger.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS (SEE PAGE S-73)
A holder of common units, Class C preferred units or profits-only
partnership units in MeriStar Partnership, who will receive both our units and
cash consideration in the partnership merger, generally will not recognize
taxable gain or loss at the time of the partnership merger, except to the extent
that:
- the exchange of MeriStar Partnership units for our units and cash is
characterized as a sale of a portion of the unitholder's MeriStar
Partnership units based on the receipt of cash consideration in the
exchange; or
- the sum of the cash consideration received by the unitholder, other than
cash consideration that is counted as proceeds of a taxable sale of a
portion of the unitholder's MeriStar Partnership units, and any net
reduction of its share of partnership liabilities exceeds the tax basis
that otherwise would be carried over to our units received in the
partnership merger.
A holder of Class D preferred units in MeriStar Partnership, who will receive
only our Series D preferred units in the partnership merger, generally will not
recognize taxable gain or loss at the time of the partnership merger.
Whether and to what extent a holder of MeriStar Partnership common units,
Class C preferred units, or profits-only partnership units will recognize
taxable gain or loss in connection with the partnership merger will depend on a
number of variables. In addition, subsequent events or transactions could cause
a former MeriStar Partnership unitholder to be required to recognize all or part
of any taxable gain deferred at the time of the partnership merger.
The tax consequences of the partnership merger to you will depend on the
facts of your own situation. You should consult your tax advisor for a full
understanding of the tax consequences to you of the partnership merger.
ACCOUNTING TREATMENT (SEE PAGE S-39)
The partnership merger will be treated as a purchase of MeriStar
Partnership by us for financial accounting purposes.
NO APPRAISAL RIGHTS (SEE PAGE S-39)
Under Delaware law, neither our limited partners nor the limited partners
of MeriStar Partners have any dissenters' rights or rights to an appraisal.
REGULATORY APPROVALS (SEE PAGE S-39)
No material federal or state regulatory requirements must be complied with
or approvals must be obtained by FelCor, MeriStar, MeriStar Partnership or us in
connection with either the merger or the partnership merger.
S-5
253
DIFFERENCES IN RIGHTS OF UNITHOLDERS (SEE PAGE S-59)
At the time of the partnership merger and once they have signed and
delivered ratification and joinder agreements, MeriStar Partnership unitholders
will become our unitholders, and their rights as partners will be determined by
our amended and restated partnership agreement and Delaware law. The rights of
MeriStar Partnership unitholders differ from the rights of our unitholders in a
number of ways as a result of differences in the limited partnership agreements
of the two partnerships. These differences include:
Issuance of Additional Units
We may issue additional partnership units having terms as determined by
FelCor, our general partner, in its sole and complete discretion.
MeriStar Partnership may issue additional partnership units only if that
issuance:
- does not have a material adverse impact on the exchange rights or
economic interests of existing limited partners,
- does not cause the MeriStar Partnership to become, with respect to an
employee benefit plan subject to Title 1 of ERISA, a "party in interest"
or a "disqualified person," and
- does not cause any portion of the assets of MeriStar Partnership to be
assets of any employee benefit plan subject to Section 2510.3-101 of the
regulations of the U.S. Department of Labor.
Transfers of Units
Transferees of our units may not be admitted as limited partners without
FelCor's consent, which may be withheld in its sole discretion. Our units are
represented by physical certificates that must be surrendered to effect a
transfer. The units in MeriStar Partnership are generally not represented by
physical certificates. Except for some exceptions, which are very similar to the
ones provided in the FelCor partnership agreement, a limited partner of MeriStar
Partnership may transfer all or any of its partnership interest to any
transferee without the consent of MeriStar.
Amendments to the Partnership Agreement
FelCor may not amend any provisions of our partnership agreement that
require the approval of a percentage of the outstanding partnership units to
effect a reduction in the votes necessary to approve that action without the
consent or vote of holders of at least that percentage of outstanding
partnership units. An amendment that materially and adversely affects the
distribution, conversion or liquidation rights and preferences of any type or
class of partnership units in relation to other types or classes of units
requires the approval of holders of at least a majority of the affected class or
type of units, excluding those held by FelCor. FelCor may not amend the
partnership agreement to increase the obligations of a limited partner without
that partner's consent.
Under MeriStar Partnership's partnership agreement, the consent of each
adversely affected limited partner is required for any amendment that would:
- convert a limited partner interest into a general partner interest,
- modify the limited liability of a limited partner in a manner adverse to
the partner,
- cause the termination of the MeriStar Partnership prior to the times set
forth in the partnership agreement,
- alter the right of a limited partner to receive distributions,
liquidation amounts or allocations as described in the partnership
agreement, or
- amend any provisions of the partnership agreement dealing with
amendments.
S-6
254
Sale of Substantially All of the Partnership's Assets
Except in connection with our dissolution and liquidation, a sale,
exchange, or other disposition of all or substantially all of our assets in a
single transaction or a series of related transactions will require the approval
of 80% of the outstanding units.
The partnership agreement of MeriStar Partnership permits MeriStar, as
general partner, to cause MeriStar Partnership to engage in a sale of all or
substantially all of MeriStar Partnership's assets without the consent of the
limited partners.
Preferred Units Outstanding
We have outstanding 5,980,600 Series A preferred units and 57,500 Series B
preferred units. Our common units, rank junior to our outstanding preferred
units as to distributions and amounts payable upon our liquidation, and our
Series C preferred units and Series D preferred units, will rank junior to our
outstanding preferred units as to amounts payable upon our liquidation. The
outstanding common units, Class C units and Class D units of MeriStar
Partnership are not currently subject to the rights of any other outstanding
class or series of units of MeriStar Partnership.
Distributions on Profits-Only Partnership Units
The profits-only partnership units of MeriStar Partnership are entitled to
receive distributions only from the proceeds from sales of hotels and other
assets, as determined by MeriStar. The holders of these units will receive our
common units in the partnership merger. We will pay regular quarterly
distributions on our common units from our operating cash flow without any
limitation similar to that applicable to the profits-only partnership units.
Meetings of Partners
Limited partners holding 25% or more of the partnership interests in
MeriStar Partnership may require the call by MeriStar of a meeting of the
partners in MeriStar Partnership. Our limited partnership agreement does not
provide an express right on the part of limited partners to require FelCor to
call a meeting of our partners.
OWNERSHIP OF FELCOR PARTNERSHIP AFTER THE PARTNERSHIP MERGER
Assuming the partnership merger was completed on , 2001, a total of
2,720,029 of our common units, 755,954 of our Series C preferred units and
392,157 of our Series D preferred units will be issued to unitholders in
MeriStar Partnership, other than FelCor and its subsidiaries.
Following the partnership merger:
- FelCor will own 93,550,062, or 88.8%, of our common units;
- other holders of our units immediately prior to the partnership merger
will continue to hold an aggregate of 9,014,046, or 8.6%, of our common
units;
- holders of MeriStar Partnership common units immediately prior to the
partnership merger, other than FelCor and its subsidiaries, will hold an
aggregate of 2,211,083, or 2.1%, of our common units;
- holders of MeriStar Partnership vested profits-only partnership units
immediately prior to the partnership merger will hold an aggregate of
508,946, or 0.5%, of our common units; and
- all of our Series C and Series D preferred units will be held by the
former holders of MeriStar Partnership Class C and Class D preferred
units, respectively; and
This information and similar information located elsewhere in this
prospectus supplement are based on the number of our units and the units of
MeriStar Partnership expected to be outstanding at the effective time of the
partnership merger.
S-7
255
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following table sets forth unaudited pro forma condensed combined
financial data for MeriStar Partnership and us as a combined entity, giving
effect to the partnership merger as if it had occurred on the dates indicated
and after giving effect to the pro forma adjustments. The unaudited pro forma
condensed combined operating data are presented as if the partnership merger had
been completed on January 1, 2000 for the year ended December 31, 2000 and
January 1, 2001 for the three months ended March 31, 2001. The unaudited pro
forma condensed combined balance sheet data at March 31, 2001 is presented as if
the partnership merger had occurred on March 31, 2001. In the opinion of our
management, all adjustments necessary to reflect the effects of these
transactions have been made. The partnership merger will be accounted for under
the purchase method of accounting as provided by Accounting Principles Board
Opinion No. 16.
The unaudited pro forma condensed combined financial data should be read
together with the respective historical audited consolidated financial
statements and financial statement notes of FelCor Partnership and of MeriStar
Partnership included in or incorporated by reference into this prospectus
supplement. See "Where You Can Find More Information" on page S-92. The
unaudited pro forma condensed combined financial data is presented for
comparative purposes only and are not necessarily indicative of what the actual
combined results of operations of MeriStar Partnership and us would have been
for the periods presented, nor do these data purport to represent the results of
future periods. See "Unaudited Pro Forma Combined Financial Information"
beginning on page S-42.
PRO FORMA
(UNAUDITED)
---------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
2000(1) 2001
------------ ------------
(IN THOUSANDS, EXCEPT
RATIO DATA)
STATEMENT OF OPERATIONS DATA:
Total revenues............................................ $2,859,104 $ 710,270
Net income before extraordinary items..................... $ 176,758 $ 45,463
Net income before extraordinary items applicable to common
unitholders............................................ $ 141,011 $ 36,547
Diluted earnings per share data:
Net income before extraordinary items applicable to
common unitholders.................................... $ 1.38 $ 0.36
Weighted average common units outstanding.............. 101,834 101,354
OTHER DATA:
Funds From Operations(2).................................. $ 472,050 $ 105,303
EBITDA(3)................................................. $ 819,267 $ 195,158
Ratio of earnings to combined fixed charges and preferred
distributions(4)....................................... 1.6x 1.5x
PRO FORMA
(UNAUDITED)
--------------
MARCH 31,
2001
--------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Investment in hotels, net of accumulated depreciation....... $6,561,934
Total assets................................................ $7,202,673
Debt........................................................ $3,685,921
Redeemable units............................................ $ 293,471
Partners' capital........................................... $2,590,433
- ------------
(1) In the second quarter of 2000, we recorded a $63 million loss relating to
the decision to sell non-strategic hotel assets, which is reflected in the
income statements presented for the period.
S-8
256
(2) We consider Funds From Operations to be a key measure of a real estate
investment trust's, or REIT's performance which should be considered along
with, but not as an alternative to, net income and cash flow as a measure of
operating performance and liquidity.
The White Paper on Funds From Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts, or NAREIT,
defines Funds From Operations as net income or loss, computed in accordance
with GAAP, excluding gains or losses from extraordinary items in accordance
with GAAP and sales of depreciable operating properties, plus real estate
related depreciation and amortization and after comparable adjustments for
our portion of these items related to unconsolidated entities and joint
ventures. We believe that Funds From Operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flow
from operating activities, financing activities and investing activities, it
provides investors with an indication of our ability to incur and service
debt, to make capital expenditures, and to fund other cash needs. We compute
Funds From Operations in accordance with standards established by NAREIT,
except that we add back rent deferred under Staff Accounting Bulletin, or
SAB 101, losses for assets held for sale and lease termination costs to
derive Funds From Operations. This may not be comparable to Funds From
Operations reported by other REITs that do not define the term in accordance
with the current NAREIT definition, that interpret the current NAREIT
definition differently than we do or that do not adjust Funds From
Operations for rent deferred under SAB 101 or losses for assets held for
sale. Funds From Operations does not represent cash generated from operating
activities determined by GAAP and should not be considered as an alternative
to net income, determined in accordance with GAAP, as an indication of our
financial performance or to cash flow from operating activities, determined
in accordance with GAAP, as a measure of our liquidity, nor is it indicative
of funds available to fund our cash needs, including our ability to make
cash distributions. Funds From Operations may include funds that may not be
available for management's discretionary use due to requirements to conserve
funds for capital expenditures and property acquisitions and other
commitments and uncertainties.
The following table details our computation of Funds From Operations.
PRO FORMA
(UNAUDITED)
---------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
2000 2001
------------ ------------------
(IN THOUSANDS)
Net income before extraordinary charges..................... $176,758 $ 45,463
Loss (gain) on sale of hotels............................... (6,024) 1,072
Loss on assets held for sale................................ 63,000
Series B redeemable preferred distributions................. (12,937) (3,234)
New redeemable preferred distributions...................... (10,500) (2,625)
Depreciation................................................ 251,586 62,246
Depreciation from unconsolidated entities................... 10,167 2,381
-------- --------
Funds From Operations....................................... $472,050 $105,303
======== ========
Weighted average units outstanding(a)....................... 106,476 105,989
- ------------
(a) Weighted average units outstanding are computed including dilutive
options, unvested stock grants and assuming conversion of Series A
preferred units, Series C preferred units and Series D preferred units
to common units.
(3) EBITDA is computed by adding Funds From Operations, interest expense, our
portion of interest expense from unconsolidated entities, amortization
expense and our redeemable preferred distributions. EBITDA is presented
because it provides useful information regarding our ability to service
debt. EBITDA should not be considered as an alternative measure of operating
results or cash flow from operations, as determined in accordance with GAAP.
EBITDA as presented by us may not be comparable to other similarly titled
measures used by other companies. A reconciliation of Funds From Operations
to EBITDA is as follows:
PRO FORMA
(UNAUDITED)
---------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
2000 2001
------------ ------------------
(IN THOUSANDS)
Funds From Operations....................................... $472,050 $105,303
Interest expense............................................ 309,161 80,331
Interest expense from unconsolidated entities............... 9,188 2,111
Amortization expense........................................ 5,431 1,554
Series B redeemable preferred distributions................. 12,937 3,234
New redeemable preferred distributions...................... 10,500 2,625
-------- --------
EBITDA...................................................... $819,267 $195,158
======== ========
(4) For the purpose of computing the ratio of earnings to combined fixed charges
and preferred distributions, earnings consist of income from continuing
operations plus fixed charges, excluding capitalized interest, and fixed
charges consist of interest, whether expensed or capitalized, and
amortization of loan costs.
S-9
257
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
FELCOR PARTNERSHIP
The following tables set forth our selected historical consolidated
financial information. The selected historical information is presented as of
and for the years ended December 31, 1996, 1997, 1998, 1999 and 2000 and as of
and for the three months ended March 31, 2000 and 2001. We derived the
historical financial information for the years ended December 31, 1996, 1997,
1998, 1999 and 2000 from our consolidated financial statements and the notes to
them, audited by PricewaterhouseCoopers LLP, independent accountants. Certain
reclassifications have been made to previously reported amounts to conform to
current year presentation with no effect to previously reported net income or
shareholders' equity. The selected historical financial information as of and
for the three months ended March 31, 2000 and 2001 has been derived from the
unaudited financial statements which have been prepared by our management on the
same basis as the audited financial statements and, in the opinion of our
management, include all adjustments consisting of normal recurring accruals that
are considered necessary for a fair presentation of the results for those
periods. The results of operations for the three months ended March 31, 2000 and
2001 are not necessarily indicative of results to be anticipated for the entire
year. The following information should be read together with our consolidated
financial statements and financial statement notes incorporated by reference in
this prospectus supplement. See "Where You Can Find More Information" beginning
on page S-92.
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------------------------------------- -----------------------
1996 1997 1998(1) 1999 2000(2) 2000 2001(3)
--------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AND RATIO DATA)
STATEMENT OF OPERATIONS DATA:
Total revenues....................... $ 98,934 $ 169,688 $ 332,600 $ 495,517 $ 539,964 $ 124,926 $ 285,744
Net income (loss).................... $ 46,527 $ 69,467 $ 121,339 $ 135,776 $ 66,391 $ 19,931 $ (9,012)
Net income (loss) applicable to
common unitholders................. $ 38,793 $ 57,670 $ 99,916 $ 111,041 $ 41,709 $ 13,747 $ (15,162)
Diluted earnings per unit:
Income applicable to common
unitholders before extraordinary
charge........................... $ 1.58 $ 1.68 $ 1.93 $ 1.59 $ 0.73 $ 0.21 $ (0.25)
Net income applicable to common
unitholders...................... $ 1.49 $ 1.67 $ 1.87 $ 1.57 $ 0.67 $ 0.21 $ (0.25)
Weighted average common units
outstanding...................... 26,004 34,467 53,323 70,561 62,556 64,050 61,609
OTHER DATA:
Cash flows provided by operating
activities......................... $ 67,494 $ 97,478 $ 192,583 $ 282,365 $ 277,304 $ 52,205 $ 40,864
Cash flows (used in) provided by
investing activities............... $(478,428) $ (687,860) $ (550,498) $ (205,517) $ (34,766) $ (18,808) $ 64,763
Cash flows provided by (used in)
financing activities............... $ 251,906 $ 600,132 $ 375,064 $ (75,417) $ (252,601) $ (18,766) $ (70,944)
Cash distributions per common
unit(4)............................ $ 1.92 $ 2.10 $ 2.545 $ 2.20 $ 2.20 $ 0.55 $ 0.55
Funds From Operations(5)............. $ 77,141 $ 129,815 $ 217,363 $ 286,895 $ 288,636 $ 68,495 $ 71,423
EBITDA(6)............................ $ 88,355 $ 165,613 $ 306,361 $ 432,689 $ 470,861 $ 112,415 $ 117,337
Ratio of earnings to combined fixed
charges and preferred
distributions(7)................... 3.5x 2.6x 2.3x 1.9x 1.5x 1.5x 0.8x
BALANCE SHEET DATA:
Investment in hotels, net of
accumulated depreciation........... $ 899,691 $1,489,764 $3,964,484 $4,035,344 $3,750,275 $4,018,411 $3,734,891
Total assets......................... $ 978,788 $1,673,364 $4,175,383 $4,255,751 $4,103,603 $4,272,711 $4,096,804
Debt................................. $ 239,425 $ 476,819 $1,594,734 $1,833,954 $1,838,241 $1,899,913 $1,812,690
Redeemable units..................... $ 98,542 $ 102,933 $ 67,595 $ 52,338 $ 205,800 $ 135,814 $ 206,872
Partners' capital.................... $ 619,496 $1,049,016 $2,337,375 $2,212,651 $1,880,599 $2,068,839 $1,842,943
S-10
258
- ------------
(1) On July 28, 1998, FelCor completed the merger of Bristol Hotel Company's
real estate holdings with and into FelCor. The merger resulted in the net
acquisition of 107 primarily full-service hotels in return for approximately
31 million shares of newly issued common stock. FelCor subsequently
contributed all assets and liabilities it acquired in the merger to us in
exchange for approximately 31 million of our common units.
(2) In the second quarter of 2000, we recorded a $63 million loss relating to
non-strategic hotel assets held for sale, which is reflected in the income
statements presented for the period.
(3) Includes hotel revenues and expenses with respect to 96 hotels that were
leased to either DJONT or subsidiaries of Bass prior to the effectiveness of
the REIT Modernization Act on January 1, 2001. Prior to January 1, 2001,
revenues were comprised mainly of percentage lease revenues. Additionally,
in the first quarter of 2001, we recorded lease termination costs of $36.2
million with respect to the 96 hotels.
(4) In 1998, we declared a special one-time distribution of accumulated but
undistributed earnings and profits as a result of Bristol Hotel Company
merging with and into FelCor, in addition to the annual dividend of $2.20
per common unit. The amount of the one-time distribution was $0.345 per
common unit.
(5) We consider Funds From Operations to be a key measure of a REIT's
performance, which should be considered along with, but not as an
alternative to, net income and cash flow as a measure of operating
performance and liquidity.
The White Paper on Funds From Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts, or NAREIT,
defines Funds From Operations as net income or loss, computed in accordance
with GAAP, excluding gains or losses from extraordinary items in accordance
with GAAP and sales of depreciable operating properties, plus real estate
related depreciation and amortization and after comparable adjustments for
our portion of these items related to unconsolidated entities and joint
ventures. We believe that Funds From Operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flow
from operating activities, financing activities and investing activities, it
provides investors with an indication of our ability to incur and service
debt, to make capital expenditures, and to fund other cash needs. We compute
Funds From Operations in accordance with standards established by NAREIT,
except that we add back rent deferred under SAB 101, losses for assets held
for sale and lease termination costs to derive Funds From Operations. This
may not be comparable to Funds From Operations reported by other REITs that
do not define the term in accordance with the current NAREIT definition,
that interpret the current NAREIT definition differently than we do or that
do not adjust Funds From Operations for rent deferred under SAB 101, losses
for assets held for sale or lease termination costs. Funds From Operations
does not represent cash generated from operating activities determined by
GAAP and should not be considered as an alternative to net income,
determined in accordance with GAAP, as an indication of our financial
performance or to cash flow from operating activities, determined in
accordance with GAAP, as a measure of our liquidity, nor is it indicative of
funds available to fund our cash needs, including its ability to make cash
distributions. Funds From Operations may include funds that may not be
available for discretionary use by our management due to requirements to
conserve funds for capital expenditures and property acquisitions and other
commitments and uncertainties.
The following table details our computation of Funds From Operations.
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
--------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Net income (loss)....................... $46,527 $ 69,467 $121,339 $135,776 $ 66,391 $ 19,931 $ (9,012)
Deferred rent........................... 8,854 5,254
Lease termination costs................. 36,226
Gain on sale............................ (2,595)
Loss on assets held for sale............ 63,000
Series B redeemable preferred
distributions......................... (8,373) (12,937) (12,937) (3,234) (3,234)
Extraordinary charge from write-off of
deferred financing fees............... 2,354 185 3,075 1,113 3,865
Depreciation............................ 26,544 50,798 90,835 152,948 160,745 40,400 39,808
Depreciation from unconsolidated
entities.............................. 1,716 9,365 10,487 9,995 10,167 2,544 2,381
------- -------- -------- -------- -------- -------- --------
Funds From Operations................... $77,141 $129,815 $217,363 $286,895 $288,636 $ 68,495 $ 71,423
======= ======== ======== ======== ======== ======== ========
Weighted average units outstanding(a)... 29,306 39,157 58,013 75,251 67,239 68,740 66,767
- ------------
(a) Weighted average units outstanding are computed including dilutive
options, unvested stock grants and assuming conversion of Series A
preferred units to common units.
S-11
259
(6) EBITDA is computed by adding Funds From Operations, interest expense, our
portion of interest expense from unconsolidated entities, amortization
expense and our Series B redeemable preferred distributions. EBITDA is
presented because it provides useful information regarding our ability to
service debt. EBITDA should not be considered as an alternative measure of
operating results or cash flow from operations, as determined in accordance
with GAAP. EBITDA as presented by us may not be comparable to other
similarly titled measures used by other companies. A reconciliation of Funds
From Operations to EBITDA is as follows:
THREE MONTHS
ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
--------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Funds From Operations................................. $77,141 $129,815 $217,363 $286,895 $288,636 $ 68,495 $ 71,423
Interest expense...................................... 9,803 28,792 73,182 125,435 158,620 37,904 40,093
Interest expense from unconsolidated entities......... 818 5,895 6,521 6,729 9,188 2,620 2,111
Amortization expense.................................. 593 1,111 922 693 1,480 162 476
Series B redeemable preferred distributions........... 8,373 12,937 12,937 3,234 3,234
------- -------- -------- -------- -------- -------- --------
EBITDA................................................ $88,355 $165,613 $306,361 $432,689 $470,861 $112,415 $117,337
======= ======== ======== ======== ======== ======== ========
(7) For the purpose of computing the ratio of earnings to combined fixed charges
and preferred distributions, earnings consist of income from continuing
operations plus fixed charges, excluding capitalized interest, and fixed
charges consist of interest, whether expensed or capitalized, and
amortization of loan costs. For the three months ended March 31, 2001,
earnings were insufficient to cover combined fixed charges and preferred
distributions by $7.7 million as the result of $36 million in lease
termination costs that were recorded in the quarter.
MERISTAR PARTNERSHIP
The following table sets forth selected historical consolidated financial
information for MeriStar Partnership. The selected historical information is
presented as of and for the years ended December 31, 1996, 1997, 1998, 1999 and
2000 and as of and for the three months ended March 31, 2000 and 2001. The
historical financial information for the years ended December 31, 1998, 1999 and
2000 has been derived from the consolidated financial statements and financial
statement notes of MeriStar Partnership which have been audited by KPMG LLP,
independent auditors. The selected historical consolidated financial information
as of and for the years ended December 31, 1996 and 1997 has been derived from
the unaudited financial statements which have been prepared by management of
MeriStar Partnership. The selected historical financial information as of and
for the three months ended March 31, 2000 and 2001 has been derived from the
unaudited financial statements which have been prepared by management of
MeriStar Partnership, on the same basis as the audited financial statements and,
in the opinion of management of MeriStar Partnership, include all adjustments
consisting of normal recurring accruals that are considered necessary for a fair
presentation of the results for those periods. The results of operations for the
three months ended March 31, 2000 and 2001 are not necessarily indicative of
results to be anticipated for the entire year. The following information should
be read together with the consolidated financial statements and financial
statement notes of MeriStar Partnership included in this prospectus supplement.
See "Where You Can Find More Information" beginning on page S-92.
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------------------- (UNAUDITED)
1996 1997 -----------------------
(UNAUDITED) (UNAUDITED) 1998(A) 1999 2000 2000 2001(B)
----------- ----------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
RESULTS OF OPERATIONS:
Total revenues....................... $ 102,742 $ 292,554 $ 522,031 $ 374,820 $ 400,685 $ 67,080 $ 302,684
Net operating income................. $ 18,773 $ 58,537 $ 135,910 $ 218,299 $ 230,340 $ 25,741 $ 46,252
Interest expense, net................ $ 12,223 $ 20,968 $ 50,492 $ 100,387 $ 117,524 $ 28,760 $ 30,229
Income (loss) before gain (loss) on
sale of assets and extraordinary
gain (loss)......................... $ 3,915 $ 21,290 $ 86,304 $ 116,207 $ 111,197 $ (2,986) $ 15,559
Gain (loss) on sale of assets, net of
tax(C).............................. $ -- $ -- $ -- $ -- $ 3,439 $ -- $ (1,062)
Extraordinary gain (loss), net of
tax(D).............................. $ (1,956) $ (4,092) $ (1,238) $ (4,551) $ 3,400 $ 3,400 $ (1,226)
Net income........................... $ 1,959 $ 17,198 $ 85,066 $ 111,656 $ 118,036 $ 414 $ 13,271
Net income applicable to common
unitholders......................... $ 1,959 $ 17,198 $ 84,416 $ 111,091 $ 117,471 $ 273 $ 13,130
S-12
260
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------------------- (UNAUDITED)
1996 1997 -----------------------
(UNAUDITED) (UNAUDITED) 1998(A) 1999 2000 2000 2001(B)
----------- ----------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
Basic earnings per unit before
extraordinary gain (loss)(E)........ $ 0.31 $ 1.29 $ 2.38 $ 2.22 $ 2.25 $ (0.06) $ 0.29
Diluted earnings per unit before
extraordinary gain (loss)(E)........ $ 0.31 $ 1.27 $ 2.25 $ 2.15 $ 2.18 $ (0.06) $ 0.29
Distributions per common unit(F)..... $ -- $ -- $ 0.82 $ 2.02 $ 2.02 $ 0.51 $ 0.51
Number of partnership units
outstanding(G)...................... 12,754 26,743 51,460 52,193 48,851 51,915 48,781
OTHER FINANCIAL DATA:
EBITDA(H)............................ $ 26,672 $ 78,891 $ 194,752 $ 320,094 $ 341,028 $ 52,039 $ 87,048
Net cash provided by operating
activities.......................... $ 12,147 $ 55,417 $ 186,891 $ 228,329 $ 224,088 $ 46,247 $ 46,352
Net cash (used in) provided by
investing activities................ $(223,425) $ (579,758) $ (785,505) $ (187,952) $ (14,286) $ 34,032 $ (31,994)
Net cash provided by (used in)
financing activities................ $ 226,131 $ 584,220 $ 520,457 $ (41,948) $ (212,173) $ (82,827) $ 4,166
Ratio of earnings to combined fixed
charges and preferred
distributions(I).................... 1.33x 2.71x 2.35x 1.89x 1.82x 0.85x 1.39x
BALANCE SHEET DATA:
Investments in hotel properties,
gross............................... $ 343,092 $ 950,052 $2,957,543 $3,118,723 $3,193,730 $3,143,594 $3,192,731
Total assets......................... $ 354,795 $1,040,223 $2,989,609 $3,086,096 $3,006,500 $3,035,331 $3,095,616
Long-term debt....................... $ 199,476 $ 491,790 $1,602,352 $1,676,771 $1,638,319 $1,629,672 $1,674,978
Redeemable units..................... $ -- $ 66,847 $ 89,435 $ 81,401 $ 88,545 $ 86,559 $ 87,175
Partners' capital.................... $ 49,141 $ 396,838 $1,170,220 $1,203,518 $1,142,772 $1,159,424 $1,126,902
- ------------
(A) MeriStar Partnership was created on August 3, 1998, when American General
Hospitality Corporation, a corporation operating as a REIT, and its
associated entities merged with CapStar Hotel Company and its associated
entities. In connection with the merger between CapStar and American
General, MeriStar Hotels & Resorts, a separate publicly traded company, was
created to be the lessee and manager of nearly all of MeriStar
Partnership's hotels. Prior to August 2, 1998, MeriStar Partnership's
operating results consisted of the revenues and expenses of the hotels.
(B) From August 3, 1998 until January 1, 2001, MeriStar Hotels & Resorts leased
substantially all of MeriStar Partnership's hotels, and MeriStar
Partnership earned lease revenue under the participating lease agreements
with its lessees. Upon assigning the 106 leases with MeriStar Hotels &
Resorts to MeriStar Partnership's taxable REIT subsidiaries on January 1,
2001, in conjunction with the REIT Modernization Act, MeriStar
Partnership's operating results now include the revenues and expenses of
these hotels.
(C) During 2000, MeriStar Partnership sold three limited service hotels that
resulted in a gain on sales of assets. During 2001, MeriStar Partnership
sold one hotel that resulted in a loss on the sale of the asset.
(D) During 1996, 1997, 1998, and 1999 some loan facilities were refinanced and
the write-offs of deferred costs associated with these facilities were
recorded as extraordinary losses in accordance with GAAP. During 2000,
MeriStar Partnership repaid some of its notes payable to MeriStar at a
discount, which resulted in an extraordinary gain. During 2001, MeriStar
Partnership paid down a portion of its revolving credit facility resulting
in an extraordinary loss.
(E) Basic and diluted earnings per unit before extraordinary loss for the year
ended December 31, 1996 is based on earnings for the period from August 20,
1996, the date of CapStar's initial public offering, through December 31,
1996.
(F) No distributions were declared prior to August 3, 1998, the date of the
merger between American General and CapStar.
(G) As of the end of the period presented.
(H) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. MeriStar Partnership's 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 entity. EBITDA does not represent cash flow from
operations as defined by GAAP, is not necessarily indicative of cash
available to fund all cash flow needs, and should not be considered as an
alternative to net income under GAAP for purposes of evaluating MeriStar
Partnership's results of operations and may not be comparable to other
similarly titled measures used by other companies.
For the three months ended March 31, 2001, EBITDA has been presented before
the effect of non-recurring items; swap termination costs of $9,297 and the
write-down of MeriStar Partnership's investment in STS Hotel Net of $2,112.
(I) For the purpose of computing the ratio of earnings to combined fixed
charges and preferred distributions, earnings consist of income from
continuing operations plus fixed charges, excluding capitalized interest,
and fixed charges consist of interest, whether expensed or capitalized, and
amortization of loan costs.
S-13
261
EQUIVALENT PER UNIT DATA
We have summarized below specified per common unit information for MeriStar
Partnership and us on a historical basis, pro forma combined basis and pro forma
combined equivalent basis. The pro forma combined amounts are based on the
purchase method of accounting. The MeriStar Partnership per common unit pro
forma combined equivalents are calculated by multiplying the pro forma combined
per common unit amounts by the common unit exchange ratio of 0.784.
The following information should be read together with the historical and
pro forma financial statements included in or incorporated by reference in this
prospectus supplement. See "Where You Can Find More Information" on page S-92.
FOR THE THREE MONTHS ENDED
MARCH 31, 2001
-----------------------------------------------------
MERISTAR
PARTNERSHIP
PRO FORMA
FELCOR MERISTAR FELCOR COMBINED
PARTNERSHIP PARTNERSHIP PARTNERSHIP EQUIVALENT
HISTORICAL HISTORICAL PRO FORMA VALUE
----------- ----------- ----------- -----------
Basic net income (loss) per common unit
before extraordinary items................ $(0.25) $ 0.29 $ 0.37 $ 0.29
Diluted net income (loss) per common unit
before extraordinary items................ $(0.25) $ 0.29 $ 0.36 $ 0.28
Cash distributions per common unit.......... $ 0.55 $ 0.51 $ 0.55(1) $ 0.43
Book value per common unit.................. $28.15 $24.91 $24.62(2) $19.30
FOR THE YEAR ENDED
DECEMBER 31, 2000
-----------------------------------------------------
MERISTAR
PARTNERSHIP
PRO FORMA
FELCOR MERISTAR FELCOR COMBINED
PARTNERSHIP PARTNERSHIP PARTNERSHIP EQUIVALENT
HISTORICAL HISTORICAL PRO FORMA VALUE
----------- ----------- ----------- -----------
Basic net income per common unit before
extraordinary items....................... $ 0.74 $ 2.25 $1.40 $1.10
Diluted net income per common unit before
extraordinary items....................... $ 0.74 $ 2.18 $1.38 $1.08
Cash distributions per common unit.......... $ 2.20 $ 2.02 $2.20(1) $1.72
Book value per common unit.................. $29.34 $25.23
- ------------
(1)FelCor Partnership does not anticipate that there will be any change from its
historical distribution policy as a result of the merger and related
transactions.
(2)Pro forma book value per common unit is calculated as pro forma partners'
capital less preferred capital divided by pro forma common units outstanding
of 100,794 at March 31, 2001.
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REQUESTS FOR INCORPORATED INFORMATION
THIS PROSPECTUS SUPPLEMENT INCORPORATES IMPORTANT BUSINESS AND FINANCIAL
INFORMATION ABOUT US THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS DOCUMENT.
YOU CAN OBTAIN ANY OF THE DOCUMENTS INCORPORATED BY REFERENCE FROM US, OR
THROUGH THE SEC OR THE SEC'S WEB SITE. THE ADDRESS OF THAT SITE IS
HTTP://WWW.SEC.GOV. DOCUMENTS INCORPORATED BY REFERENCE ARE AVAILABLE FROM US,
WITHOUT CHARGE, EXCLUDING ALL EXHIBITS UNLESS SPECIFICALLY INCORPORATED BY
REFERENCE AS AN EXHIBIT TO THIS DOCUMENT. YOU MAY OBTAIN DOCUMENTS INCORPORATED
BY REFERENCE IN THIS DOCUMENT BY REQUESTING THEM IN WRITING OR BY TELEPHONE FROM
US AT THE FOLLOWING ADDRESS:
FELCOR LODGING LIMITED PARTNERSHIP
545 E. JOHN CARPENTER FRWY., SUITE 1300
IRVING, TEXAS 75062
ATTENTION: LAWRENCE D. ROBINSON
TELEPHONE: (972) 444-4900
IF YOU REQUEST ANY INCORPORATED DOCUMENTS, WE WILL MAIL THEM TO YOU BY
FIRST CLASS MAIL, OR ANOTHER EQUALLY PROMPT MEANS, WITHIN ONE BUSINESS DAY AFTER
WE RECEIVE YOUR REQUEST.
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SUPPLEMENTAL RISK FACTORS
FelCor operates substantially all of its business through us. Furthermore,
you may receive shares of FelCor common stock if your units are redeemed.
Accordingly, all of the risks applicable to FelCor and an investment in shares
of FelCor are applicable to us and an investment in our units. You should read
the "Risk Factors" set forth in the accompanying joint proxy
statement/prospectus for more information regarding these risks. In addition to
the material risk factors contained in the accompanying joint proxy
statement/prospectus, you should consider the following material supplemental
risk factors in evaluating the units that you will receive in the partnership
merger. These factors should be considered in conjunction with the other
information included elsewhere in this prospectus supplement and in the joint
proxy statement/prospectus.
THE VALUE OF OUR UNITS YOU RECEIVE IN THE PARTNERSHIP MERGER WILL FLUCTUATE
BASED ON THE MARKET PRICE OF FELCOR COMMON STOCK AND MAY HAVE A VALUE LOWER THAN
EXPECTED.
Each of our units you will receive in the partnership merger will, under
some circumstances, be subject to a unit redemption right at your option
following the partnership merger. Upon exercise by you of your unit redemption
right with respect to your units, we will be required to acquire those units for
cash, based on the market price of FelCor common stock in accordance with our
partnership agreement. However, FelCor may assume, in its sole discretion, our
obligation, in which case FelCor will pay you shares of FelCor common stock or
their cash equivalent. Consequently, the redemption value of our units you
receive in the partnership merger will be directly affected by price
fluctuations of the FelCor common stock. During the 12-month period ending on
, 2001, the most recent date practicable before mailing of this
prospectus, the closing per share price of FelCor common stock varied from a low
of $
to a high of $ and ended that period at $ .
The exchange ratio for MeriStar Partnership units to be exchanged for our
units in the partnership merger was fixed at the time of the signing of the
merger agreement and is not subject to adjustment based on changes in the
trading price of FelCor common stock or MeriStar common stock before the closing
of the partnership merger. Accordingly, the redemption value of our units you
receive in the partnership merger will depend on the market price of FelCor
common stock at the time of closing of the partnership merger and afterwards.
NO FAIRNESS OPINION WAS OBTAINED IN CONNECTION WITH THE PARTNERSHIP MERGER.
Neither MeriStar Partnership nor we obtained a fairness opinion in
connection with the partnership merger. Therefore, no third party has passed on
the fairness of the partnership merger to MeriStar Partnership, holders of
MeriStar Partnership units, us or holders of our units.
THERE IS NO PUBLIC MARKET FOR OUR UNITS, AND NONE IS EXPECTED TO DEVELOP, WHICH
MAY CAUSE SOME DIFFICULTY IN SELLING ANY OF THE UNITS YOU RECEIVE IN THE
PARTNERSHIP MERGER.
There is no public market for our units, and none is expected to develop.
Our partnership agreement, however, provides that unitholders may, subject to
specified limitations, redeem their units for FelCor common stock on a
one-on-one basis or their cash equivalent, at the election of FelCor. The
determination of whether the redeeming party receives cash or FelCor common
stock is within the sole discretion of FelCor. If you are unable to redeem your
units in us, you may have difficulty selling those units because of the lack of
a public market and the restrictions on transfer contained in our partnership
agreement. For more information regarding these restrictions on transfer, see
"Comparison of Unitholder Rights -- Transfers -- FelCor Partnership."
THERE ARE DIFFERENCES IN THE RIGHTS OF MERISTAR PARTNERSHIP UNITHOLDERS AND OUR
UNITHOLDERS THAT MAY BE DETRIMENTAL TO MERISTAR PARTNERSHIP UNITHOLDERS WHO
RECEIVE OUR UNITS IN THE PARTNERSHIP MERGER.
As a result of the partnership merger, MeriStar Partnership unitholders
will no longer own units in MeriStar Partnership and will become limited
partners and unitholders in us. Differences between the
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MeriStar Partnership limited partnership agreement and our limited partnership
agreement result in differences in the rights of the MeriStar Partnership
unitholders as compared to our unitholders. The rights of our unitholders may in
some cases be considered less favorable than the rights of MeriStar Partnership
unitholders. The material differences in unitholder rights that may be
considered less favorable to MeriStar Partnership unitholders are:
- We have outstanding two series of preferred units which have preferences
over our common units as to distributions or liquidating distributions and
over our Series C and Series D preferred units as to liquidating
distributions;
- FelCor may, in its discretion, cause us to issue additional units without
limitation, while MeriStar Partnership may not issue additional units if
it would have a material adverse impact on the exchange rights or economic
interests of existing limited partners;
- We require FelCor's consent and the transfer and surrender of physical
certificates in order to transfer units. Except for some exceptions, which
are very similar to those provided in our partnership agreement, no
consent of MeriStar is required to transfer units in MeriStar Partnership;
and
- Our partnership agreement does not expressly permit our limited partners
to call a meeting of partners, while the partnership agreement of MeriStar
Partnership expressly permits limited partners holding at least 25% of its
partnership interests to require the call of a partners meeting.
THE FEDERAL INCOME TAX CONSEQUENCES TO YOU OF THE PARTNERSHIP MERGER AND THE
OWNERSHIP BY YOU OF OUR UNITS AFTER THE PARTNERSHIP MERGER ARE COMPLEX, AND YOU
SHOULD CAREFULLY CONSIDER THEM.
Tax Consequences of the Partnership Merger. If you are a holder of common
units, Class C preferred units or profits-only partnership units in MeriStar
Partnership, you will receive both our units and cash consideration in the
partnership merger and generally will not recognize taxable gain or loss at the
time of the partnership merger, except to the extent that:
- the exchange of MeriStar Partnership units for our units and cash is
characterized as a sale of a portion of your MeriStar Partnership units
based on the receipt of cash consideration in the exchange; or
- the sum of the cash consideration you receive, other than cash
consideration that is counted as proceeds of a taxable sale of a portion
of your MeriStar Partnership units, and any net reduction of your share
of partnership liabilities, exceeds the tax basis that otherwise would be
carried over to our units received in the partnership merger.
A holder of Class D preferred units in MeriStar Partnership who will receive
only our Series D preferred units in the partnership merger generally will not
recognize taxable gain or loss at the time of the partnership merger. However,
the particular tax consequences of the partnership merger to you will depend on
a number of factors related to your individual tax situation. See "United States
Federal Income Tax Considerations -- Tax Consequences of the Partnership Merger
to MeriStar Partnership Unitholders." We urge you to consult with your own tax
advisor to determine the anticipated tax consequences of the partnership merger
for that unitholder in light of your specific circumstances.
Subsequent Events Could Cause You to Recognize Gain. Future events and
transactions could cause you as a former MeriStar Partnership unitholder holding
our units as a result of the partnership merger to recognize part or all of the
taxable gain that has been deferred either through your original contribution of
assets to MeriStar Partnership in exchange for MeriStar Partnership units or
through the partnership merger. See "United States Federal Income Tax
Considerations -- Effect of Subsequent Events on Holders of FelCor Partnership
Units." FelCor generally is not required to take into account the tax
consequences to our limited partners in deciding whether to cause us to
undertake transactions that could cause the limited partners to recognize gain,
and the limited partners generally have no right to approve or disapprove these
transactions. The same risk of gain recognition upon the occurrence of future
events and transactions exists currently with respect to your ownership of your
MeriStar Partnership units.
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Our Tax Status. We believe that, and will receive opinions of counsel to
the effect that, at the time of the partnership merger, MeriStar Partnership and
we qualify as partnerships for federal income tax purposes. MeriStar Partnership
and we intend to continue to operate so as to qualify as a partnership for
federal income tax purposes following the partnership merger. If, however,
either MeriStar Partnership or we were to be taxed as a corporation, either at
the time of the partnership merger or later, the partnership would be required
to pay income tax at corporate rates on its net income, its partners would be
treated as stockholders for tax purposes, and distributions to its partners
would constitute dividends that would not be deductible in computing the
partnership's taxable income. In addition, FelCor would fail to qualify as a
REIT, which would have a material adverse effect on you.
There is a substantial risk that we will be classified as a publicly traded
partnership after the merger. However, even if we are classified as a publicly
traded partnership, we will not be treated as a corporation for federal income
tax purposes because we will be eligible for the "90% passive income exception."
Assuming that we are classified as a publicly traded partnership after the
partnership merger, a unitholder will not be able to use losses from other
passive activities to offset the unitholder's share of our income and gains. In
addition, a unitholder will not be able to use its share of our losses to offset
the unitholder's income and gains from other passive activities. See "United
States Federal Income Tax Considerations -- Tax Status of FelCor Partnership."
Other Tax Liabilities of Holders of Our Units. In addition to the federal
income tax risks described above, you should consider the potential state and
local tax consequences of owning our units. You may be required to file tax
returns and may incur tax liabilities both in the state or local jurisdiction
where you reside and in the state and local jurisdictions in which we own assets
or otherwise do business. You should consult your own tax advisor with respect
to the state and local income tax implications of owning our units, including
return filing requirements in the various states in which we currently own
properties and will own properties after the partnership merger.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF FELCOR PARTNERSHIP
Our management's discussion and analysis of financial condition and results
of operations is incorporated in this document by reference to our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001, and to our Annual
Report on Form 10-K for the fiscal year ended December 31, 2001. See "Where You
Can Find More Information."
BUSINESS OF FELCOR PARTNERSHIP
The description of our business, properties and legal proceedings is
incorporated in this document by reference to our Annual Report on Form 10-K for
the fiscal year ended December 31, 2001. See "Where You Can Find More
Information."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF MERISTAR PARTNERSHIP
References to "we," "us," "our" and other similar words in this
Management's Discussion and Analysis are references to MeriStar Partnership.
GENERAL
We were created on August 3, 1998, when American General Hospitality
Corporation, a corporation operating as a REIT, and its associated entities
merged with CapStar Hotel Company and its associated entities. In connection
with the merger between CapStar and American General, MeriStar Hotels & Resorts,
Inc., a separate publicly traded company, was created to be the lessee and
manager of all but eight of our hotels. The eight hotels not leased by MeriStar
Hotels & Resorts are leased by affiliates of Prime Hospitality Corporation.
Prior to January 1, 2001, in order for MeriStar to maintain its tax status
as a REIT, we were not permitted to participate in the operations of the hotel
properties. To comply with this requirement through December 31, 2000, all of
the properties were subject to leases involving two third-party lessees,
MeriStar Hotels & Resorts and Prime Hospitality Corporation.
On January 1, 2001, changes to the federal tax laws governing REITs,
commonly known as the REIT Modernization Act, became effective. The REIT
Modernization Act permits us to create taxable REIT subsidiaries on or after
January 1, 2001, which are subject to taxation as C corporations. Because of the
REIT Modernization Act, we have created a number of these taxable REIT
subsidiaries that are the lessees of our real property. The REIT Modernization
Act prohibits the taxable REIT subsidiaries from engaging in the following
activities:
- they may not manage the properties themselves; they are required to enter
into arms length management agreements with independent third-party
managers that are actively involved in the trade or business of hotel
management and manage properties on behalf of other owners,
- they may not lease a property that contains gambling operations, and
- they may not own a brand or franchise under which hotels are operated.
We believe that establishing taxable REIT subsidiaries to lease the
properties provides a more efficient alignment of and ability to capture the
economic interests of property ownership. Under the prior lease structure with
MeriStar Hotels & Resorts, we received lease payments based on the revenues
generated by the properties, but MeriStar Hotels & Resorts operated the
properties in order to maximize net operating income from the properties. This
inconsistency could potentially result in the properties being operated in a way
that did not maximize revenues. With the assignment of the leases for each of
the 106 properties managed by MeriStar Hotels & Resorts to the taxable REIT
subsidiaries and the execution of the new management agreements, we gained the
economic risks and rewards related to the properties that are usually associated
with ownership of real estate, and property revenues became the basis for
MeriStar Hotels & Resorts' management fees.
Subsidiaries of MeriStar Hotels & Resorts assigned their participating
leases to our wholly-owned taxable REIT subsidiaries as of January 1, 2001. In
connection with the assignment, our taxable REIT subsidiaries executed new
management agreements with a subsidiary of MeriStar Hotels & Resorts to manage
the hotels. Under these management agreements, the taxable REIT subsidiaries pay
a management fee to MeriStar Hotels & Resorts for each property. The taxable
REIT subsidiaries in turn make rental payments to us under the participating
leases. The management agreements have been structured to substantially mirror
the economics of the former leases. The transactions did not result in any cash
consideration exchanged among the parties except in regard to the transfer of
hotel operating assets and liabilities to the taxable REIT subsidiaries. Under
the new management agreements, the base management fee is 2.5% of total hotel
revenue plus incentive payments, based on meeting performance thresholds, that
could total up to 1.5% of total hotel revenue. The agreements have an initial
term of
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10 years with three renewal periods of five years each at the option of MeriStar
Hotels & Resorts, subject to some exceptions. Because these leases have been
assigned to our taxable REIT subsidiaries, we now bear the operating risk
associated with the hotels.
FINANCIAL CONDITION
March 31, 2001 Compared with December 31, 2000
Our total assets increased by $89.1 million to $3,095.6 million at March
31, 2001 from $3,006.5 million at December 31, 2000 primarily due to:
- lending $36.0 million to MeriStar Hotels & Resorts under a revolving
credit agreement;
- deferring $8.1 million in financing costs related to issuing $500 million
of senior unsecured notes;
- capital expenditures at the hotels;
- the increase in operating assets of $62.0 million related to the
assignment of the hotel leases with MeriStar Hotels & Resorts to the
taxable subsidiaries; partially offset by
- the decrease of $11.5 million in due from MeriStar Hotels & Resorts;
- the sale of one hotel and the use of the $7.3 million in proceeds to
paydown debt; and
- depreciation on hotel assets.
Total liabilities increased by $106.3 million to $1,878.8 million at March
31, 2001 from $1,772.5 million at December 31, 2000 due mainly to:
- net borrowings of long-term debt;
- the adoption of FASB 133 and the related recording of a $7.6 million
liability for the derivative instruments; and
- the increase in operating liabilities of $65.7 million related to the
assignment of the hotel leases with MeriStar Hotels & Resorts to the
taxable subsidiaries.
Long-term debt increased by $36.7 million to $1,675.0 million at March 31,
2001 from $1,638.3 million at December 31, 2000 due primarily to:
- $500 million in senior unsecured notes sold, partially offset set by
- the repayment of the revolving credit facility from the proceeds of the
senior unsecured notes borrowings.
Partners' capital decreased $15.9 million to $1,126.9 at March 31, 2001
from $1,142.8 million at December 31, 2000 due primarily to:
- the payment of distributions; and
- $8.6 million increase in accumulated other comprehensive loss due mainly
to the adoption of FASB 133 described above; partially offset by
- net income for 2001; and
- the issuance of additional common limited partnership units to MeriStar.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 Compared with Three Months Ended March 31,
2000.
Until January 1, 2001, MeriStar Hotels & Resorts leased substantially all
of our hotels from us. Under these leases, MeriStar Hotels & Resorts assumed all
of the operating risks and rewards of these
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hotels and paid us a percentage of each hotel's revenue under the lease
agreements. Therefore, for financial statement purposes through December 31,
2000, MeriStar Hotels & Resorts recorded all of the operating revenues and
expenses of the hotels in its statements of operations, and we recorded lease
revenue earned under the lease agreements in our statements of operations.
Effective January 1, 2001, MeriStar Hotels & Resorts assigned the hotel leases
to our newly created, wholly owned, taxable REIT subsidiaries and our taxable
REIT subsidiaries, in turn, entered into management agreements with MeriStar
Hotels & Resorts to manage the hotels. As a result of this change in structure,
our wholly-owned taxable REIT subsidiaries have assumed the operating risks and
rewards of the hotels and now pay MeriStar Hotels & Resorts a management fee to
manage the hotels for them. For consolidated financial statement purposes,
effective January 1, 2001, we now record all of the revenues and expenses of the
hotels in our statements of operations, including the management fee paid to
MeriStar Hotels & Resorts.
Our total revenues and total expenses increased $235.6 million and $216.6
million, respectively, for the three months ended March 31, 2000 as compared to
the same period in 2000. As described in the preceding paragraph, the
significant increases result from the fact that we now record the hotel
operating revenue and expenses in our consolidated financial statements
effective January 1, 2001, while we only recorded lease revenue in 2000. As a
result, our operating results for the three months ended March 31, 2001 are not
directly comparable to the same period in 2000.
For comparative purposes, the following shows the results for the three
months ended March 31, 2000 on a pro forma basis assuming the leases with
MeriStar Hotels & Resorts were converted to management contracts on January 1,
2000 compared to actual results for the three months ended March 31, 2001 (in
thousands):
2001 2000
-------- --------
Revenue..................................................... $302,684 $300,954
Total expenses.............................................. 286,661 269,226
Net income before loss on sale of assets and extraordinary
items..................................................... 15,559 31,200
Net income.................................................. 13,271 34,600
Recurring EBITDA............................................ 87,048 86,786
The following table provides our hotels' operating statistics on a same
store basis for the three months ended March 31, 2001 and 2000.
2001 2000 CHANGE
------- ------- ------
Revenue per available room................................ $ 80.36 $ 78.37 2.5%
Average daily rate........................................ $115.42 $111.44 3.6%
Occupancy................................................. 69.6% 70.3% (1.0)%
Total expenses increased $17.5 million to $286.7 million for the three
months ended March 31, 2001 from $269.2 million for the same period in 2000 on a
pro forma basis due primarily to:
- $9.3 million in swap termination costs;
- the $2.1 million write down of the investment in STS Hotel Net;
- an increase in depreciation on hotel assets; and
- a $3.0 million increase in property operating costs due primarily to a
$2.2 million increase in energy costs.
During the three months ended March 31, 2001, we recorded a charge in the
amount of $2.1 million to write-off our investment in STS Hotel Net, a provider
of internet access and related services to the hospitality industry. During
2000, STS Hotel Net continued to pursue its business strategy and operate its
business. During the first quarter of 2001, STS Hotel Net secured additional
equity from an entity which is also engaged in providing similar services to the
hospitality industry. Also, during the first quarter of
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2001, the operating environment for STS Hotel Net deteriorated significantly and
STS Hotel Net was unable to generate adequate revenues or obtain needed
additional financing. As a result, STS Hotel Net significantly curtailed its
operations and, accordingly, we wrote off our investment in STS Hotel Net at
March 31, 2001.
Recurring EBITDA is presented before the effect of non-recurring items; the
swap termination costs and the write down of the investment in STS Hotel Net.
Recurring EBITDA increased $0.2 million to $87.0 million in 2001 from $86.8
million in 2000.
In 2001, we paid down $300 million of our revolving credit facility. This
resulted in an extraordinary loss of $1.2 million, net of tax effect.
In 2001, we sold one hotel and received $7.3 million. This resulted in a
loss on the sale of the asset of $1.1 million, net of tax.
Year Ended December 31, 2000 compared with the Year Ended December 31, 1999
Until January 1, 2001 substantially all of our hotels were leased to and
operated by MeriStar Hotels & Resorts. Participating lease revenue represents
lease payments from the lessees under the participating lease agreements. Total
revenue increased by $25.9 million to $400.7 million in 2000 compared to $374.8
million in 1999. This increase was primarily attributable to an increase of
$23.7 million in participating lease revenue resulting from an increase in room
revenue at our hotels under lease. The following table provides our hotels'
operating statistics on a same-store basis for the year:
2000 1999 CHANGE
------- ------- ------
Revenue per available room................................ $ 77.71 $ 73.51 5.71%
Average daily rate........................................ $107.60 $101.92 5.57%
Occupancy................................................. 72.2% 72.1% 0.14%
Operating expenses increased to $170.3 million for the year ended December
31, 2000 from $156.5 million for the same period in 1999 due primarily to:
- to an increase in depreciation on hotel assets;
- an increase in administrative costs, as we added personnel during 2000 to
address the operating changes associated with the REIT Modernization Act;
and
- increased insurance costs.
Net interest expense increased $17.1 million to $117.5 million for the year
ended December 31, 2000, from $100.4 million in 1999 due mainly to:
- lower capitalized interest due to a decrease in capital expenditures in
2000;
- an increase in variable interest rates during 2000 and higher interest
rates on swap arrangements executed in 2000; partially offset by
- a lower average debt balance during 2000.
In 2000, we repaid $18.2 million of our notes payable to MeriStar at a
discount in connection with its repurchase of its convertible notes at an equal
discount. This resulted in an extraordinary gain of $3.4 million.
In 2000, we sold three limited service hotels and received $24.1 million.
This resulted in a gain on sale of assets of $3.4 million.
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EBITDA grew $20.9 million to $341.0 million in 2000 from $320.1 million in
1999. This growth is due to:
- the increase in participating lease revenue; partially offset by
- the increase in administrative and insurance costs.
Year Ended December 31, 1999 compared with the Year Ended December 31, 1998
Substantially all of our hotels were leased to and operated by MeriStar
Hotels & Resorts. Participating lease revenue represents lease payments from the
lessees under the participating lease agreements. Total revenue decreased by
$147.2 million to $374.8 million in 1999 compared to $522.0 million in 1998.
This decrease was primarily attributable to the change in the types of revenues
recorded in our financial statements in periods before and after August 2, 1998,
the date of the merger of CapStar Hotel Company and American General Hospitality
Corporation and the spin-off of MeriStar Hotels & Resorts.
The following table provides our hotels' operating statistics on a
same-store basis for the year:
1999 1998 CHANGE
------- ------- ------
Revenue per available room................................ $ 74.05 $ 71.80 3.1%
Average daily rate........................................ $102.39 $100.96 1.4%
Occupancy................................................. 72.3% 71.1% 1.7%
There were no department operating expenses in 1999 compared to $142.5
million in 1998. This decrease was the result of the hotel operations being
leased to MeriStar Hotels & Resorts after August 2, 1998, in conjunction with
the merger and spin-off of MeriStar Hotels & Resorts.
Undistributed operating expenses decreased significantly in 1999 as a
result of the merger. Prior to the spin-off of MeriStar Hotels & Resorts, we
were responsible for all hotel operating expenses. Subsequent to August 3, 1998,
we, as owner and lessor, were only responsible for real estate taxes, property
insurance and various other undistributed expenses. Depreciation and
amortization increased $43.0 million to $101.8 million in 1999 from $58.8
million in 1998 as a result of the assets acquired in the merger.
Net interest expense increased $49.9 million to $100.4 million for the year
ended December 31, 1999, from $50.5 million in 1998. This increase was
attributable to:
- the borrowings used to finance the acquisition of hotels during 1998;
- the borrowings used to finance renovations of hotels during 1998 and
1999;
- the new debt associated with the merger;
- higher average interest rates; and
- 1999 borrowings made to finance real estate ventures.
In 1999, we recognized extraordinary losses of $4.6 million due to the
write-off of unamortized deferred financing fees in conjunction with refinancing
some credit facilities.
EBITDA grew $125.3 million to $320.1 million in 1999 from $194.8 million in
1998. This growth is due to:
- the merger;
- other hotel acquisitions which occurred during 1998; partially offset by
- the spin-off of MeriStar Hotels & Resorts.
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LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash
Our principal sources of liquidity are cash on hand, cash generated from
operations, and funds from external borrowings and debt and equity offerings. We
expect to fund our continuing operations through cash generated by our hotels.
We also expect to finance hotel acquisitions, hotel renovations and joint
venture investments through a combination of internally generated cash, external
borrowings, and the issuance of our limited partnership units. Additionally,
MeriStar must distribute to stockholders at least 90% of its taxable income,
excluding net capital gains, to preserve its status as a REIT. MeriStar, as our
general partner, is required to use its best efforts to cause our partnership
distributions to it to be sufficient to comply with this requirement. We expect
to fund these distributions through cash generated from operations, borrowings
on the credit facilities or through the preferred return on the investment in
MeriStar Investment Partners, LP. We generated $46.4 million of cash from
operations during the first three months of 2001.
We generated $4.2 million of cash from financing activities during the
three months ended March 31, 2001 primarily from:
- net borrowings under our credit facilities, and
- capital contributions from MeriStar, partially offset by
- payment of dividends and distributions, and
- additional deferred financing costs related to issuing $500 million of
senior unsecured notes.
Uses of Cash
We used $32.0 million of cash in investing activities during the three
months ended March 31, 2001, primarily for:
- the $36.0 million note receivable from MeriStar Hotels & Resorts; and
- capital expenditures at hotels; partially offset by
- hotel operating cash received on lease conversions; and
- proceeds from selling one hotel.
In January 2001, we sold $500 million of senior unsecured notes. The senior
unsecured notes are structured as:
- $300 million in notes with a 9.0% interest rate which mature on January
15, 2008, and
- $200 million in notes with a 9.125% interest rate which mature on January
15, 2011.
The proceeds were used to repay outstanding debt under our revolving credit
facility and to make payments to terminate some swap agreements that hedged
variable interest rates of the loans that we repaid. The repayments of the term
loans under the credit facility resulted in an extraordinary loss of $1.2
million, net of tax. As of March 31, 2001, we had $253.0 million available under
our senior secured credit facility. The weighted average interest rate on
borrowings outstanding under our credit facility as of March 31, 2001 was 6.92%.
Capital for renovation work is expected to be provided by a combination of
internally generated cash and external borrowings. Initial renovation programs
for most of the hotels are complete or nearing completion. Once initial
renovation programs for a hotel are completed, we expect to spend approximately
4% annually of hotel revenues for ongoing capital expenditure programs,
including room and facilities refurbishments, renovations, and furniture and
equipment replacements. For the three months ended March 31, 2001, we spent $8.7
million on renovation and ongoing property capital expenditure programs.
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We intend to spend an additional $56.3 million during 2001 to complete the
renovation programs and for the ongoing capital expenditure programs.
We believe cash generated by operations, together with anticipated
borrowing capacity under the credit facilities, will be sufficient to fund the
existing working capital requirements, ongoing capital expenditures, and debt
service requirements. We believe, however, that the future capital decisions
will also be made in response to specific acquisition and/or investment
opportunities, depending on conditions in the capital and/or other financial
markets. Accordingly, we may consider increasing the borrowing capacity or
issuing additional debt or partnership units and these proceeds could be used to
finance acquisitions or investments, refinance existing debt, or repurchase
common stock.
We are obligated to lend MeriStar Hotels & Resorts up to $50 million for
general corporate purposes under a revolving credit agreement. As of March 31,
2001, there was $36 million outstanding under this revolving credit agreement.
FelCor, MeriStar Hotels & Resorts and we have agreed to amend, effective
when the merger is complete, the credit agreement to fix its maturity at
February 28, 2004, set the interest rate at 600 basis points over the 30-day
London Interbank Offered Rate and set the default rate of interest at 800 basis
points over the 30-day London Interbank Offered Rate. We have agreed to use best
efforts to obtain the consents of MeriStar Hotels & Resorts' senior lenders to
these amendments.
Seasonality
Demand in the lodging industry is affected by recurring seasonal patterns.
For non-resort properties, demand is lower in the winter months due to decreased
travel and higher in the spring and summer months during peak travel season. For
resort properties, demand is generally higher in winter and early spring. Since
the majority of the hotels are non-resort properties, the operations generally
reflect non-resort seasonality patterns. We have lower revenue, operating income
and cash flow in the first and fourth quarters and higher revenue, operating
income and cash flow in the second and third quarters.
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BUSINESS OF MERISTAR PARTNERSHIP
References to "we," "us," "our," and other similar words in this business
description are references to MeriStar Partnership.
GENERAL
We believe that the upscale, full-service segment of the lodging industry
is the most attractive segment in which to own hotels. The upscale, full-service
segment is attractive for several reasons. First, the real estate market has
recently experienced a significant slowdown in the construction of upscale,
full-service hotels. 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, these 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.
Our business strategy is to opportunistically acquire hotel properties and
related businesses with the potential for cash flow growth and to renovate and
reposition each hotel according to the characteristics of the hotel and its
market.
ACQUISITION STRATEGY
We focus our attention on investments in hotels located in markets with
economic, demographic and supply dynamics favorable to hotel owners. Through an
extensive due diligence process, we select those acquisition targets where we
believe selective capital improvements and well selected third-party 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, our senior management, together with
MeriStar Hotels & Resorts, creates detailed plans covering all areas of
renovation and operation. These plans serve as the basis for our acquisition
decisions and guide subsequent renovation and operating plans which will be
carried out by a third-party hotel operator.
Until January 1, 2001, in order to maintain its qualification as a REIT,
MeriStar was required to make annual distributions to its stockholders of at
least 95% of its real estate investment trust taxable income, determined without
regard to the deduction for dividends paid and by excluding net capital gains.
After January 1, 2001, under the REIT Modernization Act, the percentage of
required annual distributions was reduced to 90%.
Among other things, under the terms of our partnership agreement, we may
not take or refrain from taking, any action which, in the judgment of MeriStar,
in its sole and absolute discretion:
- could adversely affect the ability of MeriStar to continue to qualify as
a REIT unless MeriStar otherwise ceases to qualify as a REIT; or
- could subject MeriStar to any additional taxes under section 857 or
section 4981 of the Internal Revenue Code.
As a result, to complete acquisitions and renovations, we rely heavily on
our ability to raise new capital through debt and equity offerings. That ability
is dependent on the then-current status of the capital markets.
Although we are not currently pursuing direct acquisition opportunities,
due to the current economic environment and the current costs of our equity
capital, we continue to be aware of acquisition opportunities in the upscale,
full-service hotel market. We may make investments in hotels through co-
investment with strategic partners if those investments offer current cash
returns.
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THE INTERCOMPANY AGREEMENT
MeriStar and we are parties to an intercompany agreement with MeriStar
Hotels & Resorts. On completion of the merger, FelCor will assume MeriStar's
rights and obligations under the agreement. The intercompany agreement provides
that, for so long as the agreement remains in effect, MeriStar Hotels & Resorts
is prohibited from making real property investments that a REIT could make
unless:
- MeriStar and we are first given the opportunity, but elect not to pursue
the activities or investments;
- it is on land already owned or leased by MeriStar Hotels & Resorts or
subject to a lease or purchase option in favor of MeriStar Hotels &
Resorts;
- MeriStar Hotels & Resorts will operate the property under a brand name
owned by MeriStar Hotels & Resorts; or
- it is a minority investment made as part of a lease or management
agreement arrangement.
MeriStar and we have a right of first refusal with respect to any real property
investment to be sold by MeriStar Hotels & Resorts.
The intercompany agreement will generally grant MeriStar Hotels & Resorts a
right of first refusal with respect to any management opportunity at any of our
properties that MeriStar does not elect to have managed by the hotel brand
owner. This opportunity will be made available to MeriStar Hotels & Resorts only
if MeriStar determines that:
- consistent with MeriStar's status as a REIT, it must enter into a
management agreement with an unaffiliated third party with respect to the
property;
- MeriStar Hotels & Resorts is qualified to be the manager of that
property; and
- MeriStar decides not to have the property operated by the owner of a
hospitality brand under that brand.
Because of the provisions of the intercompany agreement, the nature of our
business and the opportunities we may pursue will be restricted.
Provision of Services
MeriStar Hotels & Resorts may provide MeriStar and us with services as
MeriStar or we may reasonably request from time to time, including
administrative, renovation supervision, corporate, accounting, financial,
insurance, legal, tax, information technology, human resources, acquisition
identification and due diligence, and operational services. MeriStar compensates
MeriStar Hotels & Resorts for services provided in an amount determined in good
faith by MeriStar Hotels & Resorts as the amount a third party would charge
MeriStar for comparable services. The arrangements relating to the provision of
these services were not subject to arms-length negotiation.
Equity Offerings
If either MeriStar or MeriStar Hotels & Resorts desires to engage in a
securities issuance, the issuing party will give notice to the other party as
promptly as practicable of its desire to engage in a securities issuance. Any
notice will include the proposed material terms of the issuance, to the extent
determined by the issuing party, including whether that issuance is proposed to
be made as a public or private offering, the amount of securities proposed to be
issued and the manner of determining the offering price and other terms thereof.
The non-issuing party will cooperate with the issuing party in every way to
effect any securities issuance of the issuing party by assisting in the
preparation of any registration statement or other document required in
connection with that issuance and, in connection with that issuance, providing
the
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issuing party with that information which may be required to be included in the
registration statement or other document.
Term
The intercompany agreement will terminate upon the earlier of August 3,
2008, and the date of a change in ownership or control of MeriStar Hotels &
Resorts.
Credit Facility
We are obligated to lend MeriStar Hotels & Resorts up to $50 million for
general corporate purposes under a revolving credit agreement. On March 1, 2000,
the revolving credit agreement was amended to reduce the maximum borrowing limit
from $75 million to $50 million, increase the interest rate from 350 basis
points over the 30-day London Interbank Offered Rate to 650 basis points over
the 30-day London Interbank Offered Rate and set the maturity date of the loan
to the 91st day following the maturity of MeriStar Hotels & Resorts' senior
credit facility, as amended, restated, refinanced or renewed. As of March 31,
2001, there was $36 million outstanding under this revolving credit agreement.
Upon effectiveness of the merger, FelCor Partnership will succeed to our role as
lender under this credit facility.
FelCor, MeriStar Hotels & Resorts and we have agreed to amend, effective
when the merger is complete, the credit agreement to fix its maturity at
February 28, 2004, set the interest rate at 600 basis points over the 30-day
London Interbank Offered Rate and set the default rate of interest at 800 basis
points over the 30-day London Interbank Offered Rate. We have agreed to use best
efforts to obtain the consents of MeriStar Hotels & Resorts' senior lenders to
these amendments.
COMPETITION
We compete primarily in the upscale and mid-priced sectors of the
full-service segment of the lodging industry. In each geographic market in which
our hotels are located, there are other full- and limited-service hotels that
compete with our hotels. Competition in the U.S. lodging industry is based
generally on convenience of location, brand affiliation, price, range of
services and guest amenities offered, and quality of customer service and
overall product.
EMPLOYEES
As of June 30, 2001, MeriStar and we employed 50 persons, all of whom work
at the corporate headquarters.
FRANCHISES
We employ a flexible strategy in selecting brand names based on a
particular hotel's market environment and the hotel's unique characteristics.
Accordingly, we use various national trade names under licensing arrangements
with national franchisors.
The following is a summary of our brand affiliations:
NUMBER OF
PROPERTIES
----------
Hilton Brands:
Embassy Suites............................................ 3
Doubletree and Doubletree Guest Suites.................... 6
Hilton and Hilton Suites.................................. 23
Bass Brands:
Holiday Inn............................................... 9
Crowne Plaza and Crowne Plaza Suites...................... 5
Holiday Inn Select........................................ 5
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NUMBER OF
PROPERTIES
----------
Starwood Brands:
Sheraton and Sheraton Suites.............................. 11
Westin.................................................... 4
Marriott Brands:
Courtyard by Marriott..................................... 5
Marriott.................................................. 3
Radisson Brands:
Radisson.................................................. 12
Other Brands................................................ 26
---
Total Hotels...................................... 113
===
GOVERNMENTAL REGULATION
Americans with Disabilities Act.
Under the Americans with Disabilities Act, or ADA, all public
accommodations are required to meet specific 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 our hotels, a determination that we are 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.
We are likely to incur additional costs of complying with the ADA; however,
those costs are not expected to have a material adverse effect on our results of
operations or financial condition.
Environmental Laws
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in property. Laws often impose liability whether or not the owner
or operator knew of, or was responsible for, the presence of hazardous or toxic
substances. In addition, the presence of contamination from hazardous or toxic
substances, or the failure to properly remediate contaminated property, may
adversely affect the owner's ability to sell or rent real property or to borrow
funds using 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 these substances at the disposal or treatment
facility, whether or not the facility is or ever was owned or operated by those
persons.
The operation and removal of underground storage tanks are also regulated
by federal and state laws. In connection with the ownership and operation of the
hotels, we could be held liable for the costs of remedial action with respect to
the regulated substances and storage tanks and claims related thereto.
Activities have been undertaken to close or remove storage tanks located on the
property of several of the hotels.
All of our hotels have undergone Phase I environmental site assessments,
which generally provide a nonintrusive physical inspection and database search,
but not soil or groundwater analyses, by a qualified independent environmental
engineer. The purpose of a Phase I is to identify potential sources of
contamination for which the 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 we believe would have a
material adverse effect on our results of operation or financial condition, nor
are we aware of any environmental liability or concerns. Nevertheless, it is
possible that these environmental site assessments did not reveal all
environmental liabilities or compliance concerns or that material environmental
liabilities or compliance concerns exist of which we are currently unaware.
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In addition, our 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 asbestos-containing materials
and govern emissions of and exposure to asbestos fibers in the air.
Asbestos-containing materials are present in various building materials such as
sprayed-on ceiling treatments, roofing materials or floor tiles at some of the
hotels. Operations and maintenance programs for maintaining asbestos-containing
materials have been or are in the process of being designed and implemented, or
the asbestos-containing materials have been scheduled to be or have been abated,
at these hotels. Any liability resulting from non-compliance or other claims
relating to environmental matters are not expected to have a material adverse
effect on our results of operations or financial condition.
PROPERTIES
MeriStar and we maintain corporate headquarters in Washington, D.C. We own
hotel properties throughout the United States and Canada. As of March 31, 2001,
we owned 113 hotels. We lease land for seven of our hotels and also lease part
of the land for six of our hotels. No one hotel property is material to our
operations. A typical hotel has meeting and banquet facilities, food and
beverage facilities and guest rooms and suites.
The hotels generally feature comfortable, modern guest rooms, extensive
meeting and convention facilities and full-service restaurant and catering
facilities that attract meeting and convention functions from groups and
associations, upscale business and vacation travelers as well as banquets and
receptions from the local community.
The following table sets forth some information with respect to our hotels
at June 30, 2001:
GUEST
HOTEL LOCATION ROOMS
- ----- -------- -----
Sheraton Hotel..................................... Mesa, AZ 273
Crowne Plaza Hotel................................. Phoenix, AZ 250
Embassy Suites..................................... Tucson, AZ 204
Courtyard by Marriott.............................. Century City, CA 134
Hilton Hotel....................................... Irvine, CA 289
Marriott Hotel..................................... Los Angeles, CA 469
Courtyard by Marriott.............................. Marina Del Rey, CA 276
Hilton Hotel....................................... Monterey, CA 204
Doral Palm Springs................................. Palm Springs, CA 285
Hilton Hotel....................................... Sacramento, CA 331
Holiday Inn Select................................. San Diego, CA 317
Sheraton Hotel..................................... San Francisco, CA 525
Crowne Plaza Hotel................................. San Jose, CA 239
Wyndham Hotel...................................... San Jose, CA 355
Hilton Hotel....................................... San Pedro, CA 226
Santa Barbara Inn.................................. Santa Barbara, CA 71
Holiday Inn........................................ Colorado, Springs, CO 200
Sheraton Hotel..................................... Colorado, Springs, CO 500
Embassy Suites..................................... Englewood, CO 236
Hilton Hotel....................................... Harford, CT 388
Ramada Hotel....................................... Meriden, CT 150
Ramada Hotel....................................... Shelton, CT 155
Doubletree Bradley Airport......................... Windsor Locks, CT 200
Embassy Row Hilton Hotel........................... Washington, DC 193
Georgetown Inn..................................... Washington, DC 96
The Latham Hotel................................... Washington, DC 143
South Seas Plantation.............................. Captiva, FL 579
Hilton Hotel....................................... Clearwater, FL 426
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GUEST
HOTEL LOCATION ROOMS
- ----- -------- -----
Ramada Hotel....................................... Clearwater, FL 289
Hilton Hotel....................................... Cocoa Beach, FL 296
Holiday Inn........................................ Ft. Lauderdale, FL 240
Howard Johnson Resort.............................. Key Largo, FL 100
Westin Hotel....................................... Key Largo, FL 200
Courtyard by Marriott.............................. Lake Buena Vista, FL 314
Sheraton Hotel..................................... Lake Buena Vista, FL 489
Radisson Hotel..................................... Marco Island, FL 268
Holiday Inn........................................ Madeira Beach, FL 149
Radisson Hotel..................................... Orlando, FL 742
Best Western Hotel................................. Sanibel Island, FL 46
Safety Harbor Resort and Spa....................... Sanibel Island, FL 193
Sanibel Inn........................................ Sanibel Island, FL 96
Seaside Inn........................................ Sanibel Island, FL 32
Song of the Sea.................................... Sanibel Island, FL 30
Sundial Beach Resort............................... Sanibel Island, FL 243
Doubletree Hotel................................... Tampa, FL 496
Doubletree Guest Suites............................ Atlanta, GA 155
Westin Atlanta Airport............................. Atlanta, GA 495
Jekyll Inn......................................... Jekyll Island, GA 262
Wyndham Hotel...................................... Marietta, GA 218
Radisson Hotel..................................... Arlington Heights, IL 201
Radisson Hotels & Suites........................... Chicago, IL 350
Holiday Inn........................................ Rosemont, IL 507
Radisson Hotel..................................... Schaumburg, IL 200
Doubletree Guest Suites............................ Indianapolis, IN 137
Radisson Plaza..................................... Lexington, KY 367
Hilton Hotel....................................... Louisville, KY 321
Holiday Inn Select................................. Kenner, LA 303
Hilton & Towers.................................... Lafayette, LA 327
Maison de Ville.................................... New Orleans, LA 23
Radisson Hotel..................................... Annapolis, MD 219
Radisson Hotel..................................... Baltimore, MD 148
Sheraton Hotel..................................... Columbia, MD 287
Hilton Hotel....................................... Detroit, MI 151
Hilton Hotel....................................... Grand Rapids, MI 224
Holiday Inn Sports Complex......................... Kansas City, MO 163
Sheraton Airport Plaza............................. Charlotte, NC 222
Hilton Hotel....................................... Durham, NC 194
Courtyard by Marriott.............................. Durham, NC 146
Ramada Hotel....................................... Mahwah, NJ 128
Sheraton Hotel..................................... Mahwah, NJ 225
Westin Hotel....................................... Morristown, NJ 199
Four Points Hotel.................................. Mt. Arlington, NJ 124
Doral Forrestal.................................... Princeton, NJ 290
Courtyard by Marriott.............................. Secaucus, NJ 165
Marriott Hotel..................................... Somerset, NJ 440
Doubletree Hotel................................... Albuquerque, NM 295
Wyndham Hotel...................................... Albuquerque, NM 276
Crowne Plaza Hotel................................. Las Vegas, NV 201
St. Tropez Suites.................................. Las Vegas, NV 149
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GUEST
HOTEL LOCATION ROOMS
- ----- -------- -----
Radisson Hotel..................................... Rochester, NY 171
Radisson Hotel..................................... Middleburg Heights, OH 237
Hilton Hotel....................................... Toledo, OH 213
Westin Hotel....................................... Oklahoma City, OK 395
Crowne Plaza Hotel................................. Lake Oswego, OR 161
Sheraton Hotel..................................... Frazer, PA 198
Embassy Suites..................................... Philadelphia, PA 288
Holiday Inn Select................................. Trevose, PA 215
Hilton Hotel....................................... Arlington, TX 309
Doubletree Hotel................................... Austin, TX 350
Hilton & Towers.................................... Austin, TX 320
Holiday Inn Select................................. Bedford, TX 243
Radisson Hotel..................................... Dallas, TX 304
Renaissance Hotel.................................. Dallas, TX 289
Sheraton Hotel..................................... Dallas, TX 348
Hilton Hotel....................................... Houston, TX 292
Marriott Hotel..................................... Houston, TX 302
Hilton Hotel....................................... Houston, TX 295
Sheraton Hotel..................................... Houston, TX 382
Holiday Inn Select................................. Irving, TX 409
Hilton Hotel....................................... Midland, TX 249
Hilton Hotel....................................... Salt Lake City, UT 287
Holiday Inn........................................ Alexandria, VA 178
Radisson Hotel..................................... Alexandria, VA 253
Hilton Hotel....................................... Arlington, VA 209
Hilton Hotel....................................... Arlington, VA 386
Richmond Hotel and Conference Center............... Richmond, VA 280
Hilton Hotel....................................... Bellevue, WA 179
Crowne Plaza Hotel................................. Madison, WI 226
Holiday Inn........................................ Madison, WI 194
Holiday Inn........................................ Calgary, Alberta, Canada 170
Sheraton Hotel..................................... Guildford, B.C., Canada 278
Holiday Inn........................................ Vancouver, B.C., Canada 100
Ramada Hotel....................................... Vancouver, B.C., Canada 118
------
Total Rooms.............................. 28,877
======
The Leases
Until January 1, 2001, subsidiaries of MeriStar Hotels & Resorts leased 106
of the 114 hotels. Each lease provided for an initial term of 12 years. Each
lease provided MeriStar Hotels & Resorts with three renewal options of five
years each, except in the case of properties with ground leases having a
remaining term of less than 40 years, provided that:
- MeriStar Hotels & Resorts would not have the right to a renewal if a
change in the tax law has occurred that would permit us to operate the
hotel directly;
- if MeriStar Hotels & Resorts elected not to renew a lease for any
applicable hotel, then we had the right to reject the exercise of a
renewal right on a lease of a comparable hotel; and
- the rent for each renewal term would be adjusted to reflect the then fair
market rental value of the hotel.
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If MeriStar and MeriStar Hotels & Resorts were unable to agree upon the
then fair market rental value of a hotel, the lease would have terminated upon
the expiration of the then current term and MeriStar Hotels & Resorts then would
have had a right of first refusal to lease the hotel from us on those terms as
MeriStar may have agreed upon with a third-party lessee.
Base Rent; Participating Rent; Additional Charges. Each lease required
MeriStar Hotels & Resorts to pay:
- fixed monthly base rent,
- participating rent, which was payable monthly and based on specified
percentages of room revenue, food and beverage revenue and telephone and
other revenue at each hotel in excess of base rent, and
- some other amounts, including interest accrued on any late payments or
charges.
Base rent and departmental revenue thresholds on which the rent percentage
is based were increased annually by a percentage equal to the percentage
increase in the Consumer Price Index, plus 0.75% in the case of the departmental
revenue thresholds, compared to the prior year. In addition, under some
circumstances, a reduced percentage rate would apply to the revenues
attributable to "discounted rates" that MeriStar Hotels & Resorts might have
offered. Base rent was payable monthly in arrears. Participating rent was
payable in arrears based on a monthly schedule adjusted to reflect the seasonal
variations in the hotel's revenue.
The leases required MeriStar Hotels & Resorts to pay rent, liability
insurance, all costs and expenses and all utility and other charges incurred in
the operation of the hotels. We were responsible for real estate and personal
property taxes and assessments, rent payable under ground leases, casualty
insurance, including loss of income insurance, capital impositions and capital
replacements and refurbishments, determined in accordance with GAAP. The leases
also provided for rent reductions and abatements in the event of damage or
destruction or a partial taking of any hotel.
The leases also provided for a rental adjustment under specified
circumstances in the event of a major renovation of the hotel, or a change in
the franchisor of the hotel.
Lessee Capitalization. The leases required MeriStar Hotels & Resorts, as
guarantor of the leases, to maintain a book net worth of not less than $40
million. Further, as of January 1, 1999, for so long as the tangible net worth
of MeriStar Hotels & Resorts was less than 17.5% of the aggregate rents payable
under the leases for the prior calendar year, MeriStar Hotels & Resorts was
prohibited from paying dividends or making distributions other than dividends or
distributions made for the purpose of permitting the partners of the operating
partnership to pay taxes on the taxable income of the operating partnership
attributable to its partners plus any required preferred distributions existing
to partners.
Termination. MeriStar had the right to terminate the applicable lease upon
the sale of a hotel to a third party or, upon MeriStar's determination not to
rebuild after a casualty, upon payment to MeriStar Hotels & Resorts of the fair
market value of the leasehold estate, except for properties initially identified
by MeriStar Hotels & Resorts and MeriStar as properties slated to be sold. The
fair market value of the leasehold estate was determined by discounting to
present value at a discount rate of 10% per annum the cash flow for each
remaining year of the then current lease term, which cash flow would be deemed
to be the cash flow realized by MeriStar Hotels & Resorts under the applicable
lease for the 12-month period preceding the termination date. MeriStar was to
receive as a credit against any of those termination payments an amount equal to
any outstanding "New Lease Credits," which means the projected cash flow,
determined on the same basis as the termination payment, of any new leases
entered into between MeriStar Hotels & Resorts and MeriStar after the effective
date for the initial term of the new lease amortized on a straight-line basis
over the initial term of the new lease.
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Performance Standards. MeriStar Hospitality Corporation had the right to
terminate the applicable lease if, in any calendar year, the gross revenues from
a hotel were less than 95% of the projected gross revenues for that year as set
forth in the applicable budget unless:
- MeriStar Hotels & Resorts could reasonably demonstrate that the gross
revenue shortfall was caused by general market conditions beyond its
control, or
- MeriStar Hotels & Resorts "cured" the shortfall by paying to us the
difference between the rent that would have been paid to us had the
property achieved gross revenues of 95% of the budgeted amounts and the
rent paid based on actual gross revenues.
MeriStar Hotels & Resorts did not have the cure right for more than two
consecutive years.
The leases also required that MeriStar Hotels & Resorts spend in each
calendar year at least 95% of the amounts budgeted for marketing expenses and
for repair and maintenance expenses.
Assignment and Subleasing. MeriStar Hotels & Resorts did not have the
right to assign a lease or sublet a hotel without our prior written consent. For
purposes of the lease, a change in control of MeriStar Hotels & Resorts would
have been deemed an assignment of the lease and would require our consent, which
may be granted or withheld in MeriStar's discretion.
Management Agreements with MeriStar Hotels & Resorts
Until January 1, 2001, we leased all but eight of our hotels to MeriStar
Hotels & Resorts under the lease agreements described above.
Changes to the federal tax laws governing REITs were enacted in 1999 and
became effective on January 1, 2001. Under those changes, we are permitted to
create taxable REIT subsidiaries, which may lease the property we currently own
and are taxable as C corporations. Because of these changes in the tax laws, we
have formed a number of wholly-owned taxable REIT subsidiaries. We and MeriStar
Hotels & Resorts assigned the participating leases to our taxable REIT
subsidiaries and the taxable REIT subsidiaries entered into management
agreements with MeriStar Hotels & Resorts to manage our hotels. Under these
management agreements, the taxable REIT subsidiaries pay MeriStar Hotels &
Resorts a management fee. The taxable REIT subsidiaries in turn make rental
payments to us under the participating leases. The management agreements have
been structured to substantially mirror the economics of the former leases.
Management Fees and Performance Standards. Each taxable subsidiary will
pay MeriStar Hotels & Resorts a management fee for each hotel equal to a
specified percentage of aggregate hotel operating revenues, increased or
reduced, as the case may be, by 20% of the positive or negative difference
between:
- the actual excess of total operating revenues over total operating
expenses; and
- the projected excess of total operating revenues over total operating
expenses.
The total management fee for a hotel in any fiscal year will not be less than
2.5% or greater than 4.0% of aggregate hotel operating revenues.
Term and Termination. The management agreements with MeriStar Hotels &
Resorts have initial terms of 10 years with three renewal periods of five years
each. A renewal will not go into effect if a change in the federal tax laws
permits us or one of our subsidiaries to operate the hotel directly without
adversely affecting the ability of MeriStar to qualify as a REIT or if MeriStar
Hotels & Resorts elects not to renew the agreement. We may elect not to renew
the management agreements only as provided below.
Our taxable REIT subsidiaries have the right to terminate a management
agreement for a hotel upon the sale of the hotel to a third party or if the
hotel is destroyed and not rebuilt after a casualty. Upon that termination, our
taxable REIT subsidiary will be required to pay MeriStar Hotels & Resorts the
fair market value of the management agreement. That fair market value will be
equal to the present value, using a discount rate of 10%, of the remaining
payments under the agreement, assuming that MeriStar
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Hotels & Resorts would have been paid management fees under the agreement based
on the operating results for the 12 months preceding the termination. Our
taxable REIT subsidiaries will be able to credit against any termination
payments that projected fees, discounted to present value at a discount rate of
10%, under any management agreements or leases entered into between us or our
subsidiaries on the one hand and MeriStar Hotels & Resorts on the other hand
following August 3, 1998.
If gross operating profit from a hotel is less than 85% of the amount
projected in the hotel's budget in any fiscal year and gross operating profit
from that hotel is less than 90% of the projected amount in the next fiscal
year, our taxable subsidiaries will have the right to terminate the management
agreement for the hotel, unless:
- we did not materially comply with the capital expenditures contemplated
by the budget for either or both of the applicable fiscal years; or
- MeriStar Hotels & Resorts cures the shortfall by agreeing to reduce its
management fee for the next fiscal year by the amount of the shortfall
between the actual operating profit for the second fiscal year and 90% of
the projected gross operating profit for that year.
MeriStar Hotels & Resorts can only use the cure right once during the term of
the management agreement.
Assignment. MeriStar Hotels & Resorts does not have the right to assign a
management agreement without the prior written consent of the relevant taxable
REIT subsidiary. A change in control of MeriStar Hotels & Resorts will require
the consent of the relevant subsidiary, which may be granted or withheld in its
sole discretion.
LEGAL PROCEEDINGS
In the course of our normal business activities, various lawsuits, claims
and proceedings have been or may be instituted or asserted against us. Based on
currently available facts, our management believes that the disposition of
matters that are pending or asserted will not have a material adverse effect on
our consolidated financial position, results of operations or liquidity.
MANAGEMENT
We are managed by MeriStar, our general partner. Information regarding
MeriStar's directors and officers is included or incorporated by reference in
the accompanying joint proxy statement/prospectus.
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THE PARTNERSHIP MERGER
GENERAL
The merger agreement provides that one of our wholly-owned subsidiaries
will be merged with and into MeriStar Partnership, which will survive as one of
our subsidiaries. After the partnership merger, we will own all of the interests
in MeriStar Partnership, directly or through intervening subsidiaries. MeriStar
Partnership will continue to be organized under the laws of the State of
Delaware and will do business under the name "FelCor Hospitality Operating
Partnership, L.P."
The partnership merger is conditioned upon the effectiveness of the merger
between FelCor and MeriStar and will be effective upon the filing of a
certificate of merger with the Secretary of State of the State of Delaware
promptly following the effectiveness of the merger of MeriStar into FelCor. The
merger between FelCor and MeriStar is subject to the receipt of the required
approvals of the FelCor stockholders and the MeriStar stockholders and the
satisfaction or waiver of other conditions to the merger.
No vote or consent of the limited partners of MeriStar Partnership or us is
required or being sought. FelCor, as our general partner, and MeriStar, as the
general partner of MeriStar Partnership, have taken all necessary actions under
their respective partnership agreements to approve the partnership merger.
Unless agreed otherwise, the closing of the FelCor/MeriStar merger will occur at
10:00 a.m., central time, on the third business day after the date on which the
conditions set forth in the merger agreement are satisfied or waived.
CONTRIBUTIONS BY FELCOR
In connection with the partnership merger, FelCor will make various
contributions of the MeriStar Partnership units received by it in the
FelCor/MeriStar merger, as follows:
- immediately following the merger, and prior to the partnership merger,
FelCor will contribute to us each of its MeriStar Partnership common
units, exclusive of general partner units, received by it in the merger,
in exchange for 0.784 of one of our common units and the right to receive
from us $4.60 in cash;
- immediately following the partnership merger, FelCor will contribute each
of the MeriStar Partnership general partner units received by it from
MeriStar in the merger to a taxable REIT subsidiary wholly-owned by
FelCor and then contribute all of the equity interests in that taxable
REIT subsidiary to us, in exchange for 0.784 of one of our common units
and the right to receive from us $4.60 in cash, for each MeriStar
Partnership general partner unit held by the taxable REIT subsidiary; and
- promptly following the partnership merger, we will pay to FelCor the cash
consideration due it in connection with the above contributions.
TREATMENT OF MERISTAR PARTNERSHIP UNITS IN THE PARTNERSHIP MERGER
In the partnership merger, holders of MeriStar Partnership common units,
other than FelCor and its subsidiaries, will receive for each MeriStar
Partnership unit issued and outstanding immediately before the partnership
merger, $4.60 in cash and 0.784 of our common units. The MeriStar Partnership
preferred units and profits-only units of limited partnership interest will be
exchanged as follows:
- each Class C preferred unit in MeriStar Partnership will be exchanged for
$4.60 in cash and 0.784 of our Series C preferred units;
- each Class D preferred unit in MeriStar Partnership will be exchanged for
one of our Series D preferred units; and
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- each profits-only partnership unit in MeriStar Partnership, other than
unvested units, will be exchanged for $4.60 in cash and 0.784 of our
common units, and any unvested profits-only partnership units will be
canceled.
Cash will be paid instead of issuing fractional units.
After the completion of the partnership merger, the former MeriStar
Partnership unitholders will have the right to redeem our units issued to them
in the partnership merger in accordance with the terms and limitations of our
partnership agreement. Upon redemption of these units, unitholders would receive
FelCor common stock on a one-for-one basis or their cash equivalent, at the
election of FelCor.
ISSUANCE OF OUR UNITS AND PAYMENT OF CASH CONSIDERATION
Under the merger agreement, MeriStar Partnership unitholders must sign
ratification and joinder agreements as a condition to receiving the unit
certificates and cash consideration to be paid or issued by us to them in the
partnership merger. We will mail these agreements to record holders of MeriStar
Partnership units promptly after the effectiveness of the partnership merger. In
these agreements, the MeriStar Partnership unitholders:
- ratify and agree to be bound by our amended and restated partnership
agreement, which becomes effective upon completion of the partnership
merger;
- are admitted as our limited partners with respect to the units which they
are entitled to receive because of the partnership merger; and
- waive any rights they have under their exchange rights agreements with
MeriStar and MeriStar Partnership.
Upon our receipt of a properly signed ratification and joinder agreement,
together with other customary documents as we may require, from a MeriStar
unitholder, we will send to the unitholder a certificate representing the whole
number of units and any cash payments which the unitholder is entitled to
receive as a result of the partnership merger.
Instead of issuing fractional units, we will mail each MeriStar unitholder,
after the preceding conditions are satisfied, a check in the amount of the cash
payable by us for any fractional unit. The amount of the cash payable will equal
the product of the fraction of a unit times the average closing price of FelCor
common stock on the NYSE for the ten consecutive trading days ending two trading
days prior to the closing date of the partnership merger.
DISTRIBUTIONS PRIOR TO CLOSING
The merger agreement permits each of MeriStar Partnership and us to pay
distributions in the ordinary and normal course of business, including with
respect to the MeriStar Partnership Class C and Class D preferred units, with
record and payment dates that are consistent with its past practice, not to
exceed the last distribution paid by it.
In addition, each of MeriStar Partnership and us will authorize a partial
quarterly distribution, with the record date being the closing date of the
merger, covering the period between the last regular quarterly distribution
until the closing date. The partial distribution may not be paid without
FelCor's consent if the closing date of the merger occurs within 15 days after
the record date for a regularly-scheduled dividend by FelCor. The amount of the
partial distribution will be based on a proportionate fraction of the last
quarterly distribution of the party making the partial distribution. The partial
distribution is payable within 30 days after the closing of the merger.
MeriStar Partnership must also declare a final distribution to the extent
necessary for MeriStar to comply with the distribution requirement in Section
857(a)(1) of the Internal Revenue Code. This distribution would have the same
record and payment dates as any partial quarterly distributions paid by MeriStar
Partnership. The record and payment dates for any partial quarterly distribution
or additional
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distribution paid by MeriStar Partnership may be accelerated, by the mutual
agreement of MeriStar Partnership, FelCor, MeriStar and us, to avoid the
imposition of federal excise tax on MeriStar.
All other distribution payments by MeriStar Partnership or us are
prohibited by the merger agreement.
REGULATORY APPROVALS
No material federal or state regulatory requirements must be complied with
or approvals must be obtained by FelCor, us, MeriStar or MeriStar Partnership in
connection with either the merger or the partnership merger.
ACCOUNTING TREATMENT
We will treat the partnership merger as a purchase of MeriStar Partnership
for financial accounting purposes. This means that MeriStar Partnership will be
consolidated with us, and we will record the assets acquired and the liabilities
assumed at their estimated fair values at the time the merger is completed.
RESTRICTIONS ON RESALES BY AFFILIATES
Our common units to be issued to MeriStar Partnership unitholders in the
partnership merger will be freely transferable under the Securities Act, except
for units issued to any person who may be deemed to be an "affiliate" of
MeriStar Partnership within the meaning of Rule 145 under the Securities Act or
who will become an "affiliate" of us within the meaning of Rule 144 under the
Securities Act after the partnership merger. Our common units received by
persons who are deemed to be MeriStar Partnership affiliates or who become our
affiliates may be resold by these persons only in transactions permitted by the
limited resale provisions of Rule 145 or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of MeriStar
partnership generally include individuals or entities that, directly or
indirectly through one or more intermediaries, control, are controlled by or are
under common control with MeriStar Partnership and may include officers,
directors and principal stockholders of MeriStar. All persons who may be deemed
to be affiliates of MeriStar Partnership will be so advised before the
completion of the partnership merger.
MeriStar will use its best efforts to obtain an affiliate agreement from
each affiliate of MeriStar Partnership before the completion of the partnership
merger by which each MeriStar Partnership affiliate will agree not to sell,
transfer, pledge or otherwise dispose of our common units received in the
partnership merger in violation of the Securities Act or the rules and
regulations promulgated under the Securities Act. Generally, this will require
that all sales be made as provided by Rule 145 under the Securities Act, which
in turn requires that, for specified periods, sales be made in compliance with
the volume limitations, manner of sale provisions and current information
requirements of Rule 144 under the Securities Act.
Under the affiliate agreements, we will have the right to place legends on
the certificates evidencing our common units issued to MeriStar affiliates in
the partnership merger summarizing the foregoing restrictions until a sale,
transfer, pledge or other disposition of our common units represented by these
certificates has been registered under the Securities Act or is made in
compliance with Rule 145 under the Securities Act.
Persons who are not affiliates of MeriStar Partnership generally may sell
their common units without securities law restrictions. However, any sales would
be subject to the other restrictions on transfer contained in our partnership
agreement.
NO APPRAISAL RIGHTS
Under Delaware law, neither our limited partners nor the limited partners
of MeriStar Partnership have any dissenters' rights or rights to an appraisal.
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COMPARATIVE DISTRIBUTION INFORMATION
The following table shows, for the periods indicated, the cash
distributions per common unit of MeriStar Partnership and us.
CASH DISTRIBUTIONS PER CASH DISTRIBUTIONS PER
FELCOR PARTNERSHIP COMMON UNIT MERISTAR PARTNERSHIP COMMON UNIT
------------------------------ --------------------------------
1998
First Quarter............... $0.55
Second Quarter.............. 0.55
Third Quarter............... 0.55
Fourth Quarter.............. 0.895(1) $0.318(2)
1999
First Quarter............... $0.55 $0.505
Second Quarter.............. 0.55 0.505
Third Quarter............... 0.55 0.505
Fourth Quarter.............. 0.55 0.505
2000
First Quarter............... $0.55 $0.505
Second Quarter.............. 0.55 0.505
Third Quarter............... 0.55 0.505
Fourth Quarter.............. 0.55 0.505
2001
First Quarter............... $0.55 $0.505
Second Quarter.............. 0.55 0.505
- ---------------
(1) Includes a special one-time dividend of $0.345 per share, representing
accumulated earnings and profits of Bristol Hotel Company prior to its
merger with FelCor in July 1998.
(2) No dividends were declared prior to August 3, 1998, the date of the merger
between CapStar Hotel Company and American General Hospitality Corporation,
which created MeriStar.
As described in the accompanying joint proxy statement/prospectus, under
the caption, "Comparative Per Share Market Prices and Dividend Information,"
FelCor and MeriStar are subject to REIT distribution tests. FelCor, as our
general partner, has the power to cause us to make sufficient distributions to
it to enable it to comply with the REIT distribution test. MeriStar, as the
general partner of MeriStar Partnership, has the same power. Under some
circumstances FelCor or MeriStar may be required to make distributions in excess
of cash available for distribution in order to meet these REIT distribution
requirements. In that event, FelCor or MeriStar presently would expect to borrow
funds, or to sell assets for cash, to the extent necessary to obtain cash
sufficient to make the dividends required to retain its qualification as a REIT
for federal income tax purposes.
Both MeriStar Partnership and we currently anticipate that each will
maintain at least the current distribution rate for the immediate future, unless
actual results of operations, economic conditions or other factors differ from
its current expectations. Future distributions, if any, paid by either MeriStar
Partnership or us will be at the discretion of the general partner and will
depend on its actual cash flow, its financial condition, capital requirements,
the annual distribution requirements under the REIT provisions of the Internal
Revenue Code and any other facts the general partner deems relevant.
The merger agreement permits MeriStar Partnership and us to pay, prior to
the closing of the partnership merger, regular quarterly cash distributions to
their unitholders. The merger agreement requires both MeriStar Partnership and
us to declare a partial quarterly distribution with a record date on the closing
date of the partnership merger unless the partnership merger closes within 15
days after the record date for a regularly scheduled distribution. The
respective distributions will be a fraction of each partnership's latest regular
quarterly distributions based on the number of days since the last distribution
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record date. In addition, MeriStar Partnership is required to declare an
additional special distribution, having the same record date, if necessary to
satisfy the REIT tax requirements of MeriStar to distribute 90% of its taxable
income for its shortened tax year ending with the completion of the merger. The
record and payment dates of any partial quarterly or additional distributions
paid by MeriStar Partnership may be accelerated by the mutual agreement of
FelCor and MeriStar.
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The following unaudited Pro Forma Combined Statements of Operations for the
three months ended March 31, 2001 and the year ended December 31, 2000 are based
in part upon the Consolidated Statements of Operations of FelCor Partnership,
DJONT Operations, L.L.C., or DJONT, Bristol Hotels & Resorts Tenant Companies,
or Bristol Tenant, and MeriStar Partnership for the three months ended March 31,
2001 and the year ended December 31, 2000 included or incorporated by reference
herein, except for the consolidated statement of operations of Bristol Tenant
for the three months ended March 31, 2001 which was provided by Bristol Tenant.
The Pro Forma Combined Statements of Operations for the three months ended
March 31, 2001 and the year ended December 31, 2000 assumes that all the
following occurred on January 1 of the fiscal period presented:
- our acquisition of DJONT, effective January 1, 2001, for 416,667 units of
limited partnership interest in us valued at approximately $10 million;
- our acquisition of 12 leases held by Bass, effective January 1, 2001, for
413,585 of our units of limited partnership interest valued at
approximately $10 million;
- our acquisition of the remaining 88 leases held by Bass, effective July
1, 2001, and the recording of a lease termination expense of
approximately $125 million in the third quarter of 2001 and a
corresponding liability of approximately $125 million that will be
amortized over the term of the management agreements with respect to
these hotels;
- the assignment of the leases from MeriStar Hotels & Resorts, Inc. to
taxable REIT subsidiaries, or TRSs, of MeriStar Partnership; and
- the completion of the merger, the partnership merger and the related
financings and application of the net proceeds.
In the opinion of our management, all material adjustments necessary to
reflect the effects of the preceding transactions have been made. The unaudited
Pro Forma Combined Statements of Operations are presented for illustrative
purposes only and are not necessarily indicative of what the actual results of
operations would have been had the transactions described above occurred on the
indicated dates, nor do they purport to represent our results of operations for
future periods.
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FELCOR LODGING LIMITED PARTNERSHIP
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
FELCOR MERISTAR
PARTNERSHIP PARTNERSHIP MERGER
POST RMA HISTORICAL ADJUSTMENTS PRO FORMA
(A) (B) (C) TOTAL
----------- ----------- ----------- ---------
Revenues:
Room and suite revenue............................... $322,929 $200,380 $523,309
Food and beverage revenue............................ 62,592 71,291 133,883
Other operating departments.......................... 15,973 22,471 38,444
Percentage lease revenue............................. 5,384 5,384
Retail space rental and other revenue................ 6,092 3,158 9,250
-------- -------- --------
Total revenues......................................... 407,586 302,684 710,270
-------- -------- --------
Expenses:
Hotel operating expenses:
Room............................................... 69,583 45,722 115,305
Food and beverage expenses......................... 47,577 51,404 98,981
Other operating departments........................ 15,542 12,507 28,049
Management and incentive fees........................ 13,510 7,327 20,837
Other property operating costs....................... 104,682 77,929 182,611
Property taxes, insurance, and other................. 44,182 18,387 62,569
Corporate expenses................................... 2,884 2,359 5,243
Depreciation......................................... 39,808 28,374 $(5,936)(D) 62,246
-------- -------- ------- --------
Total operating expenses............................... 337,768 244,009 (5,936) 575,841
-------- -------- ------- --------
Operating income....................................... 69,818 58,675 5,936 134,429
-------- -------- ------- --------
Interest expense, net.................................. 41,740 31,243 5,088(E) 78,071
Swap termination costs................................. 9,297 9,297
Writedown of investments............................... 2,112 2,112
Other.................................................. 771 453 59(F) 1,283
-------- -------- ------- --------
Income before equity in income from unconsolidated
entities, minority interests, and gain (loss) on sale
of assets............................................ 27,307 15,570 789 43,666
Equity in income from unconsolidated entities.......... 2,150 2,150
Minority interests in other partnerships............... (1,756) (11) (1,767)
Gain (loss) on sale of assets, net..................... 2,473 (1,062) 3(F) 1,414
-------- -------- ------- --------
Net income before extraordinary items.................. 30,174 14,497 792 45,463
Preferred distributions................................ (6,150) (141) (2,625)(G) (8,916)
-------- -------- ------- --------
Net income before extraordinary items applicable to
common unitholders................................... $ 24,024 $ 14,356 $(1,833) $ 36,547
======== ======== ======= ========
Basic per unit data:
Net income before extraordinary items applicable to
common unitholders................................. $ .39 $ 0.37
======== ========
Weighted average units outstanding................... 61,609 38,387(H) 99,996
======== ======= ========
Diluted per unit data:
Net income before extraordinary items applicable to
common unitholders................................. $ .39 $ 0.36
======== ========
Weighted average units outstanding................... 62,076 39,278(H) 101,354
======== ======= ========
See notes to pro forma combined statements of operations.
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FELCOR LODGING LIMITED PARTNERSHIP
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
FELCOR MERISTAR
PARTNERSHIP PARTNERSHIP MERGER
POST RMA POST RMA ADJUSTMENTS PRO FORMA
(I) (J) (C) TOTAL
----------- ----------- ----------- ----------
Revenues:
Room and suite revenue.................................... $1,309,300 $ 782,288 $2,091,588
Food and beverage revenue................................. 261,551 290,792 552,343
Other operating departments............................... 82,969 84,660 167,629
Percentage lease revenue.................................. 20,925 20,925
Retail space rental and other revenue..................... 8,102 18,424 $ 93(F) 26,619
---------- ---------- ----------- ----------
Total revenues.............................................. 1,661,922 1,197,089 93 2,859,104
---------- ---------- ----------- ----------
Expenses:
Hotel operating expenses:
Room.................................................... 316,204 184,791 500,995
Food and beverage expenses.............................. 193,851 209,962 403,813
Other operating departments............................. 36,250 48,263 84,513
Management and incentive fees............................. 60,653 28,943 89,596
Other property operating costs............................ 432,808 302,347 735,155
Property taxes, insurance, and other...................... 162,530 72,310 234,840
Corporate expenses........................................ 12,256 9,445 21,701
Depreciation.............................................. 161,836 107,362 (17,612)(D) 251,586
---------- ---------- ----------- ----------
Total operating expenses.................................... 1,376,388 963,423 (17,612) 2,322,199
---------- ---------- ----------- ----------
Operating income............................................ 285,534 233,666 17,705 536,905
---------- ---------- ----------- ----------
Interest expense, net....................................... 167,330 120,850 18,354(E) 306,534
Loss on assets held for sale................................ 63,000 63,000
Other....................................................... 5,001 1,622 406(F) 7,029
---------- ---------- ----------- ----------
Income before equity in income from unconsolidated entities,
minority interests, and gain (loss) on sale of assets..... 50,203 111,194 (1,055) 160,342
Equity in income from unconsolidated entities............... 12,170 12,170
Minority interests in other partnerships.................... (3,570) 3 (3,567)
Gains on sale of assets..................................... 4,388 3,439 (14)(F) 7,813
---------- ---------- ----------- ----------
Net income before extraordinary items....................... 63,191 114,636 (1,069) 176,758
Preferred distributions..................................... (24,682) (565) (10,500)(G) (35,747)
---------- ---------- ----------- ----------
Net income before extraordinary items applicable to common
unitholders............................................... $ 38,509 $ 114,071 $ (11,569) $ 141,011
========== ========== =========== ==========
Basic per unit data:
Net income before extraordinary items applicable to common
unitholders............................................. $ .62 $ 1.40
========== ==========
Weighted average units outstanding...................... 62,301 38,387(H) 100,688
========== =========== ==========
Diluted per unit data:
Net income before extraordinary items applicable to common
unitholders............................................. $ .62 $ 1.38
========== ==========
Weighted average units outstanding...................... 62,556 39,278(H) 101,834
========== =========== ==========
See notes to pro forma combined statements of operations.
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NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001,
AND THE YEAR ENDED DECEMBER 31, 2000
(UNAUDITED)
(A) Represents FelCor Partnership's historical results of operations, excluding
extraordinary items plus the pro forma effect of FelCor Partnership's
acquisition of 88 hotel leases from Bass as if the acquisition occurred on
January 1, 2000. The computation is as follows:
FELCOR
FELCOR BRISTOL PRO FORMA POST RMA
HISTORICAL(1) TENANT(2) ADJUSTMENTS TOTAL
------------- --------- ----------- --------
Revenues:
Room and suite revenue.............. $192,227 $130,702 $322,929
Food and beverage revenue........... 27,652 34,940 62,592
Other operating departments......... 11,612 4,361 15,973
Percentage lease revenue............ 51,531 $(51,531)(3)
Retail space rental and other
revenue.......................... 2,722 3,370 6,092
-------- -------- -------- --------
Total revenues........................ 285,744 173,373 (51,531) 407,586
-------- -------- -------- --------
Expenses:
Hotel operating expenses:
Room............................. 38,230 31,353 69,583
Food and beverage expenses....... 20,104 27,473 47,577
Other operating departments...... 11,921 3,621 15,542
Management and incentive fees......... 7,098 6,412(4) 13,510
Other property operating costs........ 63,379 47,016 (5,713)(5) 104,682
Percentage lease expense.............. 57,221 (57,221)(3)
Property taxes, insurance, and
other............................... 37,978 6,204 44,182
Corporate expenses.................... 2,884 2,884
Depreciation.......................... 39,808 39,808
Lease termination costs............... 36,226 (36,226)(6)
-------- -------- -------- --------
Total operating expenses.............. 257,628 172,888 (92,748) 337,768
-------- -------- -------- --------
Operating income...................... 28,116 485 41,217 69,818
-------- -------- -------- --------
Interest expense, net................. 39,356 2,384(7) 41,740
Other................................. 639 132 771
-------- -------- -------- --------
Income (loss) before equity in income
from unconsolidated entities,
minority interests, and gain on sale
of assets........................... (11,879) 353 38,833 27,307
-------- -------- -------- --------
Equity in income from unconsolidated
entities............................ 2,150 2,150
Minority interests.................... (1,756) (1,756)
Gain on sale of assets, net........... 2,473 2,473
-------- -------- -------- --------
Net income (loss) before extraordinary
items............................... (9,012) 353 38,833 30,174
Preferred distributions............... (6,150) (6,150)
-------- -------- -------- --------
Net income (loss) before extraordinary
items applicable to common
shareholders........................ $(15,162) $ 353 $ 38,833 $ 24,024
======== ======== ======== ========
Basic per share data:
Net income (loss) before
extraordinary items applicable to
common shareholders.............. $ (0.25) $ 0.39
======== ========
Weighted average shares
outstanding...................... 61,609 61,609
======== ========
Diluted per share data:
Net income (loss) before
extraordinary items applicable to
common shareholders.............. $ (0.25) $ 0.39
======== ========
Weighted average shares
outstanding...................... 61,609 467(8) 62,076
======== ======== ========
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NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
- ---------------
(1)Represents the historical results of operations of FelCor Partnership for the
three months ended March 31, 2001, excluding extraordinary items. Effective
January 1, 2001, with the enactment of the REIT Modernization Act, FelCor
Partnership had completed transactions that resulted in its newly formed
taxable REIT subsidiaries acquiring leases for 96 hotels that were previously
leased to either DJONT or Bass plc ("Bass"), accordingly, the revenues and
expenses associated with these hotels are included in FelCor Partnership's
historical consolidated statement of operations for the three month period
ended March 31, 2001.
(2)Represents the historical results of operations of FelCor Partnership's
hotels leased to Bristol Tenant for the three months ended March 31, 2001,
excluding extraordinary items.
(3)Represents the elimination of historical percentage lease revenue and expense
between FelCor Partnership and Bristol Tenant. The difference between
percentage lease revenue and percentage lease expense generally relates to
percentage lease revenue that was deferred by FelCor Partnership under SAB
101.
(4)Represents the adjustment required to record the management fees at their
contractual rates less the portion of management fees classified as lease
termination costs. In the negotiation for the acquisition of the 88 leases
and the new long-term management contract, FelCor Partnership was able to
effectively finance the lease acquisition cost over the term of the
management agreement, by paying above market management fees. FelCor
Partnership valued the lease termination cost by comparing the management
fees under the contract with similar management contracts and the actual
lease termination provision under the leases. FelCor attributed $125 million
to lease termination cost. The $125 million represents the net present value
of the above market portion of the management fees over the life of the
management contracts. FelCor Partnership will expense the $125 million on
July 1, 2001 and record a related lease termination liability. The liability
will be reduced over the life of the management contracts as cash payments
are made to Bristol Tenant. For the three months ended March 31, 2001, on a
pro forma basis, FelCor Partnership would have paid $10.3 million in cash to
Bristol Tenant under the management contracts, of which $6.4 million would be
recorded as management fee expense, $2.4 million would be recorded as
interest expense, and $1.5 million would reduce the lease termination
liability. The expense related to the $125 million lease termination cost is
not reflected in this pro forma income statement.
(5)Represents the elimination of historical franchise fees. These agreements
have been replaced with management contracts.
(6)Represents the elimination of lease termination costs associated with the
acquisition of DJONT and Bass leases.
(7)Represents the interest component of the lease termination liability.
(8)Represents the dilutive effect of historical FelCor's stock options, which
were antidilutive on a historical basis but dilutive on a pro forma basis.
- ---------------
(B) Represents MeriStar Partnership's historical results of operations,
excluding extraordinary items. Effective January 1, 2001, because of the
enactment of the REIT Modernization Act, taxable REIT subsidiaries of
MeriStar Partnership were assigned the leases on 106 hotels that had
previously been held by MeriStar Hotels & Resorts, Inc. and entered into
management contracts with MeriStar Hotels & Resorts to manage these hotels.
Accordingly, the related hotel revenues, expenses and management fees are
included in MeriStar Partnership's historical results of operations for the
three month period ended March 31, 2001. Some reclassifications have been
made to conform to the presentation of our statement of operations.
S-46
294
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
(C) On May 10, 2001, FelCor and MeriStar announced that they had signed a
merger agreement, under which MeriStar will merge with and into FelCor, a
wholly-owned subsidiary of FelCor Partnership will merge with and into
MeriStar Partnership, and the limited partners of MeriStar Partnership,
other than FelCor and its subsidiaries, will exchange their interests in
MeriStar Partnership for interests in FelCor Partnership and, where
applicable, cash. Under the merger agreement, each holder of MeriStar
common stock will receive, for each share of MeriStar common stock, $4.60
in cash plus 0.784 of a share of FelCor common stock. Each holder of common
units and profits-only partnership units in MeriStar Partnership, other
than FelCor and its subsidiaries will receive, for each common unit and
profits-only unit, $4.60 in cash plus 0.784 of a common unit of FelCor
Partnership. Each holder of Class C preferred units in MeriStar Partnership
will receive, for each unit, $4.60 in cash plus 0.784 of a Series C
preferred unit in FelCor Partnership. Each holder of Class D preferred
units in MeriStar Partnership will receive, for each unit, one Series D
preferred unit in FelCor Partnership. Amounts represent adjustments to
record the merger and related transactions as if the merger had occurred on
January 1 of the fiscal period presented. FelCor common shares and common
units are valued at $22.10, the closing share price on the date of the
announcement. The calculation of the merger acquisition cost is as follows
(in thousands, except share and unit data):
Issuance of 37.630 million common units of FelCor
Partnership units in exchange for 48.0 million common and
profits-only units of MeriStar Partnership................ $ 831,638
Issuance of 755,954 FelCor Partnership Series C preferred
units in exchange for 964,227 MeriStar Partnership Class C
preferred units........................................... 16,707
Payment of $4.60 per unit of MeriStar Partnership common
units, Class C preferred units and profits-only units..... 225,227
Issuance of 392,157 FelCor Partnership Series D preferred
units in exchange for a like number of MeriStar
Partnership Class D preferred units....................... 8,690
Issuance of 3.6 million FelCor stock options based on a
0.784 exchange ratio in exchange for MeriStar stock
options, assuming all MeriStar option holders are not
retained by FelCor........................................ 10,600
Assumption of MeriStar's liabilities........................ 1,887,451
Transaction costs........................................... 39,600
----------
Total merger acquisition cost............................... $3,019,913
==========
The following is a calculation of estimated transaction costs (in
thousands):
Severance and excise tax payments........................... $ 15,000
Financial advisory fees..................................... 12,000
Consent payments in connection with debt agreements......... 4,600
Legal fees.................................................. 3,000
Accounting fees............................................. 1,000
Mailing and filing fees..................................... 1,000
Other....................................................... 3,000
----------
Transaction costs................................. $ 39,600
==========
S-47
295
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
(D) Represents the reduction in historical depreciation associated with the
allocation of our purchase price of MeriStar Partnership, offset by
additional depreciation on $8.3 million of furniture, fixtures, and
equipment acquired from Bass. The allocation of basis to the assets
acquired from MeriStar Partnership is as follows (in thousands):
Total merger acquisition cost............................... $3,019,913
Less: non-real estate assets acquired at historical cost
(which approximates fair value)........................... 201,198
----------
Allocation to investment in hotels.......................... $2,818,715
==========
The basis is anticipated to be allocated $281.9 million to land, $2,395.9
million to buildings and improvements, and $140.9 million to furniture,
fixtures, and equipment. The depreciable lives assigned to buildings and
improvements are forty years and five years for furniture, fixtures, and
equipment. The adjustment is calculated as follows (in thousands):
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, 2000 MARCH 31, 2001
------------------ --------------------------
Buildings and improvements acquired from
MeriStar Partnership......................... $ 59,898 $ 14,974
Furniture, fixtures, and equipment acquired
from MeriStar Partnership.................... 28,186 7,048
--------- --------
88,084 22,022
Historical MeriStar Partnership depreciation... (107,362) (28,374)
--------- --------
(19,278) (6,352)
Furniture, fixtures, and equipment acquired
from Bass.................................... 1,666 416
--------- --------
Net adjustment................................. $ (17,612) $ (5,936)
========= ========
(E) Represents the net adjustment to historical interest expense for the
increase in interest expense related to new borrowings, resulting from
merger related transactions offset by reductions in historical interest
expense related to borrowings, that will be repaid with the proceeds of the
new borrowings, along with the push down of interest expense from MeriStar
to MeriStar Partnership that is not reflected in MeriStar Partnership's
historical interest expense, see also note (H), as follows (in thousands):
INTEREST FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
RATE DECEMBER 31, 2000 MARCH 31, 2001
-------- ------------------ --------------------------
Increases:
New senior notes of $600,000...... 8.50%(1) $ 50,575 $12,645
New mortgage debt of $350,000..... 5.75%(2) 20,125 5,031
New line of credit borrowings of
$362,709....................... 6.75%(3) 24,483 6,120
Amortization of deferred financing
costs of new borrowings of
$19,700 over lives of 1-10
years.......................... 6,126 1,531
-------- -------
Total increases................... 101,309 25,327
-------- -------
S-48
296
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
INTEREST FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
RATE DECEMBER 31, 2000 MARCH 31, 2001
-------- ------------------ --------------------------
Reductions:
FelCor Partnership $248,900 line
of credit repaid............... 7.66%(3) 19,066 4,766
FelCor Partnership $61,744
mortgage debt repaid........... (4) 5,340 1,203
MeriStar Partnership $356,826
notes payable to MeriStar
repaid......................... (5) 24,969 6,242
MeriStar Partnership $247,000 line
of credit repaid............... (6) 19,735 4,656
MeriStar Partnership $195,000 term
loans repaid................... (6) 16,655 3,831
Historical interest capitalized by
MeriStar Partnership........... (6,136) (1,473)
Historical amortization of
MeriStar Partnership deferred
financing costs................ 4,585 1,323
-------- -------
Total reductions.................. 84,214 20,548
-------- -------
17,095 4,779
Plus push down of interest
expense........................... 1,259 309
-------- -------
Net adjustment...................... $ 18,354 $ 5,088
======== =======
- ---------------
(1)Represents contractual fixed rate on notes issued in May 2001.
(2)Represents estimated fixed rate to be committed by lender.
(3)Represents contractual variable rate of LIBOR plus up to 200 basis points.
(4)Represents the weighted average historical rates which were 8.80% and 7.86%
for the periods ended December 31, 2000 and March 31, 2001, respectively.
(5)Represents contractual fixed rates of 8.71% on subordinated notes with a
principal balance of $202.5 million and 4.75% on convertible notes with a
principal balance of $154.3 million.
(6)Represents the historical weighted average interest rates for the periods
presented are as follows:
2000 2001
----- -----
Line of credit....................................... 7.99% 7.54%
$121 million term loan............................... 8.45% 7.74%
$74 million term loan................................ 8.69% 8.05%
We expect to assume approximately $500 million of MeriStar Partnership's
senior notes and approximately $377 million of mortgage debt of MeriStar
Partnership's subsidiaries in connection with the merger.
(F) FelCor has no assets, liabilities, revenues or expenses other than those
derived from its ownership of us. MeriStar has miscellaneous assets,
liabilities, revenues and expenses other than those derived from its
ownership of MeriStar Partnership. Upon completion of the merger and
related transactions, FelCor will contribute to us all assets and
liabilities acquired; accordingly these miscellaneous adjustments are made
to reflect the contribution of the items historically reported only at the
MeriStar level.
(G) Represents dividends on $100 million of cumulative redeemable preferred
units at an anticipated dividend rate of 10.5%.
S-49
297
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
(H) Represents the impact of additional units issued in the merger on a basic
and diluted basis, and the dilutive effect of FelCor stock options issued
to MeriStar option holders as follows (in thousands):
Basic
Units issued to MeriStar Partnership unitholders.......... 38,387
------
Adjustment to weighted average units-basic................ 38,387
Diluted
Dilutive effect of options issued to MeriStar
optionholders.......................................... 891
------
Adjustment to weighted average units-diluted................ 39,278
======
S-50
298
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
(I) Represents FelCor Partnership's historical results of operations, excluding
extraordinary items, plus the pro forma effect of FelCor Partnership's
acquisition of DJONT and 100 hotel leases from Bass as if the acquisition
occurred on January 1, 2000. The computation is as follows:
FELCOR DJONT
PARTNERSHIP OPERATIONS, BRISTOL BRISTOL TENANT BRISTOL
HISTORICAL LLC TENANT PREDECESSOR TOTAL ELIMINATIONS
(1) (2) (3) (4) HISTORICAL (5)
----------- ----------- -------- -------------- ---------- ------------
Revenues:
Room and suite revenue.......... $709,802 $461,978 $143,952 $1,315,732 $ (6,432)
Food and beverage revenue....... 112,594 115,176 36,645 264,415 (2,864)
Other operating departments..... 51,695 27,657 4,000 83,352 (383)
Percentage lease revenue........ $536,907 536,907
Retail space rental and other
revenue....................... 3,057 5,045 8,102
-------- -------- -------- -------- ---------- --------
Total revenues................... 539,964 879,136 604,811 184,597 2,208,508 (9,679)
-------- -------- -------- -------- ---------- --------
Expenses:
Hotel operating expenses:
Room............................ 173,496 111,496 32,970 317,962 (1,758)
Food and beverage expenses...... 84,542 84,817 26,454 195,813 (1,962)
Other operating departments..... 21,314 11,216 3,842 36,372 (122)
Management and incentive fees.... 24,766 16,770 5,589 47,125 (76)
Other property operating costs... 232,839 176,480 53,318 462,637 (6,284)
Percentage lease expense......... 274,653 199,338 62,916 536,907
Property taxes, insurance, and
other........................... 89,257 73,273 162,530
Corporate expenses............... 12,256 12,256
Depreciation..................... 160,745 572 345 175 161,837 (1)
-------- -------- -------- -------- ---------- --------
Total operating expenses......... 262,258 885,456 600,462 185,264 1,933,440 (10,203)
-------- -------- -------- -------- ---------- --------
Operating income (loss).......... 277,706 (6,319) 4,349 (667) 275,069 524
-------- -------- -------- -------- ---------- --------
Interest expense, net............ 156,712 618 (133) (35) 157,162 168
Loss on assets held for sale..... 63,000 63,000
Other............................ 3,376 1,625 5,001
-------- -------- -------- -------- ---------- --------
Income (loss) before equity in
income from unconsolidated
entities, minority interests,
and gain on sale of assets...... 54,618 (8,562) 4,482 (632) 49,906 356
-------- -------- -------- -------- ---------- --------
Equity in income from
unconsolidated entities......... 14,820 593 15,413
Minority interests............... (3,570) (3,243) (6,813)
Gain on sale of assets........... 4,388 4,388
Income tax expense (benefit)..... 2,798 (267) 2,531
-------- -------- -------- -------- ---------- --------
Net income (loss) before
extraordinary items............. 70,256 (11,212) 1,684 (365) 60,363 356
Preferred distributions.......... (24,682) (24,682)
-------- -------- -------- -------- ---------- --------
Net income (loss) before
extraordinary items applicable
to common shareholders.......... $ 45,574 $(11,212) $ 1,684 $ (365) $ 35,681 $ 356
======== ======== ======== ======== ========== ========
Basic per share data:
Net income before extraordinary
items applicable to common
shareholders.................. $ 0.67
========
Weighted average shares
outstanding................... 62,301
========
Diluted per share data:
Net income before extraordinary
items applicable to common
shareholders.................. $ 0.67
========
Weighted average shares
outstanding................... 62,556
========
FELCOR
PROFORMA PARTNERSHIP
ADJUSTMENTS POST RMA TOTAL
----------- --------------
Revenues:
Room and suite revenue.......... $1,309,300
Food and beverage revenue....... 261,551
Other operating departments..... 82,969
Percentage lease revenue........ $(536,907)(6)
Retail space rental and other
revenue....................... 8,102
--------- ----------
Total revenues................... (536,907) 1,661,922
--------- ----------
Expenses:
Hotel operating expenses:
Room............................ 316,204
Food and beverage expenses...... 193,851
Other operating departments..... 36,250
Management and incentive fees.... 13,604(7) 60,653
Other property operating costs... (23,545)(8) 432,808
Percentage lease expense......... (536,907)(6)
Property taxes, insurance, and
other........................... 162,530
Corporate expenses............... 12,256
Depreciation..................... 161,836
--------- ----------
Total operating expenses......... (546,848) 1,376,388
--------- ----------
Operating income (loss).......... 9,941 285,534
--------- ----------
Interest expense, net............ 10,000(9) 167,330
Loss on assets held for sale..... 63,000
Other............................ 5,001
--------- ----------
Income (loss) before equity in
income from unconsolidated
entities, minority interests,
and gain on sale of assets...... (59) 50,203
--------- ----------
Equity in income from
unconsolidated entities......... (3,243)(10) 12,170
Minority interests............... 3,243(11) (3,570)
Gain on sale of assets........... 4,388
Income tax expense (benefit)..... (2,531)(12)
--------- ----------
Net income (loss) before
extraordinary items............. 2,472 63,191
Preferred distributions.......... (24,682)
--------- ----------
Net income (loss) before
extraordinary items applicable
to common shareholders.......... $ 2,472 $ 38,509
========= ==========
Basic per share data:
Net income before extraordinary
items applicable to common
shareholders.................. $ 0.62
==========
Weighted average shares
outstanding................... 62,301
==========
Diluted per share data:
Net income before extraordinary
items applicable to common
shareholders.................. $ 0.62
==========
Weighted average shares
outstanding................... 62,556
==========
S-51
299
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
- ---------------
(1)Represents the historical results of operations of FelCor Partnership for
the year ended December 31, 2000. Certain amounts have been reclassified to
conform to the March 31, 2001 presentation with no effect on previously
reported net income.
(2)Represents the historical results of operations of DJONT for the year ended
December 31, 2000. Certain amounts have been reclassified to conform to the
March 31, 2001 presentation with no effect on previously reported net
income.
(3)Represents the historical results of operations of Bristol Tenant for the
nine months ended December 31, 2000. Certain amounts have been reclassified
to conform to the March 31, 2001 presentation with no effect on previously
reported net income.
(4)Represents the historical results of operations of Bristol Tenant
Predecessor for the three months ended March 31, 2000. Certain amounts have
been reclassified to conform to the March 31, 2001 presentation with no
effect on previously reported net income.
(5)Represents adjustment to eliminate historical amounts related to (i) a hotel
leased by Bristol Tenant not owned by FelCor Partnership and (ii) a hotel
owned by FelCor Partnership but sold in December 2000.
(6)Represents the elimination of historical percentage lease revenues and
expenses between FelCor Partnership and the lessees.
(7)Represents the adjustment required to record the management fees to Bristol
Tenant at their contractual rates less the portion of fees classified as
lease termination costs. In the negotiation for the acquisition of the 88
leases and the new long-term management contract, FelCor Partnership was
able to effectively finance the lease acquisition cost over the term of the
long term management agreement, by paying above market management fees.
FelCor Partnership valued the lease termination cost by comparing the
management fees under the contract with similar long term management
contracts and the actual lease termination provision under the leases.
FelCor attributed $125 million to lease termination cost. The $125 million
represents the net present value of the above market portion of the
management fees over the life of the management contracts. FelCor
Partnership will expense the $125 million on July 1, 2001 and record a
related lease termination liability. The liability will be reduced over the
life of the management contracts as cash payments are made to Bristol
Tenant. For the three months ended March 31, 2001, on a pro forma basis,
FelCor Partnership would have paid $51.7 million in cash to Bristol Tenant
under the management contracts, of which $35.9 million would be recorded as
management fee expense, $10 million would be recorded as interest expense,
and $5.8 million would reduce the lease termination liability. The expense
related to the $125 million lease termination cost is not reflected in this
pro forma income statement.
(8)Represents the elimination of historical franchise fees paid to Bristol
Tenant. These agreements have been replaced with management contracts.
(9)Represents the interest component of the lease termination liability.
(10)Represents the elimination of FelCor Partnership's equity in income of
DJONT's consolidated subsidiary.
(11)Represents the elimination of the DJONT minority interest of $3,243
represented by FelCor Partnership's ownership discussed in (10) above.
(12)Represents the elimination of the historical tax provisions of the Bristol
Tenant lessees due to the pro forma taxable loss of the TRSs. No benefit has
been recorded for deferred taxes related to these losses due to the
uncertainty of their recoverability.
S-52
300
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
- ---------------
(J) Represents MeriStar Partnership's historical results of operations,
excluding extraordinary items, plus the pro forma effect of MeriStar
Partnership's acquisition of 106 hotel leases from MeriStar Hotels and
Resorts, Inc. as if the acquisition occurred on January 1, 2000. The
computation is as follows:
MERISTAR
PARTNERSHIP MERISTAR
HISTORICAL PRO FORMA PARTNERSHIP
(1) ADJUSTMENTS POST RMA
----------- ----------- -----------
Revenues:
Room and suite revenue............................... $ 782,288(2) $ 782,288
Food and beverage revenue............................ 290,792(2) 290,792
Other operating departments.......................... 84,660(2) 84,660
Percentage lease revenue............................. $385,141 (364,216)(3) 20,925
Retail space rental and other revenue................ 15,544 2,880(4) 18,424
-------- --------- ----------
Total revenues......................................... 400,685 796,404 1,197,089
-------- --------- ----------
Expenses:
Hotel operating expenses:
Rooms................................................ 184,791(2) 184,791
Food and beverage expenses........................... 209,962(2) 209,962
Other operating departments.......................... 48,263(2) 48,263
Management and incentive fees.......................... 28,943(5) 28,943
Other property operating costs......................... 2,731 299,616(6) 302,347
Property taxes, insurance and other.................... 47,481 24,829(2) 72,310
Corporate expenses..................................... 9,445 9,445
Depreciation........................................... 107,362 107,362
-------- --------- ----------
Total operating expenses............................... 167,019 796,404 963,423
-------- --------- ----------
Operating income....................................... 233,666 233,666
-------- --------- ----------
Interest expense, net.................................. 120,850 120,850
Other.................................................. 1,622 1,622
-------- --------- ----------
Income (loss) before minority interest and gain on sale
of assets............................................ 111,194 111,194
Minority interests..................................... 3 3
Gain on sale of assets................................. 3,439 3,439
-------- --------- ----------
Net income (loss) before extraordinary items........... 114,636 114,636
Preferred distributions................................ (565) (565)
-------- --------- ----------
Net income (loss) before extraordinary items applicable
to common shareholders............................... $114,071 $ $ 114,071
======== ========= ==========
(1)Represents MeriStar Partnership's historical results of operations, excluding
extraordinary items. Certain reclassifications have been made to conform to
the presentation of FelCor Partnership's statement of operations.
(2)Represents the historical hotel revenues and expenses of the 106 hotels
formerly leased to MeriStar Hotels & Resorts, Inc.
(3)Represents the elimination of historical percentage lease revenue received
from MeriStar Hotels & Resorts.
(4)Represents historical other hotel revenue of the 106 hotels formerly leased
to MeriStar Hotels & Resorts.
(5)Represents the contractual management fee which will be paid to MeriStar
Hotels & Resorts under the new management agreements. The base management fee
under the agreements is 2.5% of hotel revenues.
S-53
301
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
Until January 1, 2001, MeriStar Hotels & Resorts leased substantially all of
our hotels from us. Under these leases, MeriStar Hotels & Resorts assumed all
of the operating risks and rewards of these hotels and paid us a percentage
of revenue at each hotel under the lease agreements. Therefore, for financial
statement purposes through December 31, 2000, MeriStar Hotels & Resorts
recorded all of the operating revenues and expenses of the hotels in its
statements of operations, and we recorded lease revenue earned under the
lease agreements in our statements of operations. Effective January 1, 2001,
MeriStar Hotels & Resorts assigned the hotel leases to our newly created,
wholly owned, taxable REIT subsidiaries and our taxable REIT subsidiaries in
turn, entered into management agreements with MeriStar Hotels & Resorts to
manage these hotels. As a result of this change in structure, our wholly
owned taxable REIT subsidiaries have assumed the operating risks and rewards
of the hotels and now pay MeriStar Hotels & Resorts a management fee to
manage the hotels for us. For consolidated financial statement purposes,
effective January 1, 2001, we now record all of the revenues and expenses of
the hotels in our statement of operations, including a management fee paid to
MeriStar Hotels & Resorts. The terms of the management agreements are
designed to substantially mirror the economics of the former leases.
(6)Represents historical other undistributed operating costs of the 106 hotels
formerly leased to MeriStar Hotels & Resorts, Inc.
S-54
302
PRO FORMA COMBINED BALANCE SHEET
The following unaudited Pro Forma Combined Balance Sheet as of March 31,
2001 is based in part upon the Consolidated Balance Sheets of FelCor
Partnership, DJONT, and MeriStar Partnership included or incorporated by
reference herein, and the consolidated balance sheet of Bristol Tenant which was
provided to us by Bristol Tenant.
The Pro Forma Combined Balance Sheet assumes all of the following occurred
on March 31, 2001:
- our acquisition of the remaining 88 leases held by Bass, effective July
1, 2001, and the recording of a lease termination expense of
approximately $125 million in the third quarter of 2001 and a
corresponding liability of approximately $125 million that will be
amortized over the term of the management agreements with respect to
these hotels; and
- the completion of the merger, the partnership merger and the related
financings and application of the net proceeds.
In the opinion of our management, all material adjustments necessary to
reflect the effects of the foregoing transactions have been made. The unaudited
Pro Forma Combined Balance Sheet is presented for illustrative purposes only and
is not necessarily indicative of what our actual financial position would have
been had the transactions described above occurred on March 31, 2001, nor does
it purport to represent our future financial position.
S-55
303
FELCOR LODGING LIMITED PARTNERSHIP
PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2001
(UNAUDITED, IN THOUSANDS)
FELCOR MERISTAR
PARTNERSHIP BASS FELCOR PARTNERSHIP
HISTORICAL ACQUISITION PARTNERSHIP HISTORICAL MERGER PRO FORMA
(A) (B) POST RMA (C) ADJUSTMENTS(D) TOTAL
----------- ----------- ----------- ----------- -------------- ----------
ASSETS
Net investment in hotels.............. $3,734,891 $ 8,328 $3,743,219 $2,878,442 $ (59,727)(E) $6,561,934
Investment in unconsolidated
entities............................ 150,960 150,960 41,714 192,674
Assets held for sale.................. 58,733 58,733 58,733
Cash and cash equivalents............. 60,743 15,832 76,575 18,982 95,557
Restricted cash....................... 18,221 18,221
Due from MeriStar Hotels & Resorts.... 10,709 10,709
Note receivable from MeriStar Hotels &
Resorts............................. 36,000 36,000
Accounts receivable................... 47,857 34,003 81,860 57,311 139,171
Prepaid expenses...................... 11,731 2,996 14,727 18,221 32,948
Deferred expenses, net................ 23,873 23,873 16,016 3,610(F) 43,499
Other assets.......................... 8,016 5,171 13,187 40(G) 13,227
---------- --------- ---------- ---------- ---------- ----------
Total assets.................. $4,096,804 $ 66,330 $4,163,134 $3,095,616 $ (56,077) $7,202,673
========== ========= ========== ========== ========== ==========
LIABILITIES, REDEEMABLE UNITS AND PARTNERS' CAPITAL
Debt.................................. $1,812,690 $1,812,690 $1,674,978 $ 198,253(H) $3,685,921
Distributions payable................. 34,196 34,196 24,142 58,338
Accrued expenses and other............ 144,900 $ 40,932 185,832 179,721 5,912(G) 371,465
Deferred rent......................... 5,254 (5,254)
Due to manager........................ 25,398 25,398 25,398
Lease termination liability........... 125,000 125,000 125,000
Minority interest in other
partnerships........................ 49,949 49,949 2,698 52,647
---------- --------- ---------- ---------- ---------- ----------
Total liabilities............. 2,046,989 186,076 2,233,065 1,881,539 204,165 4,318,769
---------- --------- ---------- ---------- ---------- ----------
Redeemable units at redemption
value............................... 206,872 206,872 87,175 (576)(I) 293,471
---------- --------- ---------- ---------- ---------- ----------
Preferred units:
Series A preferred units............ 149,515 149,515 149,515
Series B preferred units............ 143,750 143,750 143,750
New preferred units................. 100,000(J) 100,000
Common units.......................... 1,549,678 (119,746) 1,429,932 1,126,902 (359,666)(K) 2,197,168
---------- --------- ---------- ---------- ---------- ----------
Partners' Capital..................... 1,842,943 (119,746) 1,723,197 1,126,902 (259,666) 2,590,433
---------- --------- ---------- ---------- ---------- ----------
Total liabilities, redeemable
units and partners'
capital..................... $4,096,804 $ 66,330 $4,163,134 $3,095,616 $ (56,077) $7,202,673
========== ========= ========== ========== ========== ==========
See notes to pro forma combined balance sheet.
S-56
304
NOTES TO PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2001
(UNAUDITED)
(A) Represents the historical consolidated balance sheet of FelCor Partnership
as of March 31, 2001.
(B) Effective January 1, 2001, with the enactment of the REIT Modernization
Act, we had completed transactions that resulted in our newly formed
taxable REIT subsidiaries acquiring leases for 96 hotels that were
previously leased to either DJONT or Bass. Accordingly, the assets and
liabilities associated with these hotels are included in our historical
consolidated balance sheet as of March 31, 2001. In March 2001, we entered
into an agreement with Bass to acquire the remaining 88 hotel leases
effective July 1, 2001. In consideration for the acquisition of these
leases, one of our taxable REIT subsidiaries will enter into long-term
management agreements with Bass. A portion of the management fees with
respect to the 88 hotels managed by Bass will be considered lease
termination costs and we will record a lease termination cost of $125
million in the third quarter of 2001. This pro forma adjustment column
represents the historical hotel assets and liabilities associated with the
88 hotels and the lease termination cost liability as if the Bass leases
were acquired effective March 31, 2001.
(C) Represents the historical consolidated balance sheet of MeriStar
Partnership as of March 31, 2001. Some reclassifications have been made to
conform to the presentation of our balance sheet.
(D) On May 10, 2001, FelCor and MeriStar announced that they had signed a
merger agreement, under which MeriStar will merge with and into FelCor, one
of our wholly-owned subsidiaries will merge with and into MeriStar
Partnership and the limited partners of MeriStar Partnership, other than
FelCor and its subsidiaries, will exchange their interests in MeriStar
Partnership for interests in FelCor Partnership and, where applicable,
cash. Under the merger agreement, each holder of MeriStar common stock will
receive, for each share of MeriStar common stock, $4.60 in cash plus 0.784
of a share of FelCor common stock. Each holder of common units and
profits-only partnership units in MeriStar Partnership, other than FelCor
and its subsidiaries, will receive, for each common unit and profits-only
unit, $4.60 in cash plus 0.784 of a common unit of FelCor Partnership. Each
holder of Class C preferred units in MeriStar Partnership will receive, for
each unit, $4.60 in cash plus 0.784 of a Series C preferred unit in FelCor
Partnership. Each holder of Class D preferred units in MeriStar Partnership
will receive, for each unit, one Series D preferred unit in FelCor
Partnership. Amounts represent adjustments to record the merger and related
transactions as if the merger had occurred on March 31, 2001. The
calculation of the merger acquisition cost is as follows (in thousands,
except share and unit data):
Issuance of 37.630 million common units of FelCor
Partnership in exchange for 48.0 million common and
profits-only units of MeriStar Partnership................ $ 831,638
Issuance of 755,954 FelCor Partnership Series C preferred
units in exchange for 964,227 MeriStar Partnership Class C
preferred units........................................... 16,707
Payment of $4.60 per unit of MeriStar Partnership common,
Class C preferred and profits-only units.................. 225,227
Issuance of 392,157 FelCor Partnership Series D preferred
units in exchange for a like number of MeriStar
Partnership Class D preferred units....................... 8,690
Issuance of 3.6 million FelCor stock options based on a
0.784 exchange ratio in exchange for MeriStar stock
options, assuming all MeriStar option holders are not
retained by FelCor........................................ 10,600
Assumption of MeriStar's liabilities........................ 1,887,451
Transaction costs........................................... 39,600
----------
Total merger acquisition cost............................... $3,019,913
==========
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NOTES TO PRO FORMA COMBINED BALANCE SHEET -- (CONTINUED)
The following is a calculation of estimated transaction costs (in
thousands):
Severance and excise tax payments........................... $15,000
Financial advisory fees..................................... 12,000
Consent payments in connection with debt agreements......... 4,600
Legal fees.................................................. 3,000
Accounting fees............................................. 1,000
Mailing and filing fees..................................... 1,000
Other....................................................... 3,000
-------
Transaction costs................................. $39,600
=======
(E) Represents the purchase accounting adjustment to the historical carrying
value of MeriStar Partnership investment in hotels as follows (in
thousands):
FelCor Partnership allocation to investment in hotels....... $2,818,715
MeriStar Partnership historical carrying amount............. 2,878,442
----------
Adjustment............................................. $ (59,727)
==========
(F) Represents the net effect of the following adjustments (in thousands):
Deferred financing costs for new borrowings................. $ 19,626
Elimination of historical MeriStar Partnership deferred
financing costs........................................... (16,016)
--------
Adjustment............................................. $ 3,610
========
(G) FelCor has no assets, liabilities, revenues or expenses other than those
derived from its ownership of us. MeriStar has miscellaneous assets,
liabilities, revenues and expenses other than those derived from its
ownership of MeriStar Partnership. Upon completion of the merger and
related transactions, FelCor will contribute to us all assets and
liabilities acquired; accordingly these miscellaneous adjustments are made
to reflect the contribution of the items historically reported only at the
MeriStar level.
(H) Represents the net increase in debt as a result of the merger and related
transactions as follows (in thousands):
Issuance of $600,000 senior notes, net of discount.......... $ 595,014
Issuance of new mortgage debt............................... 350,000
Borrowings on new line of credit............................ 362,709
Repayment of FelCor Partnership line of credit.............. (248,900)
Repayment of FelCor Partnership mortgage debt............... (61,744)
Repayment of MeriStar Partnership notes payable to
MeriStar.................................................. (356,826)
Repayment of MeriStar Partnership line of credit............ (247,000)
Repayment of MeriStar Partnership term loans................ (195,000)
---------
Net Adjustment......................................... $ 198,253
=========
(I) Represents the net change in redeemable units as follows:
Elimination of MeriStar Partnership historical balance...... $(87,175)
Record at redemption value 2.769 million FelCor Partnership
common units issued in exchange for 3.532 million MeriStar
Partnership common and profits-only units and issuance of
755,954 FelCor Partnership Series C preferred units in
exchange for 964,227 MeriStar Partnership Class C
preferred units........................................... 86,599
--------
Net adjustment.................................... $ (576)
========
(J) Represents the issuance of $100 million in cumulative redeemable preferred
units.
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NOTES TO PRO FORMA COMBINED BALANCE SHEET -- (CONTINUED)
(K) Represents the net adjustments resulting from the partnership merger and
related transactions as follows (in thousands, except share and unit data):
ADDITIONAL
PAID IN
PARTNERS
CAPITAL
-----------
Issuance of 34.861 million units of FelCor Partnership in
exchange for 44.466 million units of MeriStar
Partnership............................................... $ 770,436
Elimination of historical MeriStar balances................. (1,126,902)
Offering expenses of new $100,000 of FelCor cumulative
redeemable preferred units................................ (3,200)
-----------
Net adjustments................................... $ (359,666)
===========
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DESCRIPTION OF THE PARTNERSHIP AGREEMENT AND
UNITS OF FELCOR PARTNERSHIP
The following summary of the material terms of our limited partnership
agreement and units of partnership interest does not include all of the terms of
the partnership agreement and should be read together with our partnership
agreement and the form of amended and restated partnership agreement that will
become effective at completion of the partnership merger. The partnership
agreement is incorporated by reference in this prospectus supplement. See "Where
You Can Find More Information." The form of our amended and restated partnership
agreement is included as an exhibit to the registration statement, of which this
prospectus supplement is a part.
MANAGEMENT
We are a Delaware limited partnership formed according to the terms of a
limited partnership agreement. Under the partnership agreement, FelCor, as our
sole general partner, has full, exclusive and complete responsibility and
discretion in our management and control. Our limited partners have no authority
to transact business for, or participate in our management activities or
decisions. However, FelCor may not take any action that is contrary to express
limitations or prohibitions in our partnership agreement.
TRANSFERABILITY OF INTERESTS
FelCor may not voluntarily withdraw from us or transfer or assign its
interest in us unless the transaction in which the withdrawal or transfer occurs
results in the limited partners receiving property in an amount equal to the
amount they would have received had they exercised their redemption rights
immediately prior to the transaction, or unless the successor to FelCor
contributes substantially all of its assets to us in return for an interest in
us. Although our limited partners may transfer their units in us without the
consent of FelCor, subject to some limitations, the assignee of transferred
units may not be admitted as a limited partner without the consent of FelCor,
which FelCor may withhold in its sole discretion. No transfer can be made,
however, that would cause us to be treated as a separate corporation for federal
income tax purposes. Additional limitations on a limited partner's right to
transfer our units are discussed below under "Comparison of Rights of
Unitholders -- Transfers."
CAPITAL CONTRIBUTIONS
FelCor and our limited partners have contributed cash and interests in
various hotels to us in exchange for issuance of their units. Under the
partnership agreement, FelCor is required to contribute all of the net proceeds
from the sale of its capital stock to us in exchange for additional units having
distribution, liquidation and conversion provisions substantially identical to
the capital stock issued by FelCor. As required by the partnership agreement,
immediately prior to a capital contribution by FelCor, the partners' capital
accounts and the carrying value of our property must be adjusted to reflect the
unrealized gain or unrealized loss attributable to our property as if those
items had actually been recognized immediately prior to the issuance and had
been allocated to the partners at that time.
The partnership agreement provides that if we require additional funds at
any time in excess of funds available to us from borrowing or capital
contributions, FelCor may borrow those funds from a financial institution or
other lender and lend those funds to us on the same terms and conditions as are
applicable to FelCor's borrowings of those funds. As an alternative to borrowing
funds we require, FelCor may contribute the amount of those required funds to us
as an additional capital contribution. If FelCor contributes additional capital
to us, FelCor will receive additional units.
OPERATIONS
The partnership agreement requires that we be operated in a manner that
enables FelCor to satisfy the requirements for being classified as a REIT and to
avoid any federal income tax liability.
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TERM
We will continue until December 31, 2044, or until sooner dissolved upon:
- the bankruptcy, dissolution or withdrawal of FelCor as general partner
unless the limited partners elect to continue FelCor Partnership;
- the sale or other disposition of all or substantially all of our assets;
- the redemption of all of our limited partnership interests, other than
those held by FelCor, if any; or
- the election by FelCor, as the general partner, to dissolve.
CAPITALIZATION
As of June 30, 2001, we had the following outstanding units:
- 67,663,643 common units;
- 39,229 class B, series II units;
- 5,980,600 series A preferred units; and
- 57,500 series B preferred units.
FelCor owns all of the series A and B preferred units and 86.7% of the
common units.
ISSUANCE OF PARTNERSHIP INTERESTS
FelCor is authorized to cause us to issue partnership units to our
partners, including FelCor and its affiliates, or to other persons. These units
may be issued in one or more classes or series, with designations, preferences
and relative, participating, optional or other special rights, powers and
duties, including rights, powers and duties senior to those of any existing
units, as determined by FelCor in its sole and complete discretion without the
approval of any limited partner. These units may be issued for any partnership
purpose at any time for any consideration and on the terms and conditions
established by FelCor in its sole discretion. Any partnership unit that is not
specifically designated by FelCor as being of a particular class or series is
deemed a common unit.
OUTSTANDING UNITS OF FELCOR PARTNERSHIP
Common Units
Our common units are held directly or indirectly by FelCor or by limited
partners, including a subsidiary of FelCor. They are our basic units of
partnership interest.
Our common units are entitled to be voted on matters requiring a vote of
limited partners based on the percentage interest in us represented by the
common units.
Our common units rank junior to our series A and B preferred units and will
rank junior to our series C and D preferred units to be issued in the
partnership merger with respect to payment of distributions and junior to our
series A and B preferred units with respect to payment of amounts upon our
liquidation, dissolution or winding-up.
The partnership agreement provides that we will distribute available cash
from operations quarterly, in amounts determined by FelCor in its sole
discretion, to the preferred unitholders in accordance with the certificate of
designation for those preferred units, with the distributions made pro rata
within each class of preferred units and according to the relative priorities
among each class. Any remaining available cash from operations will be
distributed quarterly to the remaining partners, including the common
unitholders, pro rata according to their percentage interests in us. This
available cash includes net sale or refinancing proceeds but excludes net
proceeds from the sale of our property in connection with our liquidation.
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Upon our liquidation, dissolution or winding-up, after payment of, or
adequate provision for, our debts and obligations, including any partner loans,
and distributions on units ranking senior to the common units with respect to
amounts paid upon our liquidation, dissolution or winding-up, our remaining
assets, if any, will be distributed to all partners, including the common
unitholders, with positive capital accounts in accordance with their respective
positive capital account balances. Under our amended and restated partnership
agreement, if any partner, including FelCor, has a negative balance in its
capital account following our liquidation, it will not be obligated to
contribute cash to us equal to the negative balance in its capital account.
Under the partnership agreement, the holders of our common units have
redemption rights, which enable them to cause FelCor to redeem their interests
in us in exchange for shares of FelCor common stock, cash or a combination of
shares and cash, at the election of FelCor. The redemption rights may not be
exercised if the issuance of shares of common stock by FelCor, as general
partner, for any part of the interest in us sought to be redeemed would:
- result in any person violating the ownership limit contained in FelCor's
charter;
- cause FelCor to be "closely held" within the meaning of the Internal
Revenue Code;
- cause FelCor to be treated as owning 10% or more of any lessee, other
than a taxable REIT subsidiary;
- otherwise cause FelCor to fail to qualify as a REIT; or
- violate applicable securities laws.
In any case, either we or FelCor may elect, in our sole and absolute discretion,
to pay the redemption amount in cash. The redemption rights may be exercised by
the holders of common units, in whole or in part, subject to the above
restrictions, at any time or from time to time, following the satisfaction of
any applicable holding period requirements. The number of shares of FelCor
common stock issuable upon the exercise of the redemption rights will be
adjusted for the occurrence of stock splits, mergers, consolidations or similar
pro rata share transactions.
Class B Units
Our class B units have all the same rights, powers, and preferences as our
common units. In addition, any holders of the class B units have the right to
require FelCor to register for resale on their behalf any shares of FelCor
common stock that the holder receives on a redemption of the holder's class B
units. FelCor may alternatively provide the redeeming unitholder an opinion of
counsel that the unitholder may resell the shares publicly without registration
under the Securities Act. The holders also have the right to include any of the
shares of FelCor issuable to them on redemption of their units in any qualified
registration statement filed by FelCor for purposes of resale by the holders.
This so called "piggyback" right is subject to reduction in the number of
unitholders' shares included in any registration statement by the underwriter,
if the registration is for an underwritten offering. FelCor will pay the
expenses of any of these registrations, except for underwriting discounts or
selling commissions attributable to the shares being sold by holders of class B
units.
The class B units are divided into two series, series I and series II. No
series I units are outstanding. FelCor intends to cancel series I of the class B
units in the amended and restated partnership agreement. The partnership
agreement authorizes 350,000 class B, series II units. In addition to the
registration rights described above, the terms of the series II units require
FelCor to effect a shelf registration covering the resale of any shares of
FelCor common stock that may be issued to the holders of series II units upon
their redemption and to maintain effectiveness of that registration statement
for a period of time. FelCor has complied with this requirement.
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Series A Preferred Units
Our series A preferred units rank senior to our common units and class B
units and on a parity with our series B preferred units with respect to payment
of distributions and amounts upon liquidation, dissolution or winding up of us.
Our series A preferred units will rank on a parity with the series C and D
preferred units to be issued in the partnership merger with respect to payment
of distributions and senior to the series C and D preferred units with respect
to payment of amounts upon our liquidation, dissolution or winding-up.
As the holder of our series A preferred units, FelCor is entitled to
receive, out of available cash, if and when declared by FelCor acting as our
general partner, cumulative preferential distributions at the rate equal to the
greater of $1.95 per unit per year or the total cash distributions declared or
paid for the corresponding period on the common units into which the series A
preferred units are convertible. These distributions are cumulative and are
payable quarterly in arrears on the last day of January, April, July and October
of each year. No interest is payable with respect to any distribution payment on
series A preferred units which is in arrears.
Upon our liquidation, dissolution or winding-up, holders of our series A
preferred units are entitled to receive an amount equal to the liquidation
preference of $25 per unit plus any accumulated and unpaid distributions on them
before any distribution of assets is made to holders of our common units, class
B units or any other class or series of units ranking junior to the series A
preferred units as to liquidation rights. If our assets are insufficient to pay
these liquidation amounts in full to holders of the series A preferred units and
holders of our other units ranking on a parity with the series A preferred units
with respect to liquidation rights, all of those holders will share ratably the
available assets based on the liquidation preference of the various units. After
payment in full of the liquidation preference to which they are entitled,
holders of the series A preferred units will not be entitled to any further
participation in any distribution of assets by us.
The FelCor series A preferred stock is currently convertible into FelCor
common stock at a rate of 0.7752 of a share of common stock per share of series
A preferred stock, subject to adjustments because of stock splits, stock
dividends, combinations and other similar transactions. Whenever any shares of
FelCor series A preferred stock are converted into shares of FelCor common
stock, a corresponding number of series A preferred units will be automatically
converted into our common units at an equivalent rate so that the same number of
shares of series A preferred stock and series A preferred units remain
outstanding at all times. The unit conversion rate is subject to the same
adjustments as are made from time to time on the conversion rate for the series
A preferred stock.
The series A preferred units are not entitled to the benefit of any sinking
fund. Our series A preferred units are entitled to be voted on matters requiring
a vote of limited partners based on the percentage interest in us represented by
the series A preferred units.
The series A preferred units will be redeemable by us when and if any
outstanding shares of the corresponding series A preferred stock of FelCor are
redeemed by FelCor and in the same proportion that the shares of series A
preferred stock are redeemed. The number of series A preferred units remaining
unredeemed must equal at all times the number of shares of series A preferred
stock remaining unredeemed. Upon redemption, we will either issue common units
based on the unit conversion rate or deliver cash in the amount equal to the
aggregate market value of the number of shares of common stock of FelCor into
which the corresponding series A preferred stock is then convertible. In either
case, the number of common units issued and amount of cash paid will equal the
number of shares of FelCor common stock or amount of cash paid in the redemption
of the corresponding shares of series A preferred stock. Upon redemption, we
will also pay any accrued and unpaid distributions with respect to the redeemed
units.
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Series B Preferred Units
Our series B preferred units rank senior to our common units and class B
units and on a parity with our series A preferred units with respect to the
payment of distributions and amounts upon liquidation, dissolution or winding up
of us. Our series B preferred units will rank on a parity with the series C and
D preferred units to be issued in the partnership merger with respect to payment
of distributions and senior to the series C and D preferred units with respect
to payment of amounts upon our liquidation, dissolution or winding-up.
As the holder of our series B preferred units, FelCor is entitled to
receive out of available cash if and when declared by FelCor, acting as general
partner, cumulative preferential distributions at the rate of $225 per unit per
year. These distributions are payable quarterly on the last day of each January,
April, July and October. No interest is payable in respect of any distribution
payment on series B preferred units that is in arrears.
Upon our liquidation, dissolution or winding-up, holders of our series B
preferred units are entitled to receive an amount equal to the liquidation
preference of $2,500 per unit plus any accumulated and unpaid distributions on
them before any distribution of assets is made to holders of our common units,
class B units or any other class or series of units ranking junior to the series
B preferred units as to liquidation rights. If our assets are insufficient to
pay these liquidation amounts in full to holders of the series B preferred units
and holders of our other units ranking on a parity with the series B preferred
units with respect to liquidation rights, all of those holders will share
ratably the available assets based on the liquidation preference of the various
units. After payment in full of the liquidation preference to which they are
entitled, holders of the series B preferred units will not be entitled to any
further participation in any distribution of assets by us.
Our series B preferred units are not convertible and are not entitled to
the benefit of any sinking fund. Our series B preferred units are entitled to be
voted on matters requiring a vote of limited partners based on the percentage
interest in us represented by the series B preferred units.
The series B preferred units will be redeemable by us when and if any
shares or fractions of those shares of the corresponding series B preferred
stock of FelCor are redeemed by FelCor and in the same proportion as the shares
or fractions of those shares of series B preferred stock are redeemed.
The number of series B preferred units remaining unredeemed must at all
times equal the number of shares of series B preferred stock remaining
unredeemed. Because the series B preferred stock is not redeemable prior to May
7, 2003, the series B preferred units are not redeemable prior to the date. Upon
redemption, we will pay a cash redemption price of $2,500 per unit, plus all
accrued and unpaid distributions on the redeemed units. The $2,500 redemption
price may only be paid from the sale proceeds of other equity interests of us
and not from any other source.
NEW SERIES C AND D PREFERRED UNITS
Effective as of the closing of the partnership merger, FelCor, in its
capacity as our general partner, will adopt an amended and restated partnership
agreement to restate the partnership agreement to reflect all prior amendments
and to amend the agreement to provide for the creation of:
- 755,954 series C preferred units; and
- 392,157 series D preferred units.
We will issue the new series C and D preferred units in the partnership
merger in exchange for the MeriStar Partnership series C and D preferred units.
None of our preferred units to be issued in the partnership merger will be
issued to FelCor, as successor to MeriStar under the merger.
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Series C Preferred Units to be Issued in the Partnership Merger
Our series C preferred units, when issued, will rank senior to our common
units and class B units and on a parity with our series A, B and D preferred
units with respect to payment of distributions by us. They will also rank junior
to the series A and B preferred units and on a parity with our common units,
class B units and series D preferred units with respect to the payment of
amounts upon liquidation, dissolution or winding up of us.
The holders of our series C preferred units will be entitled to receive
distributions, when and as determined by FelCor acting as our general partner,
prior and in preference to any distribution with respect to our common units or
class B units, at the rate of $0.5575 per series C preferred unit per quarter.
These distributions will be non-cumulative.
When we pay a quarterly distribution on our common units of at least
$0.5575 per unit, the right of the holders of series C preferred units to
receive preferential distributions will cease, and all outstanding series C
preferred units will be automatically converted to common units on a one-for-one
basis. The first quarterly distributions on the series C preferred units will be
a fraction of the regular quarterly distribution based on the number of days
elapsed since the closing of the partnership merger.
Our series C preferred units will not be entitled to the benefit of any
sinking fund. The series C preferred units will be entitled to be voted on
matters requiring a vote of partners based on the number of common units into
which the series C preferred units are then convertible and will vote together
with the common units and not as a separate group or class. Any amendment of our
partnership agreement that would materially and adversely affect the
distribution, liquidation or conversion rights and preferences of the series C
preferred units will require the approval of holders of at least a majority of
the series C preferred units.
In all other respects, the series C preferred units will have the same
rights, preferences and obligations as common units.
Series D Preferred Units to be Issued in the Partnership Merger
Our series D preferred units, when issued, will rank senior to our common
and class B units and on a parity with our series A, B and C preferred units
with respect to the payment of distributions. They will also rank junior to our
series A and B preferred units and on a parity with our common units, class B
units and series C preferred units with respect to the payment of amounts upon
liquidation, dissolution or winding up of us.
The holders of our series D preferred units will be entitled to receive
distributions, unless FelCor acting as general partner determines that we do not
have cash available, prior and in preference to any distribution with respect to
common units or class B units, equal to 6.5% per annum, compounded quarterly to
the extent not distributed, times the amount of $22.16 per series D preferred
unit.
These distributions will be cumulative from the last date on which any
distributions were paid with respect to class D preferred units of MeriStar
Partnership for which the series D preferred units are exchanged in connection
with the partnership merger and will be payable quarterly in arrears on the last
day of January, April, July and October of each year. The first quarterly
distribution on the series D preferred units will be a fraction of the regular
quarterly distribution based on the number of days elapsed since the closing of
the partnership merger.
Our series D preferred units will not be convertible and will not be
entitled to the benefit of any sinking fund. The series D preferred units will
be entitled to be voted on matters requiring a vote of partners based on one
vote per series D preferred unit and will vote together with the common units
and not as a separate group or class. Any amendment of our partnership agreement
that would materially and adversely affect the distribution, liquidation or
conversion rights and preferences of the series D preferred units will require
the approval of holders of at least a majority of the series D preferred units.
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We may redeem any or all of the outstanding series D preferred units for
cash at a redemption price of $22.16 per unit, plus an amount equal to all
distributions accrued and unpaid on the units to the date of redemption, without
interest. FelCor will have the right, in our place, to purchase all or any
portion of the series D preferred units and may elect to issue shares of FelCor
common stock instead of paying the cash purchase price. The number of shares to
be issued for each series D preferred unit will equal $22.16 divided by the
average daily market price of FelCor common stock for the five consecutive
trading days preceding receipt of the notice of redemption.
In addition, the holders of the series D preferred units also have the
right, on one occasion only on or after April 1, 2004, to require us to redeem
all of their series D preferred units at a redemption price of $22.16 per unit.
This redemption will be treated like a standard redemption under the partnership
agreement, except for the redemption price and except that the series D
preferred unit holders, instead of FelCor, will be entitled to determine whether
they receive cash or shares of FelCor common stock in exchange for their units.
In all other respects, the series D preferred units will have the same
rights, preferences and obligations as common units.
INDEMNIFICATION
Under our partnership agreement, we must indemnify, to the fullest extent
provided by law, any existing or former general partner or its director or
officer and any other persons or entities as FelCor may deem advisable, in its
sole discretion, from and against any and all losses, claims, damages,
liabilities, joint or several, judgments, fines, settlements and other amounts
arising from any and all claims, demands, actions, suits or proceedings, civil,
criminal, administrative or investigative, in which the indemnitee may be
involved, or is threatened to be involved, as a party or otherwise. In each
case, this indemnity may only be provided if the indemnitee acted in good faith,
in a manner which the indemnitee believed to be in, or not opposed to, our best
interests, and, with respect to any criminal proceeding, had no reasonable cause
to believe the indemnitee's conduct was unlawful. To the fullest extent
permitted by law, we are also obligated to advance the expenses incurred by an
indemnitee in defending any claim or proceeding upon receipt of a written
undertaking of the indemnitee to repay any advances if the indemnitee is
ultimately determined not to be entitled to indemnification.
These indemnification rights are cumulative with any other rights or
remedies afforded to an indemnitee. Any indemnification will be made only out of
our assets. Limited partners will have no personal obligation to any indemnitee
as a result of these provisions.
An indemnitee will not be denied indemnification in whole or in part
because the indemnitee had an interest in the transaction with respect to which
the indemnification applies if the transaction was otherwise permitted by the
terms of our partnership agreement.
COMPARISON OF UNITHOLDER RIGHTS
We are a Delaware limited partnership and, accordingly, the rights of our
unitholders will be governed by our partnership agreement and Delaware law.
MeriStar Partnership is a Delaware limited partnership and, accordingly, the
rights of MeriStar Partnership unitholders are governed by the partnership
agreement of MeriStar Partnership and Delaware law.
At the time of the partnership merger, MeriStar Partnership unitholders
automatically will become unitholders of us, and their rights as partners will
be determined by our amended and restated partnership agreement and Delaware
law. FelCor is the general partner of us, and MeriStar is the general partner of
MeriStar Partnership. As general partners, FelCor and MeriStar each has the
exclusive right to manage the business and affairs of the partnership for which
they serve as general partner.
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As of July 19, 2001, MeriStar Partnership had the following outstanding
units:
- 47,286,249 class A common units;
- 800,000 profits-only partnership units, of which 649,166 will be fully
vested at the time, or as a consequence, of the merger or the partnership
merger;
- 964,227 class C preferred units; and
- 392,157 class D preferred units.
No class B units of MeriStar Partnership are outstanding.
MeriStar owns 93.9% of the common units. The profits-only partnership units
are held by executive officers of MeriStar. See "The Merger -- Interests of
Certain Persons in the Merger and the Partnership Merger" in the accompanying
joint proxy statement/prospectus.
The following comparison summarizes the material differences between the
rights of unitholders of us and MeriStar Partnership but is not intended to list
all of the differences. When reading this comparison, you should refer to our
and MeriStar Partnership's partnership agreements, including all amendments, for
complete information.
ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS
FelCor Partnership. FelCor is authorized to cause us to issue partnership
units to our partners, including FelCor and its affiliates, or to other persons.
These units may be issued in one or more classes or series, with designations,
preferences and relative, participating, optional or other special rights,
powers and duties, including rights, powers and duties senior to those of the
existing classes or series of units, as determined by FelCor in its sole and
complete discretion without the approval of any limited partner. These units may
be issued for any partnership purpose at any time for any consideration and on
the terms and conditions established by FelCor in its sole discretion.
MeriStar Partnership. MeriStar is authorized to cause MeriStar Partnership
to issue partnership units or interests or options in these partnership units or
interests, to its partners, including MeriStar and its affiliates, or other
persons. These units may be issued in one or more classes or in one or more
series of any class, with designations, preferences and relative, participating,
optional or other special rights, powers and duties, including, without
limitation, rights, powers and duties senior to those of the outstanding
MeriStar Partnership units, as determined by MeriStar, in its sole and absolute
discretion without the approval of any limited partner, subject to the
limitations described below.
No partnership unit or interest may be issued to any persons unless that
issuance:
- does not have a material adverse impact on:
- the existing rights of limited partners to exercise their exchange
rights in connection with an exchange rights agreement then in effect,
or
- the economic interests of the limited partners in the allocations set
forth in an exhibit to the partnership agreement;
- does not cause MeriStar Partnership to become, with respect to an
employee benefit plan subject to Title I of ERISA, a "party in interest"
or a "disqualified person"; and
- does not cause any portion of the assets of MeriStar Partnership to be
assets of any employee benefit plan subject to Section 2510.3-101 of the
regulations of the U.S. Department of Labor.
DISTRIBUTIONS
FelCor Partnership. Our partnership agreement requires the distribution of
cash on at least a quarterly basis in an amount, if any, as determined by FelCor
in its sole discretion to be available and
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appropriate for distribution. We make distributions to all partners who are
partners on the record date for the distribution in the following order:
- first, to each partner, including FelCor, who holds a partnership unit of
a class or series that is entitled to a preference according to the
rights of that class or series of partnership unit; and
- second, to the extent that there is available cash after payment of any
preferences, to the partners who hold partnership units that are not
entitled to a preference in distribution, including common units and
class B units, pro rata, in proportion to the partner's percentage
ownership interest in us.
Series C preferred units will be entitled to receive quarterly,
non-cumulative preferred distributions of $0.5575 per unit until the
distribution rate on our common units is at least $0.5575 per unit. Our series C
preferred units rank senior to our common and class B units and on a parity with
our series A, B and D preferred units as to distributions.
Series D preferred units will be entitled to receive distributions at a
cumulative rate of 6.5% per year on $22.16 per unit, compounded quarterly to the
extent not distributed. Our series D preferred units rank senior to our common
and class B units and on a parity with our series A, B and C preferred units as
to distributions.
MeriStar Partnership. The partnership agreement of MeriStar Partnership
requires quarterly distributions of net operating cash flow generated by
MeriStar Partnership during the applicable time period. Net operating cash flows
for any period are the excess of:
- the gross cash receipts of MeriStar Partnership for that period,
including capital contributions and asset sale proceeds, over
- the sum of various costs and expenditures specified in the partnership
agreement and any reserves required by the management contracts relating
to MeriStar Partnership hotels or reasonably determined by MeriStar to be
necessary.
MeriStar, as the general partner of MeriStar Partnership, will determine in
its sole and absolute discretion the amount of the partnership distributions to
be made. Distributions will be made to all partners who are partners on the
record date for the distribution.
Class C preferred units are entitled to receive quarterly, non-cumulative
preferred distributions of $0.5575 per unit until the distribution rate on the
common units of MeriStar Partnership is at least $0.5575 per unit. The class C
preferred units rank senior to all common units and on a parity with the class D
preferred units as to distributions.
Class D preferred units are entitled to receive distributions at a
cumulative rate of 6.5% per year on $22.16 per unit, compounded quarterly to the
extent not distributed. The class D preferred units rank senior to all common
units and on a parity with class C preferred units as to distributions.
The MeriStar Partnership profits-only units are entitled to receive
distributions only from the proceeds from sales of hotels and other assets, as
determined by MeriStar.
Following the payment of preferred distributions, the holders of common
units, including MeriStar, are entitled to distributions pro rata in accordance
with their percentage interests in MeriStar Partnership.
REDEMPTION
FelCor Partnership. Except as provided below, each holder of our common
units has the right to require us to redeem those units for either cash or
shares of FelCor common stock, at the election of FelCor. A holder of our common
units that exercises the unit redemption right is entitled to receive one share
of FelCor common stock for each unit redeemed or, at the option of FelCor, cash
in an amount equal to the market value of the FelCor common stock otherwise
receivable. The market value of a share of FelCor common stock for this purpose
will be equal to the average of the daily market price of a share
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of FelCor common stock on the NYSE for the ten consecutive trading days before
the day on which the redemption notice was received by FelCor. No redemption
will occur if the issuance of shares of FelCor common stock would result in any
of several events for FelCor, as described above under the caption "Description
of the Partnership Agreement and Units of FelCor Partnership -- Outstanding
Units of FelCor Partnership -- Common Units."
A notice of redemption delivered to FelCor will serve to exercise the
redemption right. A unitholder may not exercise the redemption right for fewer
than 100 common units, or if the unitholder holds fewer than 100 common units,
all of the common units held by that unitholder. The redeeming partner will have
no right to receive any distributions paid after the redemption date with
respect to those units redeemed.
MeriStar Partnership limited partners who receive our common units in the
partnership merger will be permitted to exercise the unit redemption right at
any time after the partnership merger. Our series C preferred units will have
the same redemption rights as our common units. Our series D preferred units
will be mandatorily redeemable at our election at a redemption price of $22.16
per unit plus all accrued and unpaid distributions on the units to the date of
redemption, without interest. The holders of our series D preferred units may
also elect on one occasion only after April 1, 2004 to require us to redeem
their units at the same redemption price, and this redemption will be treated
like the standard redemption except that the unitholders, not FelCor, determine
whether they will receive cash or shares of FelCor common stock in exchange for
their units.
MeriStar Partnership. Subject to some limitations, each holder of limited
partnership units of MeriStar Partnership, other than class D units, has the
right to exchange all or a portion of those units for cash or, at the option of
MeriStar, common stock of MeriStar, and to sell all or a portion of the
remainder of those partnership units to MeriStar at any time before January 1,
2047 on the terms and subject to the conditions set forth in exchange rights
agreements among MeriStar and the particular limited partners. These agreements
may be amended from time to time.
In general, the exchange rights of the holders of MeriStar Partnership
common units and class C units are substantially the same as the redemption
rights as our common unitholders have, except that MeriStar Partnership common
and class C unitholders may not exercise their exchange rights with respect to
fewer than 1,000 units. You should consult the exchange rights agreement to
which you are a party to determine the nature of your existing exchange rights.
MeriStar Partnership class D preferred units are mandatorily redeemable at
the election of MeriStar Partnership at a redemption price of $22.16 per unit
plus all accrued and unpaid distributions on the units to the date of
redemption, without interest. The holders of the class D preferred units may
also elect on one occasion only after April 1, 2004 to require MeriStar
Partnership to redeem their units at the same redemption price, and this
redemption will be treated like the standard exchange rights except that the
unitholders, not MeriStar, determine whether they will receive cash or shares of
MeriStar common stock in exchange for their units.
TRANSFERS
FelCor Partnership. FelCor generally may not transfer any of its general
partnership interest except in limited circumstances specified in our
partnership agreement. FelCor may transfer from time to time any or all of its
partnership interests to one or more of its wholly owned subsidiaries, as long
as it retains at all times a one percent general partnership interest and FelCor
and its wholly owned subsidiaries own in the aggregate at least 20% of the
partnership interests.
Limited partners may transfer their partnership units without FelCor's
consent unless:
- the transfer would result in us being treated as an association taxable
as a corporation;
- the transfer is effected through an "established securities market" or
"secondary market" within the meaning of Section 7704 of the Internal
Revenue Code;
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- the transfer would result in a violation of federal or state securities
laws or rules; or
- the transfer would affect our qualification as a partnership under
Delaware law.
Transferees of units may not, however, be admitted as limited partners without
FelCor's consent, which FelCor may withhold in its sole discretion. All of our
units are represented by physical certificates. To effect a unit transfer, a
partner must surrender to FelCor the certificate representing the units to be
transferred, together with an application for transfer signed by the transferee.
MeriStar Partnership. MeriStar may not transfer or withdraw its general
partnership interest or transfer its limited partnership interests except in
limited circumstances specified in the partnership agreement of MeriStar
Partnership.
A limited partner may transfer all or any portion of its partnership
interest to any transferee without the consent of MeriStar, unless:
- the transfer, in the opinion of counsel to MeriStar Partnership, would:
- require the filing of a registration statement under the Securities Act
or would otherwise violate the federal securities laws;
- change the tax status of the MeriStar Partnership to a corporation,
- cause MeriStar Partnership to become, with respect to an employee
benefit plan subject to Title I of ERISA, a "party in interest" or a
"disqualified person";
- cause any portion of the assets of MeriStar Partnership to be assets of
any employee benefit plan subject to Section 2510.3-101 of the
regulations of the U.S. Department of Labor; or
- subject MeriStar Partnership to regulation under the Investment Company
Act of 1940, the Investment Advisers Act of 1940 or ERISA;
- the transfer is a sale or exchange, and the transfer would, when
aggregated with all other sales and exchanges during the 12-month period
ending on the date of the transfer, result in 50% or more of the
interests in MeriStar Partnership's capital and profits to be sold or
exchanged during that 12-month period;
- the transfer is effected through an "established securities market" or a
"secondary market" within the meaning of Section 7704 of the Internal
Revenue Code; and
- the transfer is made to a lender to MeriStar Partnership or to a person
or entity that is related to any lender to MeriStar Partnership whose
loan is a nonrecourse liability.
Partnership units in MeriStar Partnership are generally not represented by
certificates.
AMENDMENT OF THE PARTNERSHIP AGREEMENTS
FelCor Partnership. Except as described below, our partnership agreement
may only be amended by a proposal made by FelCor as general partner and with the
approval of limited partners holding a majority of the outstanding partnership
units, including units owned by FelCor. FelCor, as the general partner, may,
without the approval of any limited partners or assignees, amend any provision
of the partnership agreement to reflect:
- a change in the name of the partnership;
- the admission, substitution, withdrawal or removal of partners in
accordance with the partnership agreement;
- the designations, rights, powers, duties and preferences of any new class
or series of units of partnership interest;
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- any change reasonable or necessary, in the discretion of FelCor, that is
appropriate to qualify us as a limited partnership or advisable to ensure
that we are not taxable as a corporation or an entity for federal income
purposes; and
- any change that does not adversely affect the limited partners in any
material respect, is necessary to comply with applicable laws then in
effect, is appropriate to facilitate the trading of the partnership units
or is required by the intent of the partnership agreement.
FelCor may not, however, amend any provisions of our partnership agreement
that require the approval of a percentage of the outstanding partnership units
to effect a reduction in the votes necessary to approve that action without the
consent or vote of holders of at least that percentage of outstanding
partnership units, including units owned by FelCor. An amendment that materially
and adversely affects the distribution, conversion or liquidation rights and
preferences of any type or class of partnership unit in relation to other types
or classes requires the approval of at least a majority of the affected class or
type, excluding those held by FelCor. Additionally, FelCor may not amend the
partnership agreement to increase the obligations of a limited partner without
the limited partner's consent.
MeriStar Partnership. Except as described below, the partnership agreement
of MeriStar Partnership may only be amended with the approval of MeriStar as
general partner and the approval of limited partners holding a majority of the
MeriStar Partnership units, including MeriStar Partnership units owned by
MeriStar.
MeriStar has the power, without the consent of the limited partners, to
amend the partnership agreement of MeriStar Partnership as may be required:
- to add to the obligations of MeriStar or surrender any right or power
granted to MeriStar or any affiliate of MeriStar for the benefit of the
limited partners;
- to reflect the admission, substitution, termination or withdrawal of
partners in compliance with the partnership agreement of MeriStar
Partnership;
- to set forth the designations, rights, powers, duties and preferences of
any additional partnership interests;
- to reflect any change that does not affect the limited partners in any
material respect, or to cure any ambiguity, to correct or supplement any
provision in the partnership agreement of MeriStar Partnership, or to
make other changes with respect to matters arising under the partnership
agreement of MeriStar Partnership that will not be inconsistent with any
other provisions of the partnership agreement or applicable law; and
- to satisfy any requirements, conditions or guidelines contained in any
order, directive, opinion, ruling or regulation of a federal, state or
local law.
The consent of each adversely affected limited partner is necessary for any
amendment that would:
- convert a limited partner's interest into a general partner's interest;
- modify the limited liability of a limited partner in a manner adverse to
the partner;
- cause the termination of the MeriStar Partnership prior to the times set
forth in the partnership agreement;
- alter the right of a limited partner to receive distributions,
liquidation amounts or allocations as described in the MeriStar
Partnership Agreement; or
- amend any part of the provision of the partnership agreement dealing with
amendments.
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SALE OF SUBSTANTIALLY ALL OF THE PARTNERSHIP ASSETS
FelCor Partnership. Except in connection with dissolution and liquidation
of us, a sale, exchange, or other disposition of all or substantially all of our
assets in a single transaction or a series of related transactions will require
the approval of 80% of our outstanding units including units held directly or
indirectly by FelCor.
MeriStar Partnership. The partnership agreement of MeriStar Partnership
permits MeriStar, as general partner, to cause MeriStar Partnership to engage in
a sale of all or substantially all of MeriStar Partnership's assets without the
consent of the limited partners.
MEETINGS
FelCor Partnership. Meetings of the partners may be called at any time by
FelCor. Notice of any meeting is required to be mailed to all partners not less
than 10 days nor more than 60 days before the date of the meeting. Partners may
vote in person or by written consent submitted to FelCor. Whenever the vote or
consent of partners is permitted or required under our partnership agreement,
this vote or consent may be given at a meeting of partners. Except as otherwise
expressly provided in our partnership agreement, the consent of a majority of
the percentage interests held by limited partners, including limited partnership
interests held by FelCor, controls. Any action required or permitted to be taken
at a meeting of the partners may be taken without a meeting if written consents
to the action taken are delivered to FelCor and are signed by the partners
holding at least the percentage of partnership units required by our partnership
agreement to authorize the action.
MeriStar Partnership. Meetings of the partners may be called by MeriStar
and must be called upon receipt of a written request by limited partners holding
25% or more of the partnership interests. The request must state the nature of
the business to be transacted. Notice of any meeting is required to be given to
all partners not less than seven days nor more than 30 days before the date of
the meeting. Partners may vote in person or by proxy at the meeting. Whenever
the vote or consent of limited partners is permitted or required under the
partnership agreement of MeriStar Partnership, this vote or consent may be given
at a meeting of partners or by written consent. Except as otherwise expressly
provided in the MeriStar Partnership agreement, the affirmative vote or consent
of a majority of the percentage interests held by partners, including limited
partnership interests held by MeriStar, controls.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
OVERVIEW
The following discussion describes the material federal income tax
consequences of the partnership merger and the subsequent ownership and
disposition of our units by former MeriStar Partnership unitholders, other than
FelCor, as successor to MeriStar. This discussion assumes that we and MeriStar
Partnership will be treated as partnerships for federal income tax purposes and
not as corporations, associations taxable as corporations, or publicly traded
partnerships taxable as corporations. The information in this section is based
on current provisions of the Internal Revenue Code of 1986, or the Code,
current, temporary, and proposed Treasury regulations thereunder, the
legislative history of the Code, and current administrative interpretations and
practices of the Internal Revenue Service, including its practices and policies
as endorsed in private letter rulings, which are not binding on the Internal
Revenue Service except with respect to the taxpayer that receives that ruling,
and court decisions. Future legislation, Treasury regulations, administrative
interpretations, or court decisions, which could apply retroactively, could
affect the accuracy of statements in this prospectus supplement with respect to
the transactions entered into or contemplated prior to the effective date of
those changes. No attempt has been made to comment on all U.S. federal income
tax consequences of the partnership merger and related transactions that may be
relevant to unitholders of MeriStar Partnership who receive our units in the
partnership merger. Unitholders of MeriStar Partnership may not all be affected
in the same manner by the tax considerations discussed below because of their
different tax situations.
Hunton & Williams, special tax counsel to FelCor, and Paul, Weiss, Rifkind,
Wharton & Garrison, counsel to MeriStar, have reviewed this discussion and are
of the opinion that it fairly describes the U.S. federal income tax consequences
that are likely to be material to a MeriStar Partnership unitholder as a result
of the partnership merger. Each of the opinions discussed in this paragraph has
been filed as an exhibit to the registration statement of which this prospectus
supplement forms a part. These opinions are based on various assumptions,
including assumptions regarding the accuracy of factual representations made by
FelCor and MeriStar and the parties to the merger agreement taking actions
contemplated by, and otherwise satisfying their obligations under, the merger
agreement, are subject to limitations, and are not binding on the Internal
Revenue Service or any court. The Internal Revenue Service may challenge part or
all of those opinions and such a challenge could be successful.
THE FOLLOWING DISCUSSION MAY NOT APPLY TO PARTICULAR CATEGORIES OF
UNITHOLDERS THAT ARE SUBJECT TO SPECIAL TREATMENT UNDER THE FEDERAL INCOME TAX
LAWS, SUCH AS INSURANCE COMPANIES, FINANCIAL INSTITUTIONS, BROKER-DEALERS,
ESTATES, TRUSTS, TAX-EXEMPT ORGANIZATIONS, NON-U.S. PERSONS, PERSONS WHO DO NOT
HOLD THEIR MERISTAR PARTNERSHIP UNITS AS A CAPITAL ASSET, UNITHOLDERS WHOSE
UNITS WERE ACQUIRED AS COMPENSATION, AND OTHER PERSONS SUBJECT TO SPECIAL TAX
TREATMENT UNDER THE FEDERAL INCOME TAX LAWS. IN ADDITION, THIS DISCUSSION MAY
NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU AS A HOLDER OF
FELCOR PARTNERSHIP UNITS. UNITHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE TRANSACTIONS AND MATTERS REFERRED
TO IN THIS SECTION, INCLUDING THE STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF THE TRANSACTIONS AND MATTERS REFERRED TO IN THIS SECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
AS NOTED ABOVE, THIS DISCUSSION DOES NOT ADDRESS ANY TAX CONSEQUENCES TO
MERISTAR PARTNERSHIP UNITHOLDERS THAT ARE NON-U.S. PERSONS. SPECIAL TAX
CONSIDERATIONS MAY APPLY TO A MERISTAR PARTNERSHIP UNITHOLDER THAT ITSELF IS A
U.S. PARTNERSHIP OR LIMITED LIABILITY COMPANY BUT WHICH HAS NON-U.S. PERSONS AS
PARTNERS OR MEMBERS. ACCORDINGLY, ANY MERISTAR PARTNERSHIP UNITHOLDER THAT IS A
PARTNERSHIP OR LIMITED LIABILITY COMPANY AND WHOSE PARTNERS OR MEMBERS INCLUDE
NON-U.S. PERSONS SHOULD CONSULT WITH ITS OWN TAX ADVISOR REGARDING ANY SPECIAL
U.S. TAX CONSEQUENCES TO IT AND ITS PARTNERS OR MEMBERS THAT MAY RESULT FROM THE
TRANSACTIONS DESCRIBED IN THIS SECTION.
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TAX STATUS OF FELCOR PARTNERSHIP AND MERISTAR PARTNERSHIP
An entity that is classified as a partnership for federal income tax
purposes generally is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account its allocable
share of income, gains, losses, deductions, and credits of the partnership in
computing its federal income tax liability, even if no cash distributions are
made by the partnership to the partner. Distributions of money by a partnership
to a partner generally are not taxable unless the amount of the distribution
exceeds the partner's adjusted basis in its partnership interest.
An organization will be classified as a partnership, rather than as a
corporation, for federal income tax purposes if it:
- is treated as a partnership under Treasury regulations, effective January
1, 1997, relating to entity classification, referred to as the
"check-the-box regulations"; and
- either is not a "publicly traded" partnership or is classified as a
publicly traded partnership but satisfies the 90% passive income
exception described below.
Under the check-the-box regulations, an unincorporated entity with at least
two members may elect to be classified either as a partnership or as an
association taxable as a corporation. If this type of domestic entity fails to
make an election, it generally will be treated as a partnership for federal
income tax purposes. An entity that was treated as a partnership under the
Treasury regulations that were in effect prior to January 1, 1997 will retain
its partnership classification unless it has only one member. In addition, the
federal income tax classification of an entity that was in existence prior to
January 1, 1997 will be respected for all periods prior to January 1, 1997 if:
- the entity had a reasonable basis for its claimed classification;
- the entity and all members of the entity recognized the federal tax
consequences of any changes in the entity's classification within the 60
months prior to January 1, 1997; and
- neither the entity nor any member of the entity was notified in writing
by a taxing authority on or before May 8, 1996 that the classification of
the entity was under examination.
Each of MeriStar Partnership's predecessor and we reasonably claimed
partnership classification under the Treasury regulations relating to entity
classification in effect prior to January 1, 1997. In addition, we and MeriStar
Partnership intend to continue to be classified as partnerships for federal
income tax purposes and will not elect to be treated as associations taxable as
corporations under the check-the-box regulations.
A publicly traded partnership is a partnership whose interests are traded
on an established securities market or are readily tradable on a secondary
market or the substantial equivalent thereof. A publicly traded partnership will
not, however, be treated as a corporation for any taxable year if 90% or more of
the partnership's gross income for that year consists of passive-type income,
including real property rents, which includes rents that would be qualifying
income for purposes of the 75% gross income test, with modifications that
generally make it easier for the rents to qualify for the 90% passive income
exception, gains from the sale or other disposition of real property, interest,
and dividends. That exception from taxation as a corporation is referred to as
the 90% passive income exception.
Treasury regulations referred to as the PTP regulations provide limited
safe harbors from the definition of a publicly traded partnership. Under one of
those safe harbors, referred to as the private placement exclusion, interests in
a partnership will not be treated as readily tradable on a secondary market or
the substantial equivalent thereof if all interests in the partnership were
issued in a transaction or transactions that were not required to be registered
under the Securities Act of 1933 and the partnership does not have more than 100
partners at any time during the partnership's taxable year. In determining the
number of partners in a partnership, a person owning an interest in a
partnership, grantor trust, or S corporation that owns an interest in the
partnership is treated as a partner in the partnership only if substantially all
of the value of the owner's interest in the entity is attributable to the
entity's direct
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or indirect interest in the partnership and a principal purpose of the use of
the entity is to permit the partnership to satisfy the 100-partner limitation.
After the partnership merger, MeriStar Partnership will qualify for the private
placement exclusion. We will not qualify for the private placement exclusion
because we will have more than 100 partners and our units issued to the MeriStar
Partnership unitholders will have been registered under the Securities Act of
1933 according to this prospectus supplement. As a result, there is a
substantial risk that we will be classified as a publicly traded partnership.
However, even if we are classified as a publicly traded partnership, we will not
be treated as a corporation under the PTP regulations because we will be
eligible for the 90% passive income exception.
Assuming that we are classified as a publicly traded partnership after the
partnership merger, our unitholders will not be able to use losses from other
passive activities to offset their share of our income and gains. In addition,
our unitholders only will be able to use their share of our losses, other than a
loss incurred upon a complete disposition of our units, to offset their
allocable share of our income and gains, and will not be able to use the losses
to offset their income and gains from other passive activities.
We have not requested, and do not intend to request, a ruling from the
Internal Revenue Service that we and/or MeriStar Partnership will be treated as
a partnership for federal income tax purposes. Instead, Hunton & Williams,
special tax counsel to FelCor, will deliver an opinion to FelCor and MeriStar at
closing stating that we have been since our formation, and continue to be,
treated for federal income tax purposes as a partnership and not as a
corporation or an association taxable as a corporation. In addition, Paul Weiss,
Rifkind, Wharton & Garrison will deliver an opinion to FelCor and MeriStar at
closing stating that MeriStar Partnership has been since its formation, and
continues to be, treated for federal income tax purposes as a partnership and
not as a corporation or an association taxable as a corporation. The obligation
of FelCor and MeriStar to complete the merger is subject to the non-waivable
condition that each of Hunton & Williams and Paul Weiss deliver these opinions
to FelCor and MeriStar. These opinions will be subject to limitations and will
be based on various assumptions, including assumptions regarding the accuracy of
factual representations made by FelCor and MeriStar and the parties to the
merger agreement taking actions contemplated by, and otherwise satisfying their
obligations under, the merger agreement. Unlike a tax ruling, an opinion of
counsel is not binding upon on the Internal Revenue Service, and the Internal
Revenue Service could challenge the status of either FelCor Partnership or
MeriStar Partnership as a partnership for federal income tax purposes. If that
challenge were sustained by a court, FelCor Partnership or MeriStar Partnership,
as applicable, would be treated as a corporation for federal income tax
purposes, as described below. The opinions of Hunton & Williams and Paul Weiss
will be based on existing law, which to a great extent consists of
administrative and judicial interpretation. Subsequent administrative or
judicial changes could modify the conclusions expressed in the opinions.
If for any reason we were taxable as a corporation, rather than as a
partnership, for federal income tax purposes, most, if not all, of the tax
consequences described below would not apply and distributions to our
unitholders could be materially reduced. If either MeriStar Partnership or we
were taxable as a corporation, the items of income and deduction of MeriStar
Partnership or us would not pass through to our partners, and our partners would
be treated as stockholders for tax purposes. MeriStar Partnership or we, as
applicable, would be required to pay income tax at corporate rates on our net
income, and distributions to our partners would constitute dividends that would
not be deductible in computing the partnership's taxable income. Moreover, if
either partnership were taxable as a corporation, FelCor would not be able to
qualify as a REIT and would be taxable as a regular corporation. This likely
would have the effect of reducing the value of FelCor common stock, which, in
turn, would adversely affect the value of our units because our units are
redeemable for shares of FelCor common stock or their cash equivalent, at the
election of FelCor.
TAX CONSEQUENCES OF THE PARTNERSHIP MERGER TO MERISTAR PARTNERSHIP UNITHOLDERS
In the partnership merger, our wholly-owned subsidiary will be merged with
and into MeriStar Partnership, with MeriStar Partnership surviving as our
subsidiary. After the partnership merger, all of the partnership interests in
MeriStar Partnership will be owned, directly or indirectly through intervening
entities, including a taxable REIT subsidiary, by us. Holders of MeriStar
Partnership common units other
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than FelCor and its subsidiaries, will receive, for each MeriStar Partnership
common unit issued and outstanding immediately before the partnership merger,
$4.60 in cash and 0.784 of our common units. Holders of MeriStar Partnership
Class C preferred units will receive, for each MeriStar Partnership Class C
preferred unit issued and outstanding immediately before the partnership merger,
$4.60 in cash and 0.784 of our Series C preferred units. Holders of MeriStar
Partnership Class D preferred units will receive, for each MeriStar Partnership
Class D preferred unit issued and outstanding immediately before the partnership
merger, one of our Series D preferred units. Holders of MeriStar Partnership
profits-only partnership units will receive, for each MeriStar Partnership
profits-only partnership unit issued and outstanding immediately before the
partnership merger other than unvested units, $4.60 in cash and 0.784 of our
common units. Cash will be paid instead of issuing fractional units.
Taxable Gain or Loss
In the partnership merger, each MeriStar Partnership unitholder will be
treated for tax purposes as contributing its MeriStar Partnership units to us in
exchange for our units and, where applicable, cash in a transaction described in
section 721 of the Internal Revenue Code. In general, under section 721 of the
Internal Revenue Code, no gain or loss is recognized by a partnership or any of
its partners in the case of a contribution of property to the partnership in
exchange for an interest in the partnership unless one of several exceptions
applies. The relevant exceptions to the general rule of nonrecognition are
discussed below.
A holder of MeriStar Partnership units generally will not recognize taxable
gain or loss at the time of the partnership merger unless:
- the MeriStar Partnership unitholder receives a distribution of cash in
the partnership merger, including a deemed cash distribution resulting
from a net reduction in the unitholder's share of partnership liabilities
in excess of the unitholder's adjusted tax basis in its units;
- the contribution of MeriStar Partnership units to us is treated in whole
or in part as a "disguised sale" of the MeriStar Partnership units under
section 707 of the Internal Revenue Code;
- prior to the partnership merger, the MeriStar Partnership unitholder
guaranteed a portion of the indebtedness of MeriStar Partnership but,
after the partnership merger, the unitholder does not guarantee an
equivalent amount of our indebtedness or indebtedness of MeriStar
Partnership that remains outstanding after the partnership merger; or
- the MeriStar Partnership unitholder is required to recognize income or
gain under the "at-risk recapture" rules.
Those potential gain recognition situations are discussed below.
Even if a holder of MeriStar Partnership units does not recognize taxable
gain at the time of the partnership merger, the occurrence of subsequent events
could cause the unitholder to recognize all or part of the gain that was
deferred either through the original contribution of assets to MeriStar
Partnership or through the partnership merger. See "-- Effect of Subsequent
Events on Holders of FelCor Partnership Units" below.
Receipt of Cash
If a partner receives cash from a partnership in a contribution
transaction, the transaction will be treated as a part contribution, part sale
transaction in which the partner will be treated as having sold a part of the
contributed property to the partnership in exchange for the cash received. The
partner generally will recognize gain or loss to the extent that the transaction
is treated as a disguised sale, as described below. To the extent that the
transaction is not treated as a disguised sale, the cash received in the
transaction should be treated as a distribution that is not part of a disguised
sale. The partner will recognize gain with respect to that distribution to the
extent that the amount of the distribution exceeds the partner's adjusted tax
basis in its partnership interest immediately before the distribution.
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Each MeriStar Partnership unitholder who receives cash in exchange for its
MeriStar Partnership units, including cash received instead of a fractional
FelCor Partnership unit, will be treated as having sold part of its MeriStar
Partnership units to us in exchange for the cash received. A MeriStar
Partnership unitholder will recognize gain or loss to the extent that its
contribution of units is treated as a disguised sale, as described in
"-- Disguised Sale Upon Receipt of Cash" below. To the extent that the
unitholder's contribution of units is not treated as a disguised sale, the cash
received in the partnership merger should be treated as a distribution by us, in
which case the MeriStar Partnership unitholder will recognize gain to the extent
that the amount of the distribution exceeds its adjusted tax basis in its FelCor
Partnership units immediately before the distribution. As described in
"-- Disguised Sale Upon Receipt of Cash" below, however, the Internal Revenue
Service may assert that a greater amount of the gain should be recognized.
Disguised Sale Upon Receipt of Cash
The receipt of cash by a MeriStar Partnership unitholder in the partnership
merger may cause the "disguised sale" rules to apply with respect to the
contribution of MeriStar Partnership units to us in the partnership merger.
Section 707 of the Code and the applicable Treasury regulations thereunder,
which are referred to as the disguised sale rules, generally provide that a
disguised sale of property has occurred if a partner contributes property to a
partnership and the partnership transfers money or other consideration to the
partner. Under the disguised sale rules, a contribution to a partnership and any
transfer to a partner that occur within two years of each other are presumed to
be a disguised sale unless the facts and circumstances clearly establish that
the contribution and transfer do not constitute a disguised sale or an exception
to disguised sale treatment applies.
A MeriStar Partnership unitholder who receives cash in the partnership
merger may be deemed to have sold a portion of its MeriStar Partnership units to
us in a fully taxable transaction. Under the "debt-financed transfer" provisions
of the disguised sale rules, if a partner transfers property to a partnership,
the partnership incurs a liability, and all or a portion of the proceeds of that
liability are transferred to the partner within 90 days of incurring the
liability, the distribution to the partner is taken into account for purposes of
the disguised sale rules only to the extent that the amount of money or the fair
market value of the other property transferred to the partner exceeds the
partner's allocable share of the partnership liability. The remainder of the
distribution generally would be treated as a distribution that is not part of a
disguised sale, as described below.
For purposes of the disguised sale rules, a partner will be allocated a
share of a recourse liability of a partnership to the extent that the partner,
or a person related to the partner, bears the economic risk of loss for the
liability. A partner will be allocated a share of a nonrecourse liability of a
partnership equal to the partner's share of the partnership's excess nonrecourse
liabilities. We allocate our excess nonrecourse liabilities among our partners
in accordance with their respective percentage interests in us.
Immediately after the partnership merger, we or our wholly-owned subsidiary
will incur one or more liabilities or increase one or more existing liabilities.
A portion of the proceeds thereof will be distributed to the former MeriStar
Partnership unitholders in payment of the $4.60 per unit of cash consideration
in the partnership merger. If applicable, the wholly-owned borrower will be
disregarded for federal income tax purposes. For purposes of the disguised sale
rules, a MeriStar Partnership unitholder's share of each liability incurred or
increased will be equal to the unitholder's share of the liability as determined
pursuant to the preceding paragraph, multiplied by a fraction, the numerator of
which is the portion of the liability that is allocable to the cash proceeds
distributed to the MeriStar Partnership unitholders, and the denominator of
which is the aggregate amount of the liabilities incurred or increased. Because
each former MeriStar Partnership unitholder other than FelCor will have a
smaller percentage interest in us after the partnership merger than the
unitholder had in MeriStar Partnership immediately prior to the partnership
merger, each MeriStar Partnership unitholder will be distributed a percentage of
the portion of the liabilities incurred or increased that is allocable to the
cash consideration paid to the MeriStar Partnership unitholders that exceeds its
allocable share of those liabilities for purposes of the disguised sale rules.
Accordingly, the distribution of the cash proceeds will be taken into account
for purposes of the debt-financed transfer provisions of the disguised sale
rules, and a disguised sale will be treated as occurring,
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only to the extent that the cash distributed to a MeriStar Partnership
unitholder exceeds the unitholder's allocable share of the liabilities. The
disguised sale would be treated as a sale for all purposes of the Code.
As a result of the disguised sale, a MeriStar Partnership unitholder will
be required to recognize gain equal to the excess of the sum of the cash
distribution that is taken into account for purposes of the disguised sale rules
and the portion of the unitholder's share of MeriStar Partnership liabilities
allocable to the units treated as sold over the unitholder's adjusted tax basis
in the portion of its MeriStar Partnership units that the unitholder is treated
as having sold. The portion of its MeriStar Partnership units that a unitholder
will be treated as having sold should be equal to a fraction, the numerator of
which is the amount of cash received in the partnership merger, other than cash
that is treated as a distribution that is not part of a disguised sale, and the
denominator of which is the amount of cash, other than cash that is treated as a
distribution that is not part of a disguised sale, plus the value of our units
received in the partnership merger. The denominator would also include any
deemed cash distribution that is treated as a part of a disguised sale as
described in "-- Disguised Sale Upon Deemed Receipt of Cash" below. A MeriStar
Partnership unitholder's aggregate adjusted tax basis in its MeriStar
Partnership units should be allocated to the portion of those units that the
unitholder is deemed to sell to us based on the fraction determined above.
Because the law is not entirely clear regarding the allocations of units sold
and adjusted tax basis in part sale, part contribution transactions, it is
possible that the Internal Revenue Service will not respect the allocation of
MeriStar Partnership units sold and adjusted tax basis described in this
paragraph.
The remainder of the cash received by a MeriStar Partnership unitholder in
the partnership merger, or the amount of the cash that equals the unitholder's
allocable share of the liability, should be treated as a distribution by us that
is not part of a disguised sale. In that case, a MeriStar Partnership unitholder
would recognize gain on the distribution to the extent that the amount of the
distribution exceeds the unitholder's adjusted tax basis in its FelCor
Partnership units immediately before the distribution. As described below, it is
possible that the Internal Revenue Service could contend otherwise and that the
Internal Revenue Service would prevail with that contention.
Application of the disguised sale and debt-financed transfer rules to
transactions of the kind contemplated by the partnership merger is unclear.
Although the foregoing description is based on the relevant statutory and
regulatory provisions, the Internal Revenue Service may assert that a greater
portion, or all, of the cash received in the partnership merger should be
treated as having been received in a disguised sale. It is possible that the
Internal Revenue Service could be successful with that assertion. In that case,
a former MeriStar Partnership unitholder could be required to recognize more of
the deferred gain associated with its MeriStar Partnership units that is not
otherwise recognized in the partnership merger. Each MeriStar Partnership
unitholder is urged to consult its own tax advisor regarding the application of
the disguised sale rules to the unitholder in the partnership merger.
Character of Gain
In general, any gain or loss recognized on the sale of MeriStar Partnership
units will be capital gain or loss and will be long-term capital gain or loss if
the unitholder has held its MeriStar Partnership units for more than one year.
However, any portion of the MeriStar unitholder's recognized gain on the sale
that is attributable to "unrealized receivables" of MeriStar Partnership, as
defined in section 751 of the Code, will give rise to ordinary income.
Unrealized receivables include, to the extent not previously included in
MeriStar Partnership's income, any rights to payment for services rendered or to
be rendered. Unrealized receivables also include amounts attributable to prior
depreciation deductions that would be subject to recapture as ordinary income if
MeriStar Partnership had sold its assets at their fair market value at the time
of the partnership merger.
A unitholder generally must hold its units for more than one year for gain
or loss derived from the sale or exchange of those units to be treated as
long-term capital gain or loss. The highest marginal individual income tax rate
is 39.6%. The maximum tax rate on long-term capital gain applicable to
individuals, trusts, and estates generally is 20% for sales and exchanges of
assets held for more than one
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year, but is 25% to the extent that the gain is attributable to specific types
of previously taken depreciation deductions. The applicable Treasury regulations
apply the 25% rate to a sale of an interest in a pass-through entity, such as a
partnership, to the extent that the gain realized on the sale of the interest is
attributable to prior depreciation deductions by the partnership that have not
otherwise been recaptured as ordinary income. Accordingly, any gain on the
exchange of MeriStar Partnership units held for more than one year could be
treated partly as long-term capital gain subject to a 20% tax rate, partly as
gain from the sale of depreciable real property subject to a 25% tax rate to the
extent attributable to prior depreciation deductions by MeriStar Partnership
that have not been otherwise recaptured as ordinary income, and partly as
ordinary income to the extent attributable to unrealized receivables. Thus, gain
recognized by non-corporate unitholders upon the partnership merger may be
subject to a combination of three different tax rates. In addition, the
characterization of income as capital gain or ordinary income may affect the
deductibility of capital losses. A non-corporate unitholder generally may deduct
capital losses not offset by capital gains against its ordinary income only up
to a maximum annual amount of $3,000. A non-corporate unitholder may carry
forward unused capital losses indefinitely. A corporate unitholder must pay tax
on its net capital gain at ordinary corporate rates and may deduct capital
losses only to the extent of capital gains, with unused losses being carried
back three years and forward five years. Each MeriStar Partnership unitholder
who receives cash in exchange for its MeriStar Partnership units in the
partnership merger, including cash received instead of a fractional FelCor
Partnership unit, should consult its own tax advisor regarding the application
of the capital gains tax rates to its exchange of MeriStar Partnership units.
Reduction in Share of Partnership Liabilities/Deemed Cash Distribution
If a MeriStar Partnership unitholder's share of partnership liabilities is
reduced as a result of the partnership merger, the unitholder will be considered
to receive a deemed cash distribution in connection with the partnership merger
and, accordingly, the MeriStar Partnership unitholder could recognize taxable
gain at the time of the partnership merger. The MeriStar Partnership unitholder
will recognize gain only to the extent that the deemed cash distribution exceeds
the MeriStar Partnership unitholder's adjusted tax basis in our units received
in the partnership merger.
In order to determine whether a MeriStar Partnership unitholder's share of
liabilities is reduced as a result of the partnership merger, the unitholder's
share of MeriStar Partnership's liabilities immediately before the partnership
merger will be compared to the unitholder's share of our liabilities immediately
after the partnership merger. Any reduction in a MeriStar Partnership
unitholder's share of liabilities will be considered to result in a deemed cash
distribution from us to that unitholder, which will be taxable to the extent
that it exceeds the MeriStar Partnership unitholder's adjusted tax basis in our
units received in the partnership merger. Each MeriStar Partnership unitholder
is urged to consult its own tax advisor and take into account its own particular
circumstances in order to assess the potential impact of a reduction of the
unitholder's partnership liabilities and the resulting deemed receipt of a cash
distribution as a result of the partnership merger.
Under section 752 of the Code and the relevant Treasury regulations, the
determination of a partner's share of partnership liabilities depends on whether
the liabilities are "recourse" or "nonrecourse." A partnership liability is a
recourse liability to the extent that any partner, or a person related to any
partner, bears the economic risk of loss for that liability. A partnership
liability is a nonrecourse liability to the extent that no partner, and no
person related to any partner, bears the economic risk of loss for that
liability.
Recourse Liabilities. A former MeriStar Partnership unitholder will not
have any share of our recourse liabilities unless, and only to the extent that,
the unitholder guarantees, or agrees to reimburse a guarantor or obligor for
amounts payable with respect to, our indebtedness or indebtedness of MeriStar
Partnership that remains outstanding following the partnership merger, and that
obligation is effective for federal income tax purposes to cause the former
MeriStar Partnership unitholder to be considered to bear the risk of loss with
respect to that liability. Some of the liabilities of MeriStar Partnership,
including its line of credit, will be repaid in full in connection with the
partnership merger.
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Bottom Guarantees. There are existing agreements between MeriStar
Partnership and MeriStar Partnership unitholders under which MeriStar
Partnership agreed to maintain a specific debt balance and the unitholders
guaranteed, or agreed to reimburse the guarantor or other obligor with respect
to, MeriStar Partnership's debt to the extent of, and in proportion to, the debt
balance. This guaranty mechanism is referred to as a "bottom guaranty." MeriStar
Partnership unitholders will continue to have their rights under these bottom
guaranty agreements after the partnership merger. Each MeriStar Partnership
unitholder is urged to consult its own tax advisor regarding the tax
consequences of the bottom guaranty agreements.
Nonrecourse Liabilities. A partner's share of partnership nonrecourse
liabilities equals the sum of:
- the partner's share of "partnership minimum gain" under section 704(b) of
the Code and the relevant Treasury regulations;
- the partner's "section 704(c) minimum gain," which is the amount of any
taxable gain that would be allocated to the partner under section 704(c)
of the Code, or in the same manner as under section 704(c) of the Code in
connection with a revaluation of partnership property, if the partnership
disposed of all partnership property subject to one or more nonrecourse
liabilities of the partnership in full satisfaction of those liabilities
and for no other consideration in a taxable transaction; and
- the partner's share of "excess nonrecourse liabilities" that are not
allocable to the partners under one of the two preceding rules.
We allocate excess nonrecourse liabilities among our partners in accordance
with their respective percentage interests in us. However, a significant portion
of our liabilities, including our line of credit and senior notes, are recourse
obligations of FelCor and, therefore, will not be allocated to any unitholder
except to the extent that the unitholder agrees to reimburse FelCor for amounts
payable with respect to those liabilities. We have not made, and will not make,
any assurances to any of the former MeriStar Partnership unitholders as to
whether the unitholders will be allocated a sufficient amount of our nonrecourse
liabilities so that the unitholders' share of partnership liabilities will not
be reduced as a result of the partnership merger.
Disguised Sale Upon Deemed Receipt of Cash
As described above, if a MeriStar Partnership unitholder's share of
MeriStar Partnership liabilities is reduced as a result of the partnership
merger, the unitholder will be considered to receive a deemed cash distribution
in connection with the partnership merger and, accordingly, could recognize
taxable gain at the time of the partnership merger. Even if a MeriStar
Partnership unitholder does not recognize taxable gain as a result of the deemed
cash distribution because the distribution does not exceed the unitholder's
basis in our units, the reduction in the unitholder's share of liabilities could
be treated as a transfer of money from us to the unitholder that gives rise to a
disguised sale.
For purposes of the disguised sale rules, either an assumption of
liabilities by the partnership or a transfer of properties subject to
liabilities is treated as a transfer of money or other property from the
partnership to the partner which may give rise to a disguised sale, even if that
transaction would not otherwise result in a taxable deemed cash distribution in
excess of the partner's basis. Under the disguised sale rules, however, in
connection with a contribution to a partnership that is not otherwise treated as
part of a disguised sale, neither the assumption of "qualified liabilities" by
the partnership nor the acquisition by the partnership of properties subject to
"qualified liabilities" is treated as part of a disguised sale. Under the
disguised sale rules, a qualified liability includes:
- any liability incurred more than two years prior to the earlier of the
transfer of the property or the date the partner agrees in writing to the
transfer, as long as the liability has encumbered the transferred
property throughout the two-year period;
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- a liability that was not incurred in anticipation of the transfer of the
property to a partnership, but that was incurred by the partner within
the two-year period prior to the earlier of the date the partner agrees
in writing to transfer the property or the date the partner transfers the
property to a partnership and that has encumbered the transferred
property since it was incurred;
- a liability that is traceable under applicable Treasury regulations to
capital expenditures with respect to the property; and
- a liability that was incurred in the ordinary course of the trade or
business in which property transferred to the partnership was used or
held, but only if all of the assets related to that trade or business are
transferred, other than assets that are not material to a continuation of
the trade or business.
A liability incurred within two years of the transfer is presumed to be
incurred in anticipation of the transfer unless the facts and circumstances
clearly establish that the liability was not incurred in anticipation of the
transfer. However, to the extent that a contributing partner incurs a
refinancing liability and the proceeds thereof are allocable under the Treasury
regulations to payments discharging all or part of any other liability of that
partner or of the partnership, the refinancing debt is considered the same as
the other liability for purposes of the disguised sale rules. Finally, if a
partner treats a liability incurred within two years of the transfer as a
qualified liability because the facts clearly establish that it was not incurred
in anticipation of the transfer, treatment must be disclosed to the Internal
Revenue Service on the partner's federal income tax return in the manner set
forth in the disguised sale rules.
It is unclear exactly how the qualified liability rules are applied when a
partner contributes an interest in a partnership, referred to as the "acquired
partnership," to another partnership, referred to as the "acquiring
partnership," in exchange for an interest in the acquiring partnership and the
only liabilities involved are those of the acquired partnership. The better view
appears to be to evaluate whether the liabilities of the acquired partnership
are qualified liabilities of that acquired partnership. MeriStar and MeriStar
Partnership believe that all liabilities of MeriStar Partnership at the time of
the partnership merger should be considered qualified liabilities. Accordingly,
if the contribution of units by a MeriStar Partnership unitholder is not
otherwise treated as part of a disguised sale, the partnership merger should not
result in the recognition of gain under the disguised sale rules to the
unitholder. It is possible, however, that the Internal Revenue Service could
contend otherwise and that the Internal Revenue Service could prevail with that
contention. In addition, if the contribution of units by a MeriStar Partnership
unitholder is treated, in whole or in part, as part of a disguised sale without
regard to our assumption of or taking subject to a qualified liability (i.e.,
under the debt-financed transfer rules described in "-- Disguised Sale Upon
Receipt of Cash), our assumption of or taking subject to the qualified liability
will be treated as a transfer of additional consideration to the transferring
unitholder. The amount of the qualified liability that will be treated as
additional consideration generally is equal to the unitholder's "net equity
percentage" of the qualified liability. A unitholder's net equity percentage
generally is the amount of consideration received by the unitholder, other than
relief from qualified liabilities, divided by the unitholder's net equity in the
property sold, as calculated under the disguised sale rules.
If a MeriStar Partnership unitholder has held its MeriStar Partnership
units for less than two years, it may be necessary to evaluate separately those
liabilities of MeriStar Partnership that were outstanding prior to the
unitholder's acquisition of its interest in MeriStar Partnership. Even under
that approach, however, those liabilities would appear to be qualified
liabilities either because the liabilities were traceable to a capital
expenditure, were incurred in the ordinary course of business of MeriStar
Partnership, or were not incurred in anticipation of the partnership merger. It
is possible, however, that the Internal Revenue Service could contend that the
liability is not a qualified liability and that the Internal Revenue Service
could prevail with that contention. Moreover, a MeriStar Partnership unitholder
who acquired its MeriStar Partnership units within two years of the partnership
merger and is relying on the argument that the liability was not incurred in
anticipation of the partnership merger would be required to disclose that
position to the Internal Revenue Service on its tax return in the manner
required in the disguised sale rules.
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If a disguised sale is deemed to occur due to a MeriStar Partnership
unitholder's deemed receipt of cash in the partnership merger, the MeriStar
Partnership unitholder will be required to recognize gain equal to the excess of
the sum of the deemed cash distribution and any qualified liabilities allocable
to the MeriStar Partnership units that the unitholder is treated as having sold
over the unitholder's adjusted tax basis in the portion of the units that are
treated as having been sold. A MeriStar Partnership unitholder's aggregate
adjusted tax basis in its MeriStar Partnership units should be allocated to the
portion of the units that the unitholder is deemed to sell to us based on a
fraction, the numerator of which is the amount of the deemed cash distribution,
and the denominator of which is the amount of actual cash received other than
cash that is treated as a distribution that is not part of a disguised sale,
plus the amount of the deemed cash distribution, plus the value of our units
received in the partnership merger. Because the law is not entirely clear
regarding the allocation of adjusted tax basis in part sale, part contribution
transactions, it is possible that the Internal Revenue Service will not respect
the allocation of adjusted tax basis described in this paragraph. Each MeriStar
Partnership unitholder is urged to consult its own tax advisor regarding the
application of the disguised sale rules to the unitholder in the partnership
merger.
Section 465(e) Recapture
Under section 465 of the Code, a taxpayer's ability to use losses to offset
taxable income is limited by rules that are referred to as the "at-risk" rules.
See "-- Tax Consequences of Ownership of FelCor Partnership Units After the
Partnership Merger -- Limitations on Deductibility of Losses; Treatment of
Passive Activities and Portfolio Income." In addition, the at-risk rules may
require a taxpayer to recapture losses that were previously taken by the
taxpayer with respect to an activity if the taxpayer's "at-risk amount" for the
activity falls below zero at the close of the taxable year. Losses are
recaptured by including the amount of the losses previously taken by the
taxpayer in the taxpayer's taxable income for the year of the recapture.
The identification and scope of an activity and the calculation of the
at-risk amount under the at-risk rules are highly complex and can involve
uncertainties. Generally, a taxpayer's at-risk amount for an activity is the
amount of the taxpayer's investment in the activity, which is increased by the
taxpayer's income from the activity and the taxpayer's share of the "qualified
nonrecourse financing," as defined in section 465(b)(6) of the Code, with
respect to the activity, and reduced by the taxpayer's losses and distributions
from the activity. It is possible that the partnership merger and/or the
repayment or refinancing of some outstanding indebtedness of MeriStar
Partnership or FelCor Partnership that constitutes qualified nonrecourse
financing, either at the time of or following the partnership merger, could
cause a MeriStar Partnership unitholder's at-risk amount to be reduced below
zero, which could, in turn, cause the MeriStar Partnership unitholder to
recognize taxable income as a result of the section 465(e) recapture provisions.
The definition of qualified nonrecourse financing is different from, and
sometimes more restrictive than, the definition of nonrecourse liabilities for
purposes of determining a partner's basis in its partnership interest, discussed
above. For example, debt that we have issued in the public debt markets may not
qualify as qualified nonrecourse financing even if it qualifies as a nonrecourse
liability. It is, therefore, possible that a former MeriStar Partnership
unitholder could incur a reduction in its share of qualified nonrecourse
financing that causes it to recognize taxable income under the section 465(e)
recapture rules even if the unitholder does not have a reduction in its
nonrecourse liabilities that causes it to recognize gain as the result of a
deemed cash distribution, as described above. Each MeriStar Partnership
unitholder is urged to consult its own tax advisor regarding the application of
the section 465(e) recapture rules to the unitholder in the partnership merger.
Tax Basis of FelCor Partnership Units
A holder of MeriStar Partnership units will receive a tax basis in the
FelCor Partnership units received in the partnership merger equal to the
unitholder's adjusted tax basis in its MeriStar Partnership units that it is
treated as contributing to FelCor Partnership in the part sale, part
contribution transaction. The portion of its MeriStar Partnership units that a
unitholder will be treated as having contributed to us should be equal to a
fraction, the numerator of which is the value of our units received in the
partnership
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merger, and the denominator of which is the amount of actual and assumed cash
distributions that are treated as part of a disguised sale plus the value of our
units received in the partnership merger. A MeriStar Partnership unitholder's
aggregate adjusted tax basis in its MeriStar Partnership units should be
allocated to the portion of its units that the unitholder is deemed to
contribute to us based on the fraction determined in the preceding sentence.
Because the law is not entirely clear regarding the allocations of units
contributed and adjusted tax basis in part sale, part contribution transactions,
it is possible that the Internal Revenue Service will not respect the allocation
of MeriStar Partnership units contributed and adjusted tax basis described in
this paragraph.
TAX CONSEQUENCES OF THE PARTNERSHIP MERGER TO FELCOR PARTNERSHIP AND MERISTAR
PARTNERSHIP
Neither MeriStar Partnership nor we will recognize gain or loss upon the
partnership merger.
EFFECT OF SUBSEQUENT EVENTS ON HOLDERS OF FELCOR PARTNERSHIP UNITS
Even if a holder of MeriStar Partnership units does not recognize taxable
gain at the time of the partnership merger, subsequent events could cause the
former MeriStar Partnership unitholder to recognize all or part of the gain that
was deferred either through the original contribution of assets to MeriStar
Partnership or through the partnership merger. Subsequent events that could
cause the recognition of gain to a former MeriStar Partnership unitholder
include:
- the sale of individual properties by MeriStar Partnership, particularly
those properties with respect to which the former MeriStar Partnership
unitholder had substantial deferred gain before the partnership merger;
- the refinancing, repayment, or other reduction in the amount of existing
debt of MeriStar Partnership or us;
- the issuance of our additional units, which could reduce the former
MeriStar Partnership unitholder's share of our liabilities;
- the elimination of the disparity between the current tax bases of the
MeriStar Partnership properties and the "book bases" of the properties,
which has the effect of reducing the amount of indebtedness allocable to
former MeriStar Partnership unitholders and, therefore, can result in
deemed cash distributions. See "-- Tax Consequences of Ownership of
FelCor Partnership Units After the Partnership Merger -- Tax Allocations
with Respect to Book-Tax Difference on Contributed Properties."
Sale of MeriStar Partnership Properties
If, after the partnership merger, MeriStar Partnership sells an asset that
was contributed to MeriStar Partnership by a former MeriStar Partnership
unitholder, the former MeriStar Partnership unitholder who contributed the
property will be allocated, for federal income tax purposes, the portion of any
gain from the sale that is attributable to the built-in gain associated with the
asset that existed at the time the property was contributed to MeriStar
Partnership. That built-in gain is equal to the fair market value of the
property at the time of contribution minus the adjusted tax basis of the
property at that time. Moreover, the former MeriStar Partnership unitholders as
a group generally will be required to be allocated, for federal income tax
purposes, the portion of any gain from the sale that is attributable to the
built-in gain that existed at the time of the partnership merger, less the
built-in gain attributable to the original contribution, if any, described in
the preceding sentence. Any remaining gain will be allocated among our
unitholders according to the provisions in our partnership agreement.
If, after the partnership merger, MeriStar Partnership sells an asset that
was not contributed to MeriStar Partnership by a former MeriStar Partnership
unitholder, the former MeriStar Partnership unitholders as a group generally
will be allocated, for federal income tax purposes, the portion of any gain from
the sale that is attributable to the built-in gain associated with the asset
that existed at the time of the partnership merger. That built-in gain is equal
to the fair market value of the property at the time of
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the partnership merger minus the adjusted tax basis of the property at that
time. In addition, if we sell any of our interest in MeriStar Partnership, any
built-in gain recognized with respect to those units that existed at the time of
the partnership merger would be specially allocated to the former MeriStar
Partnership unitholders.
Former MeriStar Partnership unitholders who are specially allocated gain
under these rules would report the gain on their individual federal income tax
returns, but generally would not be entitled to any special distributions from
us. Thus, the former MeriStar Partnership unitholders may not receive cash
distributions from us sufficient to pay their additional taxes if MeriStar
Partnership sells properties or we sell any of our interest in MeriStar
Partnership after the partnership merger.
There are existing agreements between MeriStar Partnership and some
MeriStar Partnership unitholders that require MeriStar Partnership either not to
dispose of specified properties in transactions that would produce taxable gain
for those MeriStar Partnership unitholders for a specified time period or to
indemnify those MeriStar Partnership unitholders for the tax liabilities of
those MeriStar Partnership unitholders that arise on the taxable sale or
exchange of those properties. Those MeriStar Partnership unitholders will
continue to have their rights under those existing agreements after the
partnership merger. Each MeriStar Partnership unitholder is urged to consult its
own tax advisor regarding the tax consequences of those agreements. Except with
respect to those agreements, neither FelCor nor we have made any commitment to
any MeriStar Partnership unitholder not to undertake transactions that will
cause the former MeriStar Partnership unitholders to recognize all or part of
the taxable gain that was deferred either through the original contribution of
assets to MeriStar Partnership or through the partnership merger.
Distributions of Property
Upon the distribution by a partnership of property to another partner
within seven years of when the property was contributed to the partnership,
section 704(c)(1)(B) of the Code generally requires that the partner who
contributed that property to the partnership recognize any gain that existed,
but was deferred, for federal income tax purposes with respect to the property
at the time of the contribution. Similarly, section 737 of the Code generally
requires the recognition of a contributing partner's deferred gain upon the
distribution by a partnership to that partner of other partnership property
within seven years of when that partner contributed appreciated property to the
partnership. Accordingly, a former MeriStar Partnership unitholder who
contributed appreciated property to MeriStar Partnership could recognize gain
under either of these provisions if a MeriStar Partnership property is
distributed to our unitholder other than the contributing unitholder. Similarly,
gain that is deferred at the time of the partnership merger with respect to
MeriStar Partnership units at the time that the MeriStar Partnership units are
contributed to us, to the extent allocable to a former MeriStar Partnership
unitholder, will be subject to recognition under these provisions upon a
distribution of other property, including interests in MeriStar Partnership, by
us within seven years after the partnership merger.
Refinancing, Repayment, or Reduction in Indebtedness
As described above under "-- Tax Consequences of the Partnership Merger to
MeriStar Partnership Unitholders -- Taxable Gain or Loss -- Reduction in Share
of Partnership Liabilities/Deemed Cash Distribution," a MeriStar Partnership
unitholder could recognize taxable gain as a result of a reduction in the
unitholder's share of partnership liabilities in connection with the partnership
merger. A former MeriStar Partnership unitholder also could recognize taxable
gain as a result of a reduction in the unitholder's share of partnership
liabilities after the partnership merger, to the extent that the reduction
exceeds the unitholder's basis in our units. An issuance of additional units by
us without a corresponding increase in our nonrecourse liabilities could result
in a reduction of our unitholder's share of nonrecourse liabilities and a deemed
cash distribution to the unitholder. We cannot guarantee that a future
refinancing of our indebtedness or MeriStar Partnership's indebtedness that
remains outstanding after the partnership merger would not result in a reduction
of the liabilities allocated to the former MeriStar Partnership unitholders,
causing the former MeriStar Partnership unitholders to recognize taxable gain.
Generally, the
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maximum amount of gain that any former MeriStar Partnership unitholder could
recognize as a result of a reduction in liabilities is the amount by which its
share of the indebtedness of MeriStar Partnership exceeds its share of the tax
basis of the MeriStar Partnership assets, which amount is commonly referred to
as a "negative capital account."
MeriStar Partnership has entered into bottom guaranty agreements with some
MeriStar Partnership unitholders under which MeriStar Partnership agreed to
maintain a debt balance at least equal to a specified amount and the unitholders
guaranteed, or agree to reimburse the guarantor or other obligor for, MeriStar
Partnership's debt to the extent of, and in proportion to, that specified debt
balance. MeriStar Partnership unitholders will continue to have their rights
under those bottom guaranty agreements after the partnership merger. Each
MeriStar Partnership unitholder is urged to consult its own tax advisor
regarding the tax consequences of the bottom guaranty agreements.
TAX CONSEQUENCES OF OWNERSHIP OF FELCOR PARTNERSHIP UNITS AFTER THE PARTNERSHIP
MERGER
Income and Deductions in General
We are not a taxable entity for federal income tax purposes. Instead, each
of our unitholders is required to report on its federal income tax return its
allocable share of our income, gains, losses, deductions, and credits for any of
our taxable years ending within or with the taxable year of the unitholder,
without regard to whether the unitholder has received or will receive any cash
distributions from us. For each taxable year, we are required to furnish to each
of our unitholders a Schedule K-1 that sets forth the unitholder's allocable
share of any of our income, gains, losses, deductions, and credits.
Treatment of FelCor Partnership Distributions
Distributions of money by us to our unitholders, including deemed
distributions that result from a reduction in the unitholder's share of our
liabilities, generally will result in taxable gain (but not loss) to the
unitholder only if and to the extent that the distribution exceeds the
unitholder's adjusted tax basis in our units immediately before the
distribution. A portion of the gain may be taxable as ordinary income. Any
reduction in a unitholder's share of our liabilities, whether through repayment,
refinancing, or otherwise, will constitute a deemed distribution of money to the
unitholder. In addition, an issuance of additional units by us without a
corresponding increase in our nonrecourse liabilities could decrease a
unitholder's share of our nonrecourse liabilities, resulting in a deemed cash
distribution to a unitholder.
A distribution of property other than money by us to our unitholders
ordinarily does not result in the recognition of gain or loss by either us or
the unitholder unless the property is a marketable security for purposes of
section 731(c) of the Code and the exceptions to the requirement for recognition
of gain do not apply. Marketable securities, for these purposes, generally
include actively traded securities or equity interests in another entity that
are readily convertible into or exchangeable for money or marketable securities.
Upon a distribution of marketable securities, the unitholder would recognize
gain, but not loss, to the extent that the fair market value of the marketable
securities exceeds the unitholder's adjusted tax basis in our units immediately
before the distribution. It is possible that we will make distributions of
property that are considered marketable securities and that an exception to the
gain recognition requirement would not apply to that distribution.
Upon the distribution of property to a partner other than the partner who
contributed the property within seven years of the contribution of the property
to the partnership, section 704(c)(1)(B) of the Code generally requires the
partner who contributed the property to the partnership to recognize any gain
that existed, but was deferred, for federal income tax purposes with respect to
the property at time of the contribution. Similarly, section 737 of the Code
generally requires the recognition of a contributing partner's deferred gain
upon the distribution to that partner of other partnership property within seven
years of that partner's contribution of appreciated property to the partnership.
For a discussion of the effect of these provisions on former MeriStar
Partnership unitholders, see "-- Effect of Subsequent Events on Holders of
FelCor Partnership Units -- Distributions of Property."
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Initial Basis of Units
In general, a MeriStar Partnership unitholder who acquires our units in the
partnership merger will have an initial tax basis in our units equal to its
adjusted tax basis in its MeriStar Partnership units that the unitholder is
treated as contributing to us in the part sale, part contribution transaction.
See "Tax Consequences of the Partnership Merger to MeriStar Partnership
Unitholders -- Tax Basis of Units." A MeriStar Partnership unitholder's basis in
our units will be adjusted upward or downward to reflect any increase or
decrease, respectively, in the unitholder's share of MeriStar Partnership
liabilities compared to the unitholder's share of our liabilities immediately
after the partnership merger.
Our unitholder's initial basis in its units generally will be increased by
the unitholder's share of:
- our taxable income;
- any increases in nonrecourse liabilities incurred by us; and
- our recourse liabilities, to the extent that the unitholder incurs the
risk of loss with respect to those liabilities, whether through a
guarantee or indemnification agreement or otherwise.
Generally, our unitholder's initial basis in its units will be decreased,
but not below zero, by the unitholder's share of:
- our distributions;
- decreases in our liabilities, including any decrease in its share of our
nonrecourse liabilities and any recourse liabilities for which it is
considered to bear the economic risk of loss;
- our losses; and
- our nondeductible expenditures that are not chargeable to capital.
Allocations of FelCor Partnership Income, Gain, Loss, and Deductions
Our partnership agreement generally provides that net loss first will be
allocated proportionately among the unitholders in order to cause their capital
accounts to be in proportion to their respective percentage interests. Second,
net loss will be allocated proportionately among the holders of preferred units
in order to reduce their capital accounts to zero. Third, any remaining net loss
will be allocated among the unitholders in proportion to their respective
percentage interests in us. However, a holder of our units will not be allocated
net losses if the allocation would create a deficit balance in its capital
account, as specially adjusted for that purpose, which losses are referred to as
excess losses. Excess losses will be allocated first proportionately to the
other partners and thereafter to FelCor.
Our partnership agreement generally provides that net income will be
allocated first to the holders of preferred units to the extent of the preferred
return required to be paid to those holders. Second, net income will be
allocated proportionately among the unitholders in order to cause their capital
accounts to be in proportion to their respective percentage interests. Third,
any remaining net income will be allocated among the unitholders in proportion
to their respective percentage interests.
Under section 704(b) of the Code, a partnership's allocation of any item of
income, gain, loss, or deduction to a partner will be given effect for federal
income tax purposes so long as it has "substantial economic effect," or is
otherwise in accordance with the "partner's interest in the partnership." If an
allocation of an item does not satisfy this standard, it will be reallocated
among the partners on the basis of their respective interests in the
partnership, taking into account all facts and circumstances. We believe that
the allocations of items of income, gain, loss, and deduction under the
partnership agreement, as described above, will be considered to have
substantial economic effect under the applicable Treasury regulations.
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Depreciation Life Restart with Respect to MeriStar Partnership Properties
The merger of MeriStar with and into FelCor will result in the transfer of
a 50% or greater partnership interest in the MeriStar Partnership. As a result,
there will be a technical termination of MeriStar Partnership for federal income
tax purposes under section 708 of the Code. The only material consequence of the
tax termination is that the useful lives for tax depreciation purposes of all of
the MeriStar Partnership assets will restart at the time of the merger.
Consequently, the remaining depreciation deductions available with respect to
those assets will be recognized over a longer period of time than if the merger
had not occurred.
Tax Allocations with Respect to Book-Tax Difference on Contributed Properties
Under section 704(c) of the Code, income, gain, loss, and deductions
attributable to appreciated or depreciated property that is contributed to a
partnership must be allocated for federal income tax purposes in a manner so
that the contributor is charged with, or benefits from, the unrealized gain or
unrealized loss associated with the property at the time of contribution. The
amount of unrealized gain or unrealized loss generally is equal to the
difference between the fair market value of the contributed property at the time
of contribution and the adjusted tax basis of the property at the time of
contribution, which is referred to as the "book-tax difference." A book-tax
difference also can exist with respect to an asset that has not appreciated or
depreciated in economic terms if that asset has been depreciated for tax
purposes.
Our partnership agreement requires allocations of income, gain, loss, and
deductions attributable to properties for which there is a book-tax difference
to be made in a manner that is consistent with section 704(c) of the Code.
Treasury regulations under section 704(c) require partnerships to use a
"reasonable method" for allocation of items affected by section 704(c) and
outline three methods of allocation. Except as otherwise agreed between MeriStar
Partnership and its unitholders prior to the partnership merger, we are required
to use the traditional method of allocation with respect to MeriStar
Partnership's properties. Under the traditional method, former MeriStar
Partnership unitholders will be allocated less depreciation and, therefore, more
income with respect to the assets owned by MeriStar Partnership at the time of
the partnership merger. The effects of these allocations will be different for
different MeriStar Partnership unitholders and will depend upon which, if any,
properties those unitholders originally contributed to MeriStar Partnership and
the amount of depreciation, if any, that remains to be claimed with respect to
those properties. These reduced allocations of depreciation and increased
allocations of income will be offset, at least in part, by increased allocations
of depreciation with respect to properties owned by us before the partnership
merger.
If a property owned by MeriStar Partnership at the time of the partnership
merger is sold after the partnership merger, gain equal to any book-tax
difference remaining at the time of the sale must be allocated exclusively to
the former MeriStar Partnership unitholders, even though the proceeds of the
sale will be allocated proportionately among all our unitholders. Conversely, no
gain attributable to any book-tax difference remaining in one of our existing
properties at the time of a sale will be allocated to the former MeriStar
Partnership unitholders. Under the traditional method, however, the gain
required to be specially allocated would not exceed the gain that is recognized
on the sale. The amount of gain allocated to specific former MeriStar
Partnership unitholders with respect to MeriStar Partnership assets would depend
upon a number of variables, including:
- the book-tax difference that existed with respect to the assets within
MeriStar Partnership before the partnership merger;
- whether the former MeriStar Partnership unitholder owns units issued in
exchange for the contribution of that asset to MeriStar Partnership; and
- the amount of the book-tax difference with respect to that asset that has
been amortized since the partnership merger and before the sale of the
asset through the special allocations of depreciation deductions
described above.
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Our partnership agreement also requires that any gain allocated to our
unitholders upon the sale or other taxable disposition of any of our assets
must, to the extent possible after taking into account other required
allocations of gain, be characterized as recapture income in the same
proportions and to the same extent as the unitholders previously have been
allocated any deductions directly or indirectly giving rise to the treatment of
the gain as recapture income.
Limitations on Deductibility of Losses; Treatment of Passive Activities and
Portfolio Income
Generally, individuals, estates, trusts, and some closely held corporations
and personal service corporations can deduct losses from passive activities only
to the extent that those losses do not exceed the taxpayer's income from passive
activities. Generally, passive activities are activities or investments in which
the taxpayer does not materially participate, which would include the ownership
of interests in us. As described above, there is a substantial risk that we will
be classified as a publicly traded partnership after the partnership merger. See
"Tax Status of FelCor Partnership." Assuming that we are classified as a
publicly traded partnership after the partnership merger, any losses or
deductions allocable to our unitholders, other than a loss incurred upon a
complete disposition of the unitholder's interest in us, could be used only
against our gains or income and could not be used to offset income from other
passive activities. Similarly, any of our income or gain allocable to our
unitholders could not be offset with losses from other passive activities of the
unitholder. For a more detailed discussion of our possible classification as a
publicly traded partnership, see "-- Tax Status of FelCor Partnership" above.
In addition, our unitholders may not deduct their share of any of our
losses to the extent that those losses exceed the lesser of:
- the adjusted tax basis of its FelCor Partnership units at the end of our
taxable year in which the loss occurs; and
- the amount for which the unitholder is considered "at-risk" at the end of
that year.
In general, our unitholders will be at-risk to the extent of their basis in
their FelCor Partnership units, except to the extent that the unitholders
acquired their units using nonrecourse debt. For these purposes, the
unitholders' basis in their FelCor Partnership units will include all of that
unitholder's share of our recourse liabilities, but only will include the
unitholder's share of our nonrecourse liabilities that are considered "qualified
nonrecourse financing" for purposes of the at-risk rules. Qualified nonrecourse
financing is any debt that is borrowed for the activity of holding real
property, that is borrowed from a qualified person or a government entity or
guaranteed by a government entity, with respect to which no person is personally
liable for repayment, except to the extent provided in Treasury regulations, and
that is not convertible debt. In addition, although the law is unclear,
qualified nonrecourse financing generally must be secured by real property that
is used in the activity of holding real property. It is unclear to what extent
our indebtedness constitutes qualified nonrecourse financing for purposes of the
at-risk rules. In addition, because a significant portion of our indebtedness is
not secured by our properties, it is possible that the Internal Revenue Service
could successfully contend that some or all of our indebtedness is not qualified
nonrecourse financing. Moreover, it is possible that we will repay some or all
of our qualified nonrecourse financing in the future with proceeds from equity
offerings or proceeds of debt financings that do not constitute qualified
nonrecourse financing. MeriStar Partnership unitholders are urged to consult
their own tax advisors regarding the application of the at-risk rules,
including, but not limited to the qualified nonrecourse financing rules, in
connection with the partnership merger.
After the partnership merger, a former MeriStar Partnership unitholder's
at-risk amount generally will increase or decrease as its adjusted basis in our
units increases or decreases, except for increases or decreases attributable to
our liabilities that do not constitute qualified nonrecourse financing. If one
of our unitholders is not allowed to use losses in a particular taxable year
because of the application of the at-risk rules, the losses can be carried
forward and used by the unitholder to offset income in a subsequent year to
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the extent that the unitholder's adjusted basis or at-risk amount, whichever was
the limiting factor, is increased in that subsequent year. The at-risk rules
apply to:
- an individual unitholder;
- an individual shareholder or partner of a unitholder that is an S
corporation or partnership; and
- a unitholder that is a corporation if 50% or more of the value of that
corporation's stock is owned, directly or indirectly, by five or fewer
individuals at any time during the last half of the taxable year.
Disposition of FelCor Partnership Units
If our unitholders sell, transfer as a gift, or otherwise dispose of one of
our units, the unitholder will recognize gain or loss equal to the difference
between the amount realized on the disposition and the unitholder's adjusted tax
basis attributable to the unit transferred. The amount realized on the
disposition of a unit generally will equal the sum of:
- any cash received;
- the fair market value of any other property received; and
- the amount of our liabilities allocated to the unit transferred.
Because the amount realized includes any amount attributable to the relief
from our liabilities attributable to the unit, a unitholder could have taxable
income, or perhaps even a tax liability, in excess of the amount of cash and
property received upon the disposition of the unit.
In general, any gain or loss recognized on the disposition of one of our
units will be capital gain or loss. However, any portion of our unitholder's
amount realized on the disposition of a unit that is attributable to our
"unrealized receivables", as defined in section 751 of the Code, will give rise
to ordinary income. The amount of ordinary income that would be required to be
recognized would be equal to the amount by which the unitholder's share of our
unrealized receivables exceeds the portion of the unitholder's basis that is
attributable to those assets. Unrealized receivables include, to the extent not
previously included in our income, any rights to payment for services rendered
or to be rendered. Unrealized receivables also include amounts attributable to
prior depreciation deductions that would be subject to recapture as ordinary
income if we had sold our assets at their fair market value at the time of the
disposition.
A unitholder generally must hold its units for more than one year for gain
or loss derived from the sale or exchange of the units to be treated as
long-term capital gain or loss. The highest marginal individual income tax rate
is 39.6%. The maximum tax rate on long-term capital gain applicable to
individuals, trusts, and estates generally is 20% for sales and exchanges of
assets held for more than one year, but is 25% to the extent that the gain is
attributable to specific types of previously taken depreciation deductions. The
applicable Treasury regulations apply the 25% rate to a sale of an interest in a
pass-through entity, such as a partnership, to the extent that the gain realized
on the sale of the interest is attributable to prior depreciation deductions by
the partnership that have not otherwise been recaptured as ordinary income.
Accordingly, any gain on the sale of MeriStar Partnership units held for more
than one year could be treated partly as long-term capital gain subject to a 20%
tax rate, partly as gain from the sale of depreciable real property subject to a
25% tax rate to the extent attributable to prior depreciation deductions by
MeriStar Partnership that have not been otherwise recaptured as ordinary income,
and partly as ordinary income to the extent attributable to unrealized
receivables. Thus, gain recognized by non-corporate unitholders upon the
partnership merger may be subject to a combination of three different tax rates.
In addition, the characterization of income as capital gain or ordinary income
may affect the deductibility of capital losses. A non-corporate unitholder
generally may deduct capital losses not offset by capital gains against its
ordinary income only up to a maximum annual amount of $3,000. A non-corporate
unitholder may carry forward unused capital losses indefinitely. A corporate
unitholder must pay tax on its
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net capital gain at ordinary corporate rates and may deduct capital losses only
to the extent of capital gains, with unused losses being carried back three
years and forward five years.
Redemptions of FelCor Partnership Units
If one of our unitholders exercises its redemption right and FelCor elects
to acquire the unitholder's FelCor Partnership units in exchange for cash or
shares of FelCor common stock, the transaction will be a fully taxable sale of
the unitholder's units tendered for redemption. The amount realized by a
unitholder on the redemption of its FelCor Partnership units will equal the sum
of:
- any cash received;
- the fair market value of any shares of FelCor common stock received; and
- the amount of our liabilities allocated to the units redeemed.
The unitholder's taxable gain and the tax consequences of that gain would be
determined as described under "-- Disposition of FelCor Partnership Units"
above.
If we redeem a unitholder's FelCor Partnership units for cash that is
contributed by FelCor in order to effect the redemption, the redemption likely
will be treated as a sale of our units to FelCor in a fully taxable transaction,
although the matter is not free from doubt. Under those circumstances, the
redeeming unitholder's amount realized will equal the sum of the cash received
and the amount of our liabilities allocated to the units redeemed. The
unitholder's taxable gain and the tax consequences of that gain would be
determined as described under "-- Disposition of FelCor Partnership Units"
above.
If one of our units is redeemed for cash that is not contributed by FelCor
to effect the redemption, the unitholder's tax treatment will depend upon
whether or not the redemption results in a disposition of all of the
unitholder's FelCor Partnership units. If all of the unitholder's FelCor
Partnership units are redeemed, the unitholder's taxable gain and the tax
consequences of that gain will be determined as described under "-- Disposition
of FelCor Partnership Units" above. However, if less than all of a unitholder's
FelCor Partnership units are redeemed, the unitholder will not be allowed to
recognize loss on the redemption and will recognize taxable gain only if and to
the extent that the unitholder's amount realized on the redemption, calculated
as described above, exceeds the unitholder's basis in all of its units
immediately before the redemption.
Partnership Audit Procedures
The federal income tax information returns filed by us may be audited by
the Internal Revenue Service. The Code contains partnership audit procedures
governing the manner in which Internal Revenue Service audit adjustments of
partnership items are resolved.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of adjustments by the Internal Revenue
Service, and tax settlement proceedings. The tax treatment of partnership items
of income, gain, loss, deduction, and credit is determined at the partnership
level in a unified partnership proceeding, rather than in separate proceedings
with each partner. The Code provides for one partner to be designated as the
"tax matters partner" for these purposes. FelCor is the tax matters partner for
us. The tax matters partner is authorized, but not required, to take actions on
our behalf and the unitholders and can extend the statute of limitations for
assessment of tax deficiencies against our unitholders with respect to our
items. The tax matters partner will make a reasonable effort to keep each
unitholder informed of administrative and judicial tax proceedings with respect
to our items in accordance with Treasury regulations issued under section 6223
of the Code. The tax matters partner may seek judicial review, to which all
unitholders will be bound, of a final partnership administrative adjustment.
Unitholders generally are required to treat our items on their federal
income tax returns in a manner consistent with the treatment of the items on our
information return. In general, that consistency requirement is waived if a
unitholder files a statement with the Internal Revenue Service identifying the
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inconsistency. Failure to satisfy the consistency requirement, if not waived,
will result in an adjustment to conform the treatment of the item by the
unitholder to the treatment on our return. Even if the consistency requirement
is waived, adjustments to the unitholder's tax liability with respect to our
items may result from an audit of our or the unitholder's tax return.
Intentional or negligent disregard of the consistency requirement may subject a
unitholder to substantial penalties. In addition, an audit of our return may
lead to an audit of an individual unitholder's tax return, which could result in
adjustment of non-partnership items.
Alternative Minimum Tax on Items of Tax Preference
The Code contains alternative minimum tax rules that are applicable to
corporate and noncorporate taxpayers. We will not be subject to the alternative
minimum tax, but our unitholders are required to take into account on their own
tax returns their respective share of our tax preference items and adjustments
in order to compute their alternative minimum taxable income. Since the impact
of this tax depends on each unitholder's particular situation, unitholders are
urged to consult with their own tax advisors as to the applicability of the
alternative minimum tax following the partnership merger.
State and Local Taxes
In addition to the federal income tax consequences described above, a
MeriStar Partnership unitholder should consider the potential state and local
tax consequences of owning our units. A unitholder may be required to file tax
returns and may incur tax liability both in the state or local jurisdiction
where the unitholder resides and in the state and local jurisdictions in which
we own assets or otherwise do business. We also may be required to withhold
state income tax from distributions otherwise payable to our unitholders. To the
extent that our unitholders pay income tax with respect to our income to a state
where it is not resident or we are required to pay the tax on behalf of the
unitholder, the unitholder may be entitled to a deduction or credit against
income tax that it otherwise would owe to its state of residence with respect to
the same income. We anticipate providing our unitholders with any information
reasonably necessary to permit them to satisfy state and local return filing
requirements. A MeriStar Partnership unitholder should consult with its own tax
advisor regarding the state and local income tax implications of owning our
units, including return filing requirements in the various states in which we
currently own properties and will own properties after the partnership merger.
LEGAL MATTERS
The validity of our units to be issued in connection with the partnership
merger will be passed upon for us by Jenkens & Gilchrist, a Professional
Corporation, Dallas, Texas.
EXPERTS
The financial statements incorporated in this prospectus supplement by
reference to the Annual Report on Form 10-K of FelCor Partnership for the year
ended December 31, 2000 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of MeriStar Hospitality Operating Partnership,
L.P. and subsidiaries as of December 31, 2000 and 1999, and for each of the
years in the three-year period ended December 31, 2000 and the financial
statement schedule of real estate and accumulated depreciation have been
included herein in this supplement to the joint proxy statement/prospectus in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
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WHERE CAN YOU FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-4 of which
this prospectus supplement and the accompanying joint proxy statement/prospectus
form a part. The registration statement registers the distribution to holders of
units of MeriStar Partnership of our units of limited partnership to be issued
in connection with the partnership merger. The registration statement, including
the attached exhibits and schedules, contains additional relevant information
about us. The rules and regulations of the SEC allow us to omit specified
information included in the registration statement from this joint proxy
statement/prospectus. In addition, we file reports, proxy statements and other
information with the SEC under the Securities Exchange Act of 1934. You may read
and copy any of this information at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, including us, who file
electronically with the SEC. The address of that site is http://www.sec.gov.
Reports, proxy statements and other information concerning us may also be
inspected at the offices of the New York Stock Exchange, which are located at 20
Broad Street, New York, New York 10005.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" information in this
document, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered to be a part of this document, except
for any information that is superseded by information included directly in this
document.
The documents listed below that we have previously filed with the SEC are
considered to be a part of this prospectus supplement. They contain important
business and financial information about us that is not included in or delivered
with this document.
FelCor Lodging Limited Partnership SEC Filings:
1. Annual Report on Form 10-K for the year ended December 31, 2000; and
2. Quarterly Report on Form 10-Q for the three months ended March 31,
2001.
We incorporate by reference in this document all additional documents that
we may file with the SEC between the date of this prospectus supplement and the
date of effectiveness of the partnership merger. These include periodic reports,
such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as well as proxy or other materials.
FelCor and we supplied all information contained or incorporated by
reference in this prospectus supplement or the accompanying joint proxy
statement/prospectus relating to us, as well as all pro forma financial
information, and MeriStar or MeriStar Partnership has supplied all information
contained in this prospectus supplement or the accompanying joint proxy
statement/prospectus relating to MeriStar or MeriStar Partnership. This document
constitutes our prospectus.
S-92
340
WHAT INFORMATION YOU SHOULD RELY ON
No person has been authorized to give any information or to make any
representation that differs from, or adds to, the information discussed in this
document or which is specifically incorporated by reference. Therefore, if
anyone gives you different or additional information, you should not rely on it.
This document is dated , 2001. The information
contained in this document speaks only as of its date unless the information
specifically indicates that another date applies. This document does not
constitute an offer to exchange or sell, or a solicitation of an offer to
exchange or purchase, MeriStar Partnership's or our units of limited partnership
interest, to or from any person to whom it is unlawful to direct these
activities.
S-93
341
INDEX TO FINANCIAL STATEMENTS
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
PAGE
----
Condensed Consolidated Balance Sheets -- March 31, 2001
(unaudited) and December 31, 2000......................... F-2
Condensed Consolidated Statements of Operations and
Comprehensive Income -- Three Months Ended March 31, 2001
and 2000 (unaudited)...................................... F-3
Condensed Consolidated Statements of Partners'
Capital -- Three Months Ended March 31, 2001 and 2000
(unaudited)............................................... F-4
Condensed Consolidated Statements of Cash Flows -- Three
Months Ended March 31, 2001 and 2000 (unaudited).......... F-5
Notes to Condensed Consolidated Financial Statements........ F-6
Independent Auditors' Report................................ F-12
Consolidated Balance Sheets -- December 31, 2000 and 1999... F-13
Consolidated Statements of Operations -- Years Ended
December 31, 2000, 1999 and 1998.......................... F-14
Consolidated Statements of Partners' Capital -- Years Ended
December 31, 2000, 1999 and 1998.......................... F-15
Consolidated Statements of Cash Flows -- Years Ended
December 31, 2000, 1999 and 1998.......................... F-16
Notes to the Consolidated Financial Statements.............. F-17
Schedule III -- Real Estate and Accumulated Depreciation.... F-32
F-1
342
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
-------------- -----------------
(UNAUDITED)
ASSETS
Investments in hotel properties............................. $3,192,731 $3,193,730
Accumulated depreciation.................................... (314,289) (287,229)
---------- ----------
2,878,442 2,906,501
Cash and cash equivalents................................... 18,982 242
Accounts receivable, net.................................... 57,311 2,833
Prepaid expenses and other.................................. 18,221 2,767
Note receivable from OpCo................................... 36,000 --
Due from OpCo............................................... 10,709 22,221
Investments in and advances to affiliates................... 41,714 42,196
Restricted cash............................................. 18,221 19,918
Intangible assets, net of accumulated amortization of $5,289
and $5,575................................................ 16,016 9,822
---------- ----------
$3,095,616 $3,006,500
========== ==========
LIABILITIES, MINORITY INTERESTS AND PARTNERS' CAPITAL
Accounts payable, accrued expenses and other liabilities.... $ 131,668 $ 72,197
Accrued interest............................................ 30,957 28,365
Income taxes payable........................................ 1,204 921
Distributions payable....................................... 24,142 24,581
Deferred income taxes....................................... 8,257 8,113
Interest rate swaps......................................... 7,635 --
Notes payable to MeriStar................................... 356,826 356,729
Mortgages and notes payable................................. 1,318,152 1,281,590
---------- ----------
Total liabilities................................. 1,878,841 $1,772,496
---------- ----------
Minority interests.......................................... 2,698 2,687
Redeemable OP units at redemption value..................... 87,175 88,545
Partners' capital -- common OP units 44,465,990 and
44,403,034 issued and outstanding......................... 1,126,902 1,142,772
---------- ----------
$3,095,616 $3,006,500
========== ==========
See accompanying notes to condensed consolidated financial statements.
F-2
343
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
UNAUDITED
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
-------- -------
Revenue:
Hotel operations:
Rooms................................................... $200,380 $ --
Food and beverage....................................... 71,291 --
Other operating departments............................. 22,471 --
Participating lease revenue............................... 5,384 65,523
Office rental and other revenues.......................... 3,158 1,557
-------- -------
Total revenue...................................... 302,684 67,080
-------- -------
Hotel operating expenses by department:
Rooms..................................................... 45,722 --
Food and beverage......................................... 51,404 --
Other operating departments............................... 11,570 --
Office rental, parking and other operating expenses......... 937 606
Undistributed operating expenses:
Administrative and general................................ 44,917 1,744
Property operating costs.................................. 42,699 --
Property taxes, insurance and other....................... 18,387 12,691
Depreciation and amortization............................. 29,387 26,298
Write down of investment in STS Hotel Net................. 2,112 --
Swap termination costs.................................... 9,297 --
-------- -------
Total operating expenses........................... 256,432 41,339
-------- -------
Net operating income........................................ 46,252 25,741
Interest expense, net....................................... 30,229 28,760
-------- -------
Income (loss) before minority interests, income taxes, loss
on sale of asset and extraordinary gain (loss)............ 16,023 (3,019)
Minority interests.......................................... 11 23
-------- -------
Income (loss) before income taxes, loss on sale of asset and
extraordinary gain (loss)................................. 16,012 (3,042)
Income tax expense (benefit)................................ 453 (56)
-------- -------
Income (loss) before loss on sale of asset and extraordinary
gain (loss)............................................... 15,559 (2,986)
Loss on sale of asset, net of tax effect of ($19)........... (1,062) --
Extraordinary gain (loss) on early extinguishments of debt,
net of tax effect of ($17) and $50........................ (1,226) 3,400
-------- -------
Net income.................................................. 13,271 414
Other comprehensive income (loss):
Transition adjustment..................................... (2,842) --
Foreign currency translation adjustment................... (974) (155)
Change in fair value of cash flow hedges.................. (4,793) --
-------- -------
Comprehensive income........................................ $ 4,662 $ 259
======== =======
Net income applicable to common unitholders................. $ 13,130 $ 273
======== =======
Net income applicable to general partner common
unitholder................................................ 12,065 250
======== =======
Net income applicable to third party limited partner common
unitholders............................................... 1,065 23
======== =======
Earnings per unit:
Basic:
Income before extraordinary gain (loss)................. $ 0.29 $ (0.06)
Extraordinary gain (loss)............................... (0.02) 0.07
-------- -------
Net income.............................................. $ 0.27 $ 0.01
======== =======
Diluted:
Income before extraordinary gain (loss)................. $ 0.29 $ (0.06)
Extraordinary gain (loss)............................... (0.02) 0.07
-------- -------
Net income.............................................. $ 0.27 $ 0.01
======== =======
See accompanying notes to condensed consolidated financial statements.
F-3
344
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
UNAUDITED
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
------------ ------------
Balance at beginning of period.............................. $1,142,772 $1,203,518
Contributions............................................... 4,180 2,636
Contribution from general partner related to amortization of
unearned stock-based compensation......................... 797 --
Repurchase of units......................................... -- (14,100)
Allocations from redeemable OP units........................ (1,226) (6,419)
Distributions............................................... (24,142) (26,329)
Net income applicable to common unitholders............... 13,130 273
Transition adjustment..................................... (2,842) --
Foreign currency translation adjustment................... (974) (155)
Change in fair value of cash flow hedges.................. (4,793) --
---------- ----------
Balance at end of period.................................... $1,126,902 $1,159,424
========== ==========
F-4
345
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
--------- --------
Operating activities:
Net income................................................ $ 13,271 $ 414
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 29,387 26,298
Loss on sale of assets, before tax effect................. 1,081 --
Write down of investment in STS Hotel Net................. 2,112 --
Extraordinary loss (gain) on early extinguishment of debt,
before tax effect...................................... 1,243 (3,450)
Minority interests........................................ 11 23
Amortization of stock based compensation.................. 797 --
Deferred income taxes..................................... 144 49
Changes in operating assets and liabilities:
Accounts receivable, net............................... (7,173) (2,710)
Prepaid expenses and other............................. (2,580) 3,103
Due from OpCo.......................................... 11,512 (12,249)
Accounts payable, accrued expenses, accrued interest
and other liabilities................................. (3,736) 34,981
Income taxes payable................................... 283 (212)
--------- --------
Net cash provided by operating activities......... 46,352 46,247
--------- --------
Investing activities:
Investment in hotel properties, net....................... (8,743) (24,849)
Proceeds from disposition of assets....................... 7,274 --
Hotel operating cash received in lease conversions........ 3,778 --
Investments in and advances to affiliates, net............ -- (433)
Repayments of notes receivable............................ (36,000) 57,110
Change in restricted cash................................. 1,697 2,204
--------- --------
Net cash (used in) provided by investing
activities...................................... (31,994) 34,032
--------- --------
Financing activities:
Deferred financing costs.................................. (9,322) (49)
Proceeds from mortgages and notes payable................. 578,347 45,097
Principal payments on mortgages and notes payable......... (541,720) (74,138)
Repayments of MeriStar borrowings......................... -- (14,608)
Contributions from partners............................... 1,720 1,373
Repurchase of units....................................... -- (14,100)
Distributions paid to partners............................ (24,859) (26,402)
--------- --------
Net cash provided by (used in) financing
activities...................................... 4,166 (82,827)
--------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... 216 (1)
--------- --------
Net increase (decrease) in cash and cash equivalents........ 18,740 (2,549)
Cash and cash equivalents, beginning of period.............. 242 2,549
--------- --------
Cash and cash equivalents, end of period.......... $ 18,982 $ --
========= ========
See accompanying notes to condensed consolidated financial statements.
F-5
346
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
UNAUDITED
(DOLLARS IN THOUSANDS)
1. ORGANIZATION
MeriStar Hospitality Operating Partnership, L.P. ("the Partnership") owns a
portfolio of primarily upscale, full-service hotels in the United States and
Canada. The portfolio is diversified by franchise and brand affiliations. As of
March 31, 2001, the Partnership owned 113 hotels, with 28,877 rooms, 105 of
which are leased by the Partnership's taxable subsidiaries and managed by
MeriStar Hotels & Resorts, Inc., ("OpCo"). Eight of the hotels are leased by
affiliates of Prime Hospitality Corporation. During 2000, substantially all of
the hotels were leased to and operated by OpCo.
The Partnership was formed on August 3, 1998, as a result of the merger
between CapStar Hotel Company ("CapStar") and American General Hospitality
Corporation ("AGH") and the subsequent formation of MeriStar Hospitality
Corporation ("MeriStar") , the merged entity. MeriStar, a real estate investment
trust ("REIT") is the general partner and owns a one percent interest as of
March 31, 2001. The limited partners are MeriStar LP, Inc., a wholly owned
subsidiary of MeriStar, which held approximately a 90 percent interest as of
March 31, 2001 and various third parties, which owned an aggregate interest of
nine percent at March 31, 2001. Partners' capital includes the partnership
interests of MeriStar and MeriStar LP, Inc. MeriStar held 483,902 and 484,591
common OP units as of March 31, 2001 and December 31, 2000, respectively.
MeriStar LP, Inc. held 43,982,088 and 43,918,443 common OP units as of March 31,
2001 and December 31, 2000 respectively. Due to the redemption rights of the
limited partnership units held by third parties, these units have been excluded
from partner's capital and classified as Redeemable OP units and recorded at
redemption value. At March 31, 2001 and December 31, 2000 there were 4,316,410
and 4,448,268 redeemable units outstanding.
On January 1, 2001, changes to the federal tax laws governing real estate
investment trusts, commonly know as the REIT Modernization Act, or RMA, became
effective. The REIT Modernization Act permits the Partnership to create taxable
REIT subsidiaries on or after January 1, 2001, which are subject to taxation
similar to subchapter C corporations. Because of the RMA, the Partnership has
created a number of these taxable REIT subsidiaries that are the lessees of its
real property. The REIT Modernization Act prohibits the taxable REIT
subsidiaries from engaging in the following activities:
- they may not manage the properties themselves; they need to enter into
"arms length" management agreements with an independent third-party
manager that is actively involved in the trade or business of hotel
management and manages properties on behalf of other owners,
- they may not lease a property that contains gambling operations, and
- they may not own a brand or franchise under which hotels are operated.
The Partnership believes that establishing taxable REIT subsidiaries to
lease the properties provides a more efficient alignment of and ability to
capture the economic interests of property ownership.
Subsidiaries of OpCo assigned their participating leases to the
wholly-owned taxable REIT subsidiaries as of January 1, 2001. In connection with
the assignment, the taxable subsidiaries executed new management agreements with
a subsidiary of OpCo to manage the hotels. Under these management agreements,
the taxable subsidiaries pay a management fee to OpCo for each property. The
taxable subsidiaries in turn make rental payments to the Partnership under the
participating leases. The management agreements have been structured to
substantially mirror the economics of the former leases. The transactions did
not result in any cash consideration exchanged among the parties except in
regard to the transfer of hotel operating assets and liabilities to the taxable
subsidiaries. Under the new management agreements, the base management fee is
2.5% of total hotel revenue plus incentive payments, based on
F-6
347
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
meeting performance thresholds, that could total up to 1.5% of total hotel
revenue. The agreements have an initial term of 10 years with three renewal
periods of five years each at the option of OpCo, subject to some exceptions.
Because these leases have been assigned to the taxable subsidiaries, the
Partnership now bears the operating risk associated with the hotels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These unaudited interim financial statements have been prepared according
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures that are normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These interim financial statements should be read in
conjunction with the financial statements, accompanying notes and other
information for the year ended December 31, 2000. Certain 2000 amounts have been
reclassified to conform to the 2001 presentation.
In management's opinion, the accompanying unaudited condensed consolidated
interim financial statements reflect all adjustments, which are of a normal and
recurring nature, necessary for a fair presentation of the financial condition
and results of operations and cash flows for the periods presented. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities, as well as the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. The actual results could differ from those
estimates. The results of operations for the interim periods are not necessarily
indicative of the results for the entire year.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" requires a public entity to
report selected information about operating segments in financial reports issued
to shareholders. Based on the guidance provided in the standard, the Partnership
has determined that its business is conducted in one reportable segment. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Revenues for Canadian operations totaled
$5,522 and $1,425 for the three months ended March 31, 2001 and 2000,
respectively.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin or SAB No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 addresses lessor revenue recognition in interim periods
related to rental agreements which provide for minimum rental payments, plus
contingent rents based on the lessee's operations, such as a percentage of sales
in excess of an annual specified revenue target. SAB No. 101 requires the
deferral of contingent rental income until specified targets are met. This SAB
relates only to the recognition of the lease revenue in interim periods for
financial reporting purposes; it has no effect on the timing of rent payments
under the leases. The effect of SAB No. 101 was to defer recognition of
additional contingent rental income of $1,173 and $32,679 for the three months
ended March 31, 2001 and 2000, respectively.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. In June 1999, the Financial Accounting Standard Board
issued Statement of Financial Accounting Standard No. 137 which amended
Statement of Financial Accounting Standard No. 133 to defer the effective date
to all fiscal quarters of all fiscal years beginning after June 15, 2000. In
June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 138 which provides additional guidance and
amendments to Statement of Financial Accounting Standard No. 133.
F-7
348
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Partnership's interest rate risk management objective is to limit the
impact of interest rate changes on earnings and cash flows. The Partnership
assesses interest rate cash flow risk by continually identifying and monitoring
changes in interest rate exposures that may adversely impact expected future
cash flows, and by evaluating hedging opportunities. The Partnership does not
enter into derivative instruments for any purpose other than cash flow hedging
purposes.
The Partnership's interest rate swap agreements are considered to be a
hedge against changes in the amount of future cash flows associated with the
interest payments of the Partnership's variable rate debt obligations.
Accordingly, the interest rate swap agreements are reflected at fair value in
the Partnership's consolidated balance sheet as of March 31, 2001 and the
related gains or losses on these contracts are recorded in partner's capital as
a component of accumulated other comprehensive income.
The Partnership recognized a transition adjustment of $2,842 as the fair
value of these derivative instruments at January 1, 2001. The Partnership
recorded a liability and corresponding charge to other comprehensive loss for
this amount. As of March 31, 2001, the fair value of the Partnership's
derivative instruments represents a liability of $7,635. The estimated net
amount recorded in accumulated other comprehensive income expected to be
reclassified to the statement of operations within the next nine months is
approximately $3,982.
SFAS No. 130, "Reporting Comprehensive Income," requires an enterprise to
display comprehensive income and its components in a financial statement to be
included in an enterprise's full set of annual financial statements or in the
notes to financial statements. Comprehensive income represents a measure of all
changes in equity of an enterprise that result from recognized transactions and
other economic events for the period other than transactions with owners in
their capacity as owners. Comprehensive income of the Partnership includes net
income and other comprehensive income from foreign currency items and the
valuation of derivative instruments. Accumulated other comprehensive loss
included in partners' capital was $14,690 and $6,081 as of March 31, 2001 and
December 31, 2000.
3. NOTE RECEIVABLE FROM OPCO
The Partnership may lend OpCo up to $50,000 for general corporate purposes
pursuant to a revolving credit agreement. The interest rate on this credit
agreement is 650 basis points over the 30-day London Interbank Offered Rate. As
of March 31, 2001, $36,000 was outstanding under this revolving credit
agreement.
4. LONG-TERM DEBT
Long-term debt consisted of the following:
MARCH 31, DECEMBER 31,
2001 2000
---------- ------------
Senior Unsecured Notes...................................... $ 498,314 $ --
Credit Facility............................................. 442,000 898,000
Secured Facility............................................ 323,397 324,554
Mortgage Debt and Other..................................... 54,441 59,036
---------- ----------
Mortgages and Notes payable............................... $1,318,152.. $1,281,590
Notes payable to MeriStar................................... 356,826 356,729
---------- ----------
$1,674,978 $1,638,319
========== ==========
F-8
349
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of March 31, 2001, aggregate future maturities of the above obligations
are as follows:
2001.................................................... $ 21,536
2002.................................................... 47,897
2003.................................................... 333,589
2004.................................................... 240,168
2005.................................................... 9,265
Thereafter.............................................. 1,022,523
----------
$1,674,978
==========
On January 26, 2001, the Partnership sold $300,000 of 9.0% senior notes due
2008 and $200,000 of 9.13% senior notes due 2011. The notes are unsecured
obligations of the Partnership. MeriStar, together with a number of the
subsidiaries of the Partnership, guarantees payment of principal and interest on
the notes on a senior unsecured basis. The net proceeds from the sale of
$492,000 were used to repay amounts outstanding under the Credit Facility and to
make payments to terminate some swap agreements that hedged variable interest
rates of the loans that were repaid. The terminated swap agreements had notional
amounts totaling $300,000. The Partnership recognized a loss of $9,297 to
terminate these swap agreements. The repayments of term loans under the Credit
Facility resulted in an extraordinary loss of $1,243 ($1,226, net of tax) from
the write-off of deferred financing costs.
5. DISTRIBUTIONS PAYABLE
On March 21, 2001, the Partnership declared a distribution for the three
months ended March 31, 2001 of $0.505 per Common and Class B OP Unit and $0.5575
per Class C OP Unit. The distribution was paid on April 30, 2001.
6. EARNINGS PER UNIT
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per unit ("EPU") computations for income before
extraordinary gain (loss):
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
-------- --------
Basic EPU Computation:
Net income (loss) before extraordinary gain (loss)........ $14,497 $(2,986)
Distributions paid related to unvested restricted stock of
MeriStar............................................... (183) --
Preferred distributions................................... (141) (141)
------- -------
Income (loss) before extraordinary gain (loss) available
to common unitholders.................................. 14,173 (3,127)
Weighted average number of OP Units outstanding........... 48,421 51,572
------- -------
Basic EPU before extraordinary gain (loss)................ $ 0.29 $ (0.06)
======= =======
Diluted EPU Computation:
Income (loss) before extraordinary gain (loss) available
to common unitholders.................................. 14,173 (3,127)
Weighted average number of OP units outstanding........... 48,421 51,572
Stock options of MeriStar................................. 322 --
------- -------
Total weighted average number of diluted OP units
outstanding............................................ 48,743 51,572
------- -------
Diluted EPU before extraordinary gain (loss).............. $ 0.29 $ (0.06)
======= =======
F-9
350
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effects of the Class D Preferred OP Units, convertible debt of
MeriStar, and restricted stock of MeriStar were not included in the computation
of EPU as their effect was anti-dilutive.
7. SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
-------- -------
Cash paid for interest and income taxes:
Interest, net of capitalized interest of $2,005 and
$1,743, respectively................................... $ 27,637 $33,013
Income taxes.............................................. 994 267
Non-cash investing and financing activities:
Write down of investment in STS Hotel Net................. 2,112 --
Redemption of redeemable OP Units......................... 2,640 25
Operating assets received and liabilities assumed from
lease conversion:
Accounts receivable.................................... 47,305 --
Prepaid expenses and other............................. 12,874 --
Furniture and fixtures................................. 315 --
Accumulated depreciation............................... (163) --
Investment in affiliates, net.......................... 1,629 --
-------- -------
Total operating assets received................... 61,960 --
======== =======
Accounts payable and accrued expenses.................. (65,706) --
Long-term debt......................................... (32) --
-------- -------
Total liabilities assumed......................... (65,738) --
======== =======
8. PARTICIPATING LEASE AGREEMENTS
Changes to the federal tax laws governing REITs became effective on January
1, 2001. Under those changes, the Partnership created taxable REIT subsidiaries
that lease the hotels the Partnership currently owns. The taxable subsidiaries
are wholly-owned and are similar to a subchapter C corporation. Accordingly, as
of January 1, 2001, OpCo assigned the participating leases to the taxable REIT
subsidiaries and the taxable subsidiaries entered into management agreements
with OpCo to manage the properties. Under these management agreements, the
taxable REIT subsidiaries pay OpCo a management fee. The taxable REIT
subsidiaries in turn make rental payments to the Partnership under the
participating leases. The management agreements have been structured to
substantially mirror the economics and terms of the former leases.
As of March 31, 2001, the Partnership leases eight of the hotels to Prime
Hospitality. These leases continue to have non-cancelable remaining terms
ranging from 8 to 10 years, subject to earlier termination on the occurrence of
certain contingencies, as defined. The rent due under each percentage lease is
the greater of base rent or percentage rent, as defined. Percentage rent
applicable to room and food and beverage revenue varies by lease and is
calculated by multiplying fixed percentages by the total amounts of such
revenues over specified threshold amounts. Both the minimum rent and the revenue
thresholds used in computing percentage rents are subject to annual adjustments
based on increases in the United States Consumer Price Index. Percentage rent
applicable to other revenues is calculated by multiplying fixed percentages by
the total amounts of such revenues. During interim reporting periods, the
Partnership defers recognition of revenue for lease payments considered to be
contingent until specified percentage rent thresholds are met.
F-10
351
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total lease payments on all of the leases were $3,784 and $92,754 for the
three months ended March 31, 2001 and 2000, respectively. Lease payments from
Prime Hospitality for the three months ended March 31, 2000 were $4,828.
9. STOCK-BASED COMPENSATION
As of March 31, 2001, MeriStar has granted 586,500 shares of MeriStar
restricted stock to the Partnership's employees. This restricted stock vests
ratably over a three-year or five-year period.
On March 29, 2000, the Partnership granted 462,500 Profits-Only OP Units,
or POPs, to some of the executive officers pursuant to the POPs Plan. The units
vest ratably over three years based on achieving certain operating performance
criteria and upon the occurrence of certain other events. The Profits-Only OP
Units are subject to variable plan accounting.
10. DISPOSITION
On March 21, 2001, the Partnership sold one hotel and received proceeds of
$7,274. The sale resulted in a loss of $1,081 ($1,062, net of tax).
11. SUBSEQUENT EVENTS
On May 2, 2001, the Partnership paid $1,504 to acquire four hotel leases
from affiliates of Prime Hospitality Corporation. Concurrently, the Partnership
signed long-term management contracts with OpCo for these properties.
On May 9, 2001, the Partnership and MeriStar entered into an Agreement and
Plan of Merger with Felcor Lodging Trust Incorporated ("Felcor")and its
operating partnership. Under the merger agreement, a wholly-owned subsidiary of
FelCor's operating partnership will merge with and into the Partnership, and
MeriStar will merge with and into Felcor. Holders of MeriStar common stock will
receive 0.784 of a share of Felcor common stock and $4.60 in cash for each share
of MeriStar's common stock. Holders of OP Units will receive $4.60 in cash and
0.784 of FelCor Operating Partnership Units. Class D Preferred OP Units will get
Series D preferred Units in FelCor Operating Partnership on a one for one basis.
The merger agreement requires the approval of holders of a majority of
MeriStar's outstanding shares of common stock and holders of a majority of the
outstanding shares of common stock of FelCor. MeriStar currently expect the
merger to close during the third quarter of 2001.
F-11
352
INDEPENDENT AUDITORS' REPORT
The Partners
MeriStar Hospitality Operating Partnership, L.P.
We have audited the accompanying consolidated balance sheets of MeriStar
Hospitality Operating Partnership, L.P. and subsidiaries (the "Partnership") as
of December 31, 2000 and 1999 and the related consolidated statements of
operations, partners' capital, and cash flows for each of the years in the
three-year period ended December 31, 2000. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule of real estate and accumulated depreciation. These consolidated
financial statements and financial statement schedule are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MeriStar
Hospitality Operating Partnership, L.P. and subsidiaries as of December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
KPMG LLP
Washington, D.C.
May 30, 2001
F-12
353
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
2000 1999
---------- ----------
ASSETS
Investments in hotel properties............................. $3,193,730 $3,118,723
Accumulated depreciation.................................... (287,229) (182,430)
---------- ----------
2,906,501 2,936,293
Cash and cash equivalents................................... 242 2,549
Accounts receivable, net.................................... 2,833 1,328
Prepaid expenses and other.................................. 2,767 9,137
Note receivable from Lessee................................. -- 57,110
Due from Lessee............................................. 22,221 11,476
Investments in and advances to affiliates................... 42,196 40,085
Restricted cash............................................. 19,918 17,188
Intangible assets, net of accumulated amortization of $5,575
and $2,847................................................ 9,822 10,930
---------- ----------
$3,006,500 $3,086,096
========== ==========
LIABILITIES, MINORITY INTERESTS AND PARTNERS' CAPITAL
Accounts payable, accrued expenses and other liabilities.... $ 72,197 $ 55,866
Accrued interest............................................ 28,365 31,380
Income taxes payable........................................ 921 730
Distributions payable....................................... 24,581 26,263
Deferred income taxes....................................... 8,113 7,477
Notes payable to MeriStar................................... 356,729 374,541
Mortgages and notes payable................................. 1,281,590 1,302,230
---------- ----------
Total liabilities................................. 1,772,496 1,798,487
---------- ----------
Minority interests.......................................... 2,687 2,690
Redeemable OP units at redemption value..................... 88,545 81,401
Partners' capital -- Common OP units, 44,403,034 and
47,256,468 issued and outstanding......................... 1,142,772 1,203,518
---------- ----------
$3,006,500 $3,086,096
========== ==========
See accompanying notes to consolidated financial statements.
F-13
354
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
-------- -------- --------
Revenue:
Participating lease revenue.............................. $391,729 $368,012 $135,994
Hotel operations:
Rooms................................................. -- -- 275,610
Food and beverage..................................... -- -- 85,374
Other operating departments........................... -- -- 19,496
Office rental, parking and other revenue................. 8,956 6,808 5,557
-------- -------- --------
Total revenue.................................... 400,685 374,820 522,031
-------- -------- --------
Hotel operating expenses by department:
Rooms................................................. -- -- 65,048
Food and beverage..................................... -- -- 67,493
Other operating departments........................... -- -- 9,975
Office rental, parking and other operating expenses...... 2,731 1,964 2,713
Undistributed operating expenses:
Administrative and general............................ 9,445 5,735 52,213
Property operating costs.............................. -- -- 58,611
Property taxes, insurance and other................... 47,481 47,027 29,240
Lease expense......................................... -- -- 34,641
Depreciation and amortization......................... 110,688 101,795 58,842
Spin-off costs........................................ -- -- 7,345
-------- -------- --------
Total operating expenses......................... 170,345 156,521 386,121
-------- -------- --------
Net operating income....................................... 230,340 218,299 135,910
Interest expense, net...................................... 117,524 100,387 50,492
-------- -------- --------
Income before minority interests, income taxes, gain on
sale of assets, and extraordinary gain (loss)............ 112,816 117,912 85,418
Minority interests......................................... (3) 24 (2,185)
-------- -------- --------
Income before income taxes, gain on sale of assets, and
extraordinary gain (loss)................................ 112,819 117,888 87,603
Income taxes............................................... 1,622 1,681 1,299
-------- -------- --------
Income before gain on sale of assets and extraordinary gain
(loss)................................................... 111,197 116,207 86,304
Gain on sale of assets, net of tax effect of $56........... 3,439 -- --
Extraordinary gain (loss) on early extinguishment of debt,
net of tax effect of $50 in 2000, ($74) in 1999, and
($207) in 1998........................................... 3,400 (4,551) (1,238)
-------- -------- --------
Net income................................................. 118,036 111,656 85,066
Preferred distributions.................................... (565) (565) (650)
-------- -------- --------
Net income available to common unitholders................. $117,471 $111,091 $ 84,416
======== ======== ========
Net income applicable to general partner common
unitholder.......................................... 107,638 101,345 77,225
======== ======== ========
Net income applicable to third party limited partner
common unitholders.................................. 9,833 9,746 7,191
======== ======== ========
Earnings per unit:
Basic:
Income before extraordinary gain...................... $ 2.25 $ 2.22 $ 2.38
Extraordinary gain (loss)............................. 0.07 (0.09) (0.03)
-------- -------- --------
Net income............................................ $ 2.32 $ 2.13 $ 2.35
Diluted:
Income before extraordinary gain...................... $ 2.18 $ 2.15 $ 2.25
Extraordinary gain (loss)............................. 0.06 (0.08) (0.03)
-------- -------- --------
Net income............................................ $ 2.24 $ 2.07 $ 2.22
======== ======== ========
See accompanying notes to consolidated financial statements.
F-14
355
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
Balance, January 1, 1998.................................... $ 396,838
Contributions............................................... 777,862
Allocation from redeemable OP units......................... 12,234
Distributions............................................... (97,170)
Net income available to common unitholders................ 84,416
Foreign currency translation adjustment................... (3,960)
----------
Comprehensive income........................................ 80,456
----------
Balance, December 31, 1998.................................. 1,170,220
Contributions............................................... 33,459
Distributions............................................... (117,885)
Allocation from redeemable OP units......................... 11,645
Repurchase of OP units...................................... (6,252)
Net income available to common unitholders................ 111,091
Foreign currency translation adjustment................... 1,240
----------
Comprehensive income........................................ 112,331
----------
Balance, December 31, 1999.................................. 1,203,518
Contributions............................................... 9,872
Distributions............................................... (101,730)
Allocation from redeemable OP units......................... (14,957)
Repurchase of OP units...................................... (73,638)
Contribution from general partner related to amortization of
stock-based compensation.................................. 3,070
Net income available to common unitholders................ 117,471
Foreign currency translation adjustment................... (834)
----------
Comprehensive income........................................ 116,637
----------
Balance, December 31, 2000.................................. $1,142,772
==========
See accompanying notes to the consolidated financial statements.
F-15
356
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
--------- --------- ----------
Operating activities:
Net income.............................................. $ 118,036 $ 111,656 $ 85,066
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 110,688 101,795 58,842
Gain on assets sold, before tax effect............... (3,495) --
Extraordinary (gain)loss on early extinguishment of
debt, before tax effect............................ (3,450) 4,625 1,445
Minority interests................................... (3) 24 (2,185)
Non-cash spin-off costs.............................. -- -- 3,205
Amortization of stock based compensation............. 3,070 -- --
Deferred income taxes................................ 636 715 (270)
Changes in operating assets and liabilities:
Accounts receivable, net........................... (1,505) 1,716 29,673
Prepaid expenses and other......................... 6,370 (5,262) 24,760
Due from Lessee.................................... (10,745) (4,039) (7,437)
Accounts payable, accrued expenses, accrued
interest and other liabilities.................. 4,295 16,098 (5,485)
Income taxes payable............................... 191 1,001 (723)
--------- --------- ----------
Net cash provided by operating activities....... 224,088 228,329 186,891
--------- --------- ----------
Investing activities:
Investment in hotel properties, net..................... (90,703) (170,063) (701,710)
Proceeds from disposition of assets..................... 24,148 8,900 --
Purchases of intangible assets.......................... -- -- (5,584)
Investments in and advances to affiliates, net.......... (2,111) (31,298) (2,320)
Purchases of minority interests......................... -- (72) (44)
Repayments of notes receivable.......................... 57,110 9,890 (67,000)
Change in restricted cash............................... (2,730) (5,309) (8,847)
--------- --------- ----------
Net cash used in investing activities........... (14,286) (187,952) (785,505)
--------- --------- ----------
Financing activities:
Deferred financing costs................................ (1,615) (6,005) --
Proceeds from mortgages and notes payable............... 179,388 429,636 1,407,261
Principal payments on mortgages and notes payable....... (200,028) (407,432) (821,051)
Borrowings from MeriStar................................ -- 55,000 --
Repayments to MeriStar on borrowings.................... (14,362) (2,785) --
Repurchase of units..................................... (73,638) (6,252) --
Contributions from partners............................. 1,356 2,249 1,870
Distributions paid to partners.......................... (103,274) (106,359) (67,623)
--------- --------- ----------
Net cash (used in) provided by financing
activities.................................... (212,173) (41,948) 520,457
--------- --------- ----------
Effect of exchange rate changes on cash and cash
equivalents............................................. 64 (53) 204
Net decrease in cash and cash equivalents................. (2,307) (1,624) (77,953)
Cash and cash equivalents, beginning of year.... 2,549 4,173 82,126
--------- --------- ----------
Cash and cash equivalents, end of year.......... $ 242 $ 2,549 $ 4,173
========= ========= ==========
See accompanying notes to consolidated financial statements.
F-16
357
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
1. ORGANIZATION
MeriStar Hospitality Operating Partnership, L.P. (the "Partnership") owns a
portfolio of primarily upscale, full-service hotels, diversified by franchise
and brand affiliations, in the United States and Canada. Substantially all of
the Partnership's hotels are leased to and operated by MeriStar Hotel & Resorts,
Inc. ("OpCo"), an affiliated entity. As of December 31, 2000, the Partnership
owned 114 hotels with 29,090 rooms, 106 of which are leased and operated by
OpCo.
The Partnership was formed on August 3, 1998, as a result of the merger
("the Merger") between CapStar Hotel Company ("CapStar") and American General
Hospitality Corporation ("AGH") and the subsequent formation of MeriStar
Hospitality Corporation ("MeriStar"), the merged entity. MeriStar, a real estate
investment trust ("REIT") is the general partner and owns a one percent interest
as of December 31, 2000. The limited partners are MeriStar LP, Inc., a wholly
owned subsidiary of MeriStar, which held approximately a 90 percent interest as
of December 31, 2000 and various third parties, which owned an aggregate
interest of nine percent at December 31, 2000. Partners' capital includes the
partnership interests of MeriStar and MeriStar LP, Inc. MeriStar held 484,591
and 518,009 common OP units as of December 31, 2000 and 1999, respectively.
MeriStar LP, Inc. held 43,918,443 and 46,738,459 common OP units as of December
31, 2000 and 1999, respectively. Due to the redemption rights of the limited
partnership units held by third parties, these units have been excluded from
partners' capital and classified as Redeemable OP units and recorded at
redemption value.
In order for MeriStar to maintain its tax status as a REIT, the Partnership
has not been permitted to engage in the operations of its hotel properties. To
comply with this requirement, the Partnership has leased all of its real
property to third-party lessee/managers -- OpCo and Prime Hospitality
Corporation.
On January 1, 2001, the REIT Modernization Act (the "RMA") became law. The
RMA permits the Partnership to create wholly-owned taxable REIT subsidiaries
(the "TRS") on or after January 1, 2001, which will be subject to taxation
similar to a subchapter C-Corporation. A TRS will be allowed to lease the real
property owned by the Partnership. Also, the RMA prohibits a TRS from engaging
in certain activities. First, a TRS may not manage the properties itself; it
will need to enter into an "arms length" management agreement with an
independent third-party manager that is actively involved in the trade or
business of hotel management and manages properties on behalf of other owners.
Second, a TRS may not lease a property that contains gambling operations. Third,
a TRS may not own a brand or franchise. The Partnership believes that
establishing these taxable REIT subsidiaries to lease its properties will
provide a more efficient alignment of and ability to capture the economic
interests of property ownership.
Until January 1, 2001, the Partnership leased 106 hotels to OpCo. Each of
the leases was a 12-year participating lease under which OpCo paid the
Partnership a fixed base rent plus participating rent based on a percentage of
hotel revenues. Because of the RMA, the Partnership has created a number of
taxable REIT subsidiaries. The Partnership and OpCo have also agreed to assign
the leases for the 106 hotels to these taxable REIT subsidiaries. The new
management agreements have been structured to mirror the current economics of
the existing leases. The transactions did not result in any cash consideration
exchanged among the parties. Under the new management agreements, the base
management fee is 2.5 percent of total hotel operating revenue with incentives
up to an additional 1.5 percent of total revenue if certain operating thresholds
are achieved. The agreements have an initial term of 10 years with three renewal
periods of five years each at OpCo's option, subject to some exceptions. Because
of these changes, the Partnership now bears the operating risk associated with
its properties.
F-17
358
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Partnership and all of its majority owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Investments in unconsolidated joint ventures and affiliated companies in
which the Partnership holds a voting interest of 50% or less and exercises
significant influence are accounted for using the equity method. The Partnership
uses the cost method to account for its investment in entities in which it does
not have the ability to exercise significant influence.
Cash Equivalents and Restricted Cash -- The Partnership considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents. Restricted cash represents amounts required to be
maintained in escrow under certain of the Partnership's credit facilities.
Investments in Hotel Properties -- Investments in hotel properties are
recorded at cost, which includes the allocated purchase price for hotel
acquisitions, or at fair value at the time of contribution for contributed
property. Property and equipment balances are depreciated using the
straight-line method over lives ranging from five to 40 years. For the years
ended December 31, 2000, 1999 and 1998, the Partnership capitalized interest of
$8,613, $12,540, and $5,182, respectively. Properties held for sale are carried
at the lower of their carrying values or estimated fair values less costs to
sell. Depreciation of these properties is discontinued when an operating
property is classified as held for sale. Properties held for sale are not
material and, therefore, are included in investments in hotel properties.
Intangible Assets -- Intangible assets consist primarily of deferred
financing fees. These deferred fees are amortized on a straight-line basis over
the lives of the related borrowings for up to 10 years. Total accumulated
amortization at December 31, 2000 and 1999 was $5,575 and $2,847, respectively.
In 1999 and 1998, the Partnership recognized extraordinary losses of $4,551 and
$1,238 (net of tax effect of $74 and $207), respectively, due to the write-off
of unamortized deferred financing fees in conjunction with refinancing certain
credit facilities.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
of -- The carrying values of long-lived assets, which include property and
equipment and all intangibles, are evaluated periodically in relation to the
operating performance and future undiscounted cash flows of the underlying
assets. If the analysis indicates that the carrying value is not recoverable
from future cash flows, the long-lived asset is written down to estimated fair
value and an impairment loss is recognized. No impairment losses were recorded
during 2000, 1999 or 1998.
Income Taxes -- No provision for federal income taxes has been reflected in
the financial statements because all taxable income or loss, or tax credits are
passed through to the partners. The Partnership is subject to state, local and
foreign taxes in certain jurisdictions.
Foreign Currency Translation -- Results of operations for the Partnership's
Canadian hotels are maintained in Canadian dollars and translated using the
average exchange rates during the period. Assets and liabilities are translated
to U.S. dollars using the exchange rate in effect at the balance sheet date.
Resulting translation adjustments are reflected in accumulated other
comprehensive income.
Revenue Recognition -- Prior to the Merger, revenue was earned through the
operations and management of the hotel properties and was recognized when
earned. Subsequent to the Merger, the Partnership earns participating lease
revenue. Participating lease revenue represents lease payments from lessees
pursuant to participating lease agreements. Office, retail and parking rental is
generally recognized on a straight-line basis over the terms of the respective
leases.
F-18
359
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Participating Lease Agreements -- The Partnership's participating leases
have non-cancelable remaining terms ranging from 8 to 10 years, subject to
earlier termination on the occurrence of certain contingencies, as defined. The
rent due under each percentage lease is the greater of base rent or percentage
rent, as defined. Percentage rent applicable to room and food and beverage
revenue varies by lease and is calculated by multiplying fixed percentages by
the total amounts of such revenues over specified threshold amounts. Both the
minimum rent and the revenue thresholds used in computing percentage rents are
subject to annual adjustments based on increases in the United States Consumer
Price Index. Percentage rent applicable to other revenues is calculated by
multiplying fixed percentages by the total amounts of such revenues. During
interim reporting periods, the Partnership defers recognition of revenue for
lease payments considered to be contingent until specified percentage rent
thresholds are met.
Changes to the federal tax laws governing REITs were enacted in 1999 and
became effective on January 1, 2001. Under those changes, the Partnership is
permitted to create subsidiaries that lease the property the Partnership
currently owns and are taxable, similar to a subchapter C-Corporation. The
Partnership's taxable REIT subsidiaries are wholly-owned. Accordingly, the
Partnership and OpCo assigned the participating leases to the taxable REIT
subsidiaries and the taxable REIT subsidiaries entered into management
agreements with OpCo to manage the Partnership's properties. Under these
management agreements, the taxable subsidiaries pay OpCo a management fee. The
taxable REIT subsidiaries in turn make rental payments to the Partnership under
the participating leases. The management agreements have been structured to
substantially mirror the economics of the former leases.
Financial Instruments -- From time to time the Partnership enters into swap
and collar agreements that are designated as, and are effective as, hedges
against the impact of interest rate fluctuation on certain of the Partnership's
existing and probable future long-term debt instruments. Because these
agreements qualify for hedge accounting treatment, any gains or losses are
recognized as adjustments to interest expense over the lives of the underlying
debt instruments. For hedge agreements associated with anticipated future debt
instruments, gains or losses are deferred until those debt instruments are
entered into. If the Partnership determines it is no longer probable that the
Partnership will enter into an anticipated debt instrument, any related deferred
gains or losses are recognized in the current period.
Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Segment Information -- SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" requires a public entity to report selected
information about operating segments in financial reports issued to
shareholders. It also establishes standards for related disclosures about
product and services, geographic areas and major customers. Based on the
guidance provided in the standard, the Partnership has determined that its
business is conducted in one operating segment.
The following table summarizes geographic information required to be
disclosed under SFAS No. 131:
2000 1999 1998
-------- -------- --------
REVENUE:
U.S. ............................................. $394,264 $367,809 $507,078
Foreign........................................... 6,521 7,011 14,953
-------- -------- --------
$400,785 $374,820 $522,031
======== ======== ========
F-19
360
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENTS IN HOTEL PROPERTIES, NET:
U.S. ............................................. $2,850,348 $2,876,909
Foreign........................................... 56,153 59,384
---------- ----------
$2,906,501 $2,936,293
========== ==========
Comprehensive Income -- SFAS No. 130, "Reporting Comprehensive Income,"
requires an enterprise to display comprehensive income and its components in a
financial statement to be included in an enterprise's full set of annual
financial statements or in the notes to financial statements. Comprehensive
income represents a measure of all changes in equity of an enterprise that
result from recognized transactions and other economic events for the period
other than transactions with owners in their capacity as owners. Comprehensive
income of the Partnership includes net income and other comprehensive income
from foreign currency items. Accumulated other comprehensive loss included in
partners' capital was $6,081 and $5,247 as of December 31, 2000 and 1999,
respectively.
New Accounting Pronouncements -- In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires that an entity recognize all
derivatives as either assets or liabilities in balance sheets and measure those
instruments at fair value. In June 1999, the FASB issued SFAS No. 137 which
amended SFAS No. 133 to defer the effective date to all fiscal quarters of
fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS
No. 138 which provides additional guidance and amendments to SFAS No. 133. The
Partnership recognized a transition adjustment of $2,842 as the fair value of
its derivative instruments at January 1, 2001. The transition adjustment
resulted in an interest rate swap liability and a corresponding charge to other
comprehensive income.
3. INVESTMENTS IN HOTEL PROPERTIES
Investments in hotel properties consists of the following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Land........................................................ $ 317,072 $ 318,360
Buildings................................................... 2,461,089 2,378,318
Furniture, fixtures and equipment........................... 338,350 320,787
Construction-in-progress.................................... 77,219 101,258
---------- ----------
Total............................................. $3,193,730 $3,118,723
========== ==========
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Partnership has ownership interests in certain unconsolidated joint
ventures and affiliated companies.
In 2000, the Partnership invested $2,100 in STS Hotel Net, a Partnership
that provides high-speed internet portals to guest rooms. This investment is
accounted for using the cost method.
In 1999, the Partnership invested $40,000 in MeriStar Investment Partners,
LP ("MIP"), a joint venture established to acquire upscale, full-service hotels.
The Partnership's investment is in the form of a preferred partnership interest.
The Partnership receives a 16% preferred return on its investment.
F-20
361
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTE RECEIVABLE FROM LESSEE
On March 1, 2000, OpCo repaid the remaining balance of $57,110 on its
revolving credit agreement with the Partnership upon closing its bank revolving
credit facility. At that time, OpCo's revolving credit agreement with the
Partnership was also amended to reduce the maximum borrowing limit from $75,000
to $50,000. Any amounts outstanding will bear interest at the rate of the 30-day
London Interbank Offered Rate plus 650 basis points.
6. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Credit Facility............................................. $ 898,000 $ 908,000
Secured Facility............................................ 324,554 328,954
Mortgage Debt and Other..................................... 59,036 65,276
---------- ----------
Mortgages and Notes Payable............................... 1,281,590 1,302,230
Notes Payable to MeriStar................................... 356,729 374,541
---------- ----------
$1,638,319 $1,676,771
========== ==========
Credit Facility -- In conjunction with the Merger, the Partnership entered
into a $1,000,000 senior secured credit facility (the "Credit Facility"). The
Credit Facility is structured as a $300,000, five-year term loan facility; a
$200,000, five-and-a-half year term loan facility; and a $500,000, three-year
revolving credit facility with two one-year optional extensions. The Credit
Facility is secured by MeriStar's common stock, and the partners' ownership
interests in the Partnership and its subsidiaries. The interest rate on the term
loans and revolving facility ranges from 100 to 200 basis points over the 30-day
London Interbank Offered Rate ("LIBOR"), depending on certain financial
performance covenants and long-term senior unsecured debt ratings. The weighted
average interest rate on borrowings outstanding under the Credit Facility as of
December 31, 2000 and 1999 was 8.3% and 8.4%, respectively. As of December 31,
2000, the Partnership had $98.0 million available under the Credit Facility's
revolving facility.
Secured Facility -- In 1999, the Partnership completed a $330,000 10-year
non-recourse financing ("Secured Facility") secured by a portfolio of 19 hotels.
The loan bears a fixed interest rate of 8.01% and matures in 2009. The
Partnership used most of the net proceeds to repay the amounts outstanding under
prior credit facilities.
Mortgage Debt -- In connection with the Merger, the Partnership assumed
mortgage debt secured by seven hotels. The mortgage debt matures between 2001
and 2012 and the interest rates on the mortgages range from 7.5% to 10.5%.
Notes Payable to MeriStar -- In 1997, MeriStar completed the offering of
$150,000 aggregate principal amount (issue price of $149,799, net of discount)
of its 8.75% senior subordinated notes due 2007 (the "Subordinated Notes"). In
conjunction with this transaction, the Partnership borrowed $150,000 from
MeriStar under terms matching those of the Subordinated Notes; however, the
interest rate on the Partnership's note to MeriStar is 8.69%, the effective rate
on the Subordinated Notes. The indenture pursuant to which the Subordinated
Notes were issued contains certain covenants, including maintenance of certain
financial ratios, reporting requirements, and other customary restrictions. The
note provides for semi-annual payments of interest on February 15 and August 15,
commencing on February 15, 1998.
In 1999, under terms matching those of the Subordinated Notes, MeriStar
completed an "add-on" offering of $55,000 of Subordinated Notes. In conjunction
with the "add-on" sale of Subordinated Notes,
F-21
362
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Partnership borrowed $55,000 from MeriStar under terms matching those of the
Subordinated Notes however, the interest rate on the Partnership's note to
MeriStar is 8.69%, the effective rate on the Subordinated Notes. The Partnership
used the net proceeds to repay indebtedness under its Credit Facility and to
invest in MIP. These notes are unsecured obligations of the Partnership and
provide for semi-annual payments of interest on February 15 and August 15,
commencing on August 15, 1999. The outstanding balance on these notes payable to
MeriStar is $202,429 and $202,041 at December 31, 2000 and 1999, respectively.
In 1997, MeriStar completed the offering of $172,500 aggregate principal
amount of its 4.75% convertible subordinated notes due 2004 (the "Convertible
Notes"). In conjunction with this transaction, the Partnership borrowed $172,500
from MeriStar under terms matching those of the Convertible Notes. The proceeds
were used to repay outstanding indebtedness under a prior credit facility and to
finance certain hotel acquisitions. The note provides for semi-annual payments
of interest on April 15 and October 15, commencing on April 15, 1998. During
2000, the Partnership repaid $18,200 of its note to MeriStar at a discount in
connection with MeriStar's repurchase of its Convertible Notes at an equal
discount. This resulted in an extraordinary gain of $3,450 ($3,400, net of
taxes). The outstanding balance on this note payable to MeriStar is $154,300 and
$172,500 at December 31, 2000 and 1999, respectively.
Hedge Agreements -- As of December 31, 2000, the Partnership has seven swap
agreements with notional principal amounts totaling $700,000. These swap
agreements provide hedges against the impact future interest rates have on the
Partnership's floating London Interbank Offered Rate ("LIBOR") debt instruments.
The swap agreements effectively fix the 30-day LIBOR between 6.0% and 7.2%. The
swap agreements expire between September 2001 and July 2003. For the year ended
December 31, 2000, the Partnership has received net payments of $3,081 on these
swaps and other similar swaps that expired during the year.
In anticipation of the August 1999 completion of the Secured Facility, the
Partnership entered into two separate hedge transactions during July 1999. Upon
completion of the Secured Facility, the Partnership terminated the underlying
treasury lock agreements, resulting in a net payment to the Partnership of
$5,100. The amount was deferred and is being recognized as a reduction to
interest expense over the life of the underlying debt. As a result, the
effective interest rate on the Secured Facility is 7.76%.
As of December 31, 2000, after consideration of the hedge agreements
described above, the Partnership has fixed the effective interest rate on 88% of
its long-term debt and its overall weighted average interest rate is 7.93%.
Future Maturities -- Aggregate future maturities of the above obligations
are as follows:
2001.................................................... $ 28,288
2002.................................................... 47,897
2003.................................................... 667,589
2004.................................................... 361,168
2005.................................................... 9,265
Thereafter.............................................. 524,112
----------
$1,638,319
==========
Management has determined that the fair value of the outstanding balance of
the Partnership's long-term debt approximates $1,589,311 at December 31, 2000.
F-22
363
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The Partnership's income taxes were allocated as follows:
2000 1999 1998
------ ------ ------
Taxes on income before gain on sale of assets, and
extraordinary gain (loss)................................ $1,622 $1,681 $1,299
Taxes on gain on sale of assets............................ 56 -- --
Tax expense or (benefit) on extraordinary gain (loss)...... 50 (74) (207)
------ ------ ------
$1,728 $1,607 $1,092
====== ====== ======
The Partnership's effective income tax rate is as follows:
2000 1999 1998
---- ---- ----
State and local taxes....................................... 1.1% 1.1% 1.1%
Difference in effective rate on foreign subsidiaries........ 0.3 0.3 0.3
Other....................................................... -- -- 0.1
--- --- ---
1.4% 1.4% 1.5%
=== === ===
The components of income tax expense related to income before gain on sale
of assets, and extraordinary gain (loss) are as follows:
2000 1999 1998
------ ------ ------
Current:
State.................................................... $ 640 $ 815 $1,408
Foreign.................................................. 346 151 161
------ ------ ------
986 966 1,569
Deferred:
State.................................................... 548 675 (270)
Foreign.................................................. 88 40 --
------ ------ ------
636 715 (270)
------ ------ ------
$1,622 $1,681 $1,299
====== ====== ======
The tax effects of the principal temporary differences that give rise to
the Partnership's net deferred tax liability are as follows:
DECEMBER 31,
----------------
2000 1999
------ ------
Accelerated depreciation.................................... $2,089 $1,477
Fair value of hotel assets acquired......................... 5,440 5,440
Allowance for doubtful accounts............................. (24) (24)
Accrued vacation............................................ (12) (12)
Accrued expenses............................................ 386 386
Other....................................................... 234 210
------ ------
Net deferred tax liability.................................. $8,113 $7,477
====== ======
There is no valuation allowance for deferred tax assets as of December 31,
2000 or 1999 as management believes it is more likely than not that these
deferred tax assets will be fully realized.
F-23
364
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with the Merger and related transactions, the Partnership
established a new accounting basis for AGH's assets and liabilities based on
their fair values. In accordance with accounting principles generally accepted
in the United States of America, the Partnership has provided a deferred income
tax liability for the estimated future tax effect of differences between the
accounting and tax bases of assets acquired from AGH. This deferred income tax
liability, related to future state and local income taxes, is estimated as
$5,440, based on information available at the date of the Merger and
subsequently.
8. PARTNERSHIP UNITS
The outstanding units of limited partnership interest in the Partnership
held by third parties are redeemable at the option of the holder for a like
number of shares of common stock of MeriStar, or cash, or a combination thereof,
at the election of MeriStar. Due to these redemption rights, these limited
partnership units have been excluded from partners' capital and are included in
redeemable OP units and measured at redemption value as of the end of the
periods presented. At December 31, 2000 and 1999 there were 4,056,111 and
4,544,420 redeemable units outstanding, respectively. The value of these
redeemable units is based on the closing market price of MeriStar's common stock
at the balance sheet date, which at December 31, 2000 and 1999 was $19.70 and
$16.00, respectively. In addition, there were 392,157 Class D Preferred OP Units
outstanding at December 31, 2000 and 1999 with a redemption value of $22.16 per
unit.
The Partnership's agreement provides for four classes of partnership
interests ("OP Units"): Common OP Units, Class B OP Units, Class C OP Units and
Class D OP Units. Common OP Units and Class B OP Units receive quarterly
distributions per OP Unit equal to the dividend paid on each share of MeriStar's
common stock. Class C OP Units receive a non-cumulative, quarterly distribution
equal to $0.5575 per Class C OP Unit until such time as the dividend rate on
MeriStar's common stock exceeds $0.5575 whereupon the Class C OP Units
automatically convert into Common OP Units. Class D OP Units pay a 6.5%
cumulative annual preferred return based on an assumed price per common share of
$22.16, compounded quarterly to the extent not paid on a current basis. The
Partnership may redeem them at any time after April 1, 2000 at a price of $22.16
per share for cash or, at MeriStar's option, for shares of MeriStar common stock
having a value equal to the redemption price. The holders have the option to
redeem the Class D OP Units at any time after April 1, 2004 for cash or, at the
holders option, for shares of MeriStar common stock having a value equal to
$22.16. All net income earned and capital proceeds received by the Partnership,
after payment of the annual preferred return on Class D OP units, are shared by
the holders of the Common OP Units. As of December 31, 2000 and 1999,
outstanding OP Units were 48,459,145 and 51,800,888 respectively.
During 1999, 65,875 Common OP Units were issued to partially finance the
purchase of a hotel and 974,588 Common OP units were issued as a conditional
component of a purchase agreement for a hotel purchased in 1998. During 1998,
962,858 Common and Class B OP Units were issued to partially finance the
purchases of certain hotels and 3,305,175 Common OP Units were issued to former
holders of AGH OP Units. During 1997, the Partnership issued 1,483,759 Common
and Class B OP Units and 392,157 Class D OP Units to partially finance the
purchases of certain hotels and lease contracts on other hotels.
On March 21, 2000, June 21, 2000, September 25, 2000, and December 20,
2000, the Partnership declared its first, second, third and fourth quarter
distributions, respectively, equivalent to an annual rate of $2.02 per Common
and Class B OP Unit and $2.23 per Class C OP Unit in the Partnership. The amount
of the distribution for each quarter was $0.505 per Common and Class B OP Unit
and $0.5575 per Class C OP Unit and was paid on April 28, 2000, July 31, 2000,
October 31, 2000 and January 31, 2001, respectively.
F-24
365
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 17, 1999, June 21, 1999, September 15, 1999, and December 6, 1999,
the Partnership declared its first, second, third and fourth quarter
distributions, respectively, equivalent to an annual rate of $2.02 per Common
and Class B OP Unit and $2.23 per Class C OP Unit in the Partnership. The amount
of the distribution for each quarter was $0.505 per Common and Class C OP Unit
and $0.5575 per Class C OP Unit and was paid on April 30, 1999, July 30, 1999,
October 29, 1999 and January 31, 2000, respectively.
On September 2, 1998 and November 4, 1998, respectively, the Partnership
declared its third and fourth quarter distributions, equivalent to an annual
rate of $2.02 per Common and Class B OP Unit and $2.23 per Class C OP Unit in
the Partnership. The third quarter distribution was paid on a prorated basis
from August 4, 1998 (the first day of operations following the Merger) through
September 30, 1998. The amount of the distribution was $0.31837 per Common and
Class B OP Unit and was paid on October 30, 1998. The fourth quarter
distribution of $0.505 per Common and Class B OP Unit and $0.5575 per Class C OP
Unit was paid on January 29, 1999.
When MeriStar, the general partner, repurchases its outstanding common
stock, the Partnership repurchases a matching number of units held by MeriStar
at an equal price. In September 1999, MeriStar's Board of Directors authorized
the repurchase of up to five million shares of its common stock from time to
time in open market or privately negotiated transactions. As of December 31,
2000, MeriStar has repurchased a total of 4,083,204 shares for $72,354 which has
been recorded as a reduction to partners' capital as a result of the redemption
of units held by MeriStar to fund the repurchase.
F-25
366
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EARNINGS PER UNIT
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per unit ("EPU") computations for income before
extraordinary gain (loss):
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
-------- -------- -------
Basic EPU Computation:
Net income before extraordinary gain (loss)......... $114,636 $116,207 $86,304
Distributions paid related to unvested restricted
stock of MeriStar................................ (1,168) -- --
Preferred distributions............................. (565) (565) (650)
-------- -------- -------
Income before extraordinary gain (loss) available to
common unitholders............................... 112,903 115,642 85,654
Weighted average number of OP Units outstanding..... 50,122 52,153 36,021
-------- -------- -------
Basic EPU before extraordinary gain (loss).......... $ 2.25 $ 2.22 $ 2.38
======== ======== =======
Diluted EPU Computation:
Income before extraordinary gain (loss) available to
common unitholders............................... $112,903 $115,642 $85,654
Preferred distributions............................. 565 565 650
Interest on convertible debt of MeriStar............ 7,338 8,137 6,377
Distributions paid related to unvested restricted
stock of MeriStar................................ 254 -- --
-------- -------- -------
Adjusted net income................................. 121,060 124,344 92,681
Weighted average number of OP units outstanding..... 50,122 52,153 36,021
OP Unit equivalents:
Stock options of MeriStar........................ 208 102 383
Class D Preferred OP Units....................... 392 392 392
Convertible debt of MeriStar..................... 4,612 5,066 4,454
Restricted stock of MeriStar..................... 126 -- --
-------- -------- -------
Weighted average number of diluted OP units
outstanding.................................... 55,460 57,713 41,250
-------- -------- -------
Diluted EPU before extraordinary gain (loss)..... $ 2.18 $ 2.15 $ 2.25
======== ======== =======
10. RELATED-PARTY TRANSACTIONS
Pursuant to an intercompany agreement, the Partnership and OpCo provide
each other with, among other things, reciprocal rights to participate in certain
transactions entered into by each party. In particular, OpCo has a right of
first refusal to become the lessee of any real property acquired by the
Partnership. OpCo also may provide the Partnership with certain services
including administrative, renovation supervision, corporate, accounting,
finance, insurance, legal, tax, information technology, human resources,
acquisition identification and due diligence, and operational services, for
which OpCo is compensated in an amount that the Partnership would be charged by
a third party for comparable services. During the years ended December 31, 2000,
1999 and 1998, the Partnership paid OpCo $1,165, $1,600 and $781 respectively,
for such services.
F-26
367
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information of the Partnership's significant lessee,
OpCo, is as follows:
2000 1999
---------- ----------
BALANCE SHEET DATA:
Total assets...................................... $ 339,118 $ 258,931
Total liabilities................................. $ 254,673 $ 179,168
2000 1999 1998
---------- ---------- --------
OPERATING DATA:
Revenue........................................... $1,411,619 $1,292,114 $562,347
Net income (loss)................................. $ (9,380) $ 6,685 $ 3,950
OpCo has a revolving credit facility with the Partnership. On March 1,
2000, OpCo repaid the remaining balance of $57,110 on its revolving credit
agreement with the Partnership upon closing its bank revolving credit facility.
At this time, the revolving credit agreement was amended to reduce the maximum
borrowing limit from $75,000 to $50,000 and the interest rate on the facility
was changed from LIBOR plus 350 basis points to LIBOR plus 650 basis points.
During 2000, 1999 and 1998, the Partnership earned interest of $955, $4,907, and
$1,967, respectively, from this facility. There were no amounts outstanding
under this facility at December 31, 2000.
In order for AGH to qualify as a REIT prior to the Merger, AGH's operating
partnership sold certain personal property relating to certain of the hotels
acquired by AGH in connection with its initial public offering to AGH Leasing,
L.P. (which has since come under the control of OpCo) for $315, which amount was
paid by issuance of a promissory note to AGH's operating partnership. The note
was transferred to the Partnership in connection with the Merger. The promissory
note bears interest at the rate of 10.0% per annum and requires the payment of
quarterly installments of principal and interest over a five-year period ending
on July 31, 2000. This note was repaid during 2000.
Certain members of management and their respective affiliates owned equity
interests relating to a hotel which was acquired by the Partnership in January
1999. Such persons and affiliates received an aggregate of $1,488 of the
Partnership's OP Units in exchange for such interests in the hotel.
11. STOCK-BASED COMPENSATION
MeriStar sponsors a restricted stock plan and a stock option plan (the
"Plans") in which Partnership employees participate. Upon issuance of any stock,
MeriStar is obligated to contribute the proceeds to the Company in exchange for
an equal number of OP units.
Stock Options
At the date of the Merger, CapStar had outstanding approximately 1,758,000
options (the "CapStar Options") under an equity incentive plan. As a result of
the Merger, all holders of CapStar Options received one option in MeriStar and
one option in OpCo, and the original exercise price of the CapStar Options was
allocated between the two companies. In addition, approximately 1,060,000 of the
CapStar Options became fully vested as of the Merger date.
In connection with the Merger, a new equity incentive plan (the "Equity
Incentive Plan") was adopted. This plan authorizes 4,549,561 shares of common
stock to be awarded. Awards may be granted to officers or other key employees of
MeriStar or an affiliate. These shares are exercisable in three annual
installments and expire ten years from the grant date.
F-27
368
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity for 2000, 1999 and 1998 is as follows:
NUMBER OF AVERAGE
SHARES OPTION PRICE
--------- ------------
Balance, January 1, 1998.................................... 1,601,406 $26.28
Granted................................................... 2,171,796 24.78
Exercised................................................. (37,823) 17.45
Forfeited................................................. (32,000) 29.44
--------- ------
Balance, December 31, 1998.................................. 3,703,379 24.80
Granted................................................... 1,015,750 19.37
Exercised................................................. (94,012) 15.64
Forfeited................................................. (264,064) 27.87
--------- ------
Balance, December 31, 1999.................................. 4,361,053 23.56
Granted................................................... 584,875 16.13
Exercised................................................. (47,153) 17.26
Forfeited................................................. (113,441) 28.62
--------- ------
Balance, December 31, 2000.................................. 4,785,334 $22.68
========= ======
Shares exercisable at December 31, 1998..................... 2,231,072 $24.63
========= ======
Shares exercisable at December 31, 1999..................... 2,577,620 $24.53
========= ======
Shares exercisable at December 31, 2000..................... 3,482,816 $23.99
========= ======
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ----------- --------
$14.88 to $19.19 1,978,572 7.58 $17.17 1,051,410 $16.59
$19.75 to $25.31 1,160,502 7.04 21.62 852,206 21.68
$25.80 to $31.42 1,435,280 6.02 29.98 1,435,280 29.98
$31.51 to $32.08 210,980 7.00 32.05 143,920 32.04
--------- ---- ------ --------- ------
$14.88 to $32.08 4,785,334 6.96 $22.75 3,482,816 $23.99
========= ==== ====== ========= ======
Other Stock Compensation
In conjunction with the Merger, holders of CapStar options were granted a
total of 150,000 shares of stock with a value of $3,205. This restricted stock
vests ratably over a three-year period.
As of December 31, 2000, MeriStar granted 586,500 shares of restricted
stock. This restricted stock vests ratably over a three-year or five-year
period. The Partnership incurred $3,070 in compensation expense in 2000 related
to the amortization of this restricted stock.
As of December 31, 2000, the Partnership has issued 462,500 Profits-Only OP
Units to certain of the Partnership's executive officers pursuant to a
Profits-Only Operating Partnership Units Plan. The units vest over three years
based on achieving certain operating performance criteria and upon the
occurrence of certain other events. The Profits-Only OP Units are subject to
variable plan accounting.
F-28
369
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
The Partnership leases land at certain hotels from third parties. Certain
leases contain contingent rent features based on gross revenues at the
respective property. Future minimum lease payments required under these
operating leases as of December 31, 2000 were as follows:
2001...................................................... $ 1,556
2002...................................................... 1,556
2003...................................................... 1,556
2004...................................................... 1,559
2005...................................................... 1,559
Thereafter................................................ 57,396
-------
$65,182
=======
Until January 1, 2001 the Partnership leased all of its hotels to OpCo and
one other lessee under non-cancelable participating leases that expire from 2009
to 2011. Beginning January 1, 2001, the Partnership will lease eight hotels to
one lessee under non-cancelable participating leases that expire in 2009. The
Partnership also leases certain office, retail and parking space to outside
parties under non-cancelable operating leases with initial or remaining terms in
excess of one year. Future minimum rental receipts under these non-cancelable
leases as of December 31, 2000 were as follows:
2001..................................................... $ 20,289
2002..................................................... 19,801
2003..................................................... 18,937
2004..................................................... 18,590
2005..................................................... 16,945
Thereafter............................................... 63,428
--------
$157,990
========
In the course of the Partnership's normal business activities, various
lawsuits, claims and proceedings have been or may be instituted or asserted
against the Partnership. Based on currently available facts, management believes
that the disposition of matters that are pending or asserted will not have a
material adverse effect on the consolidated financial position, results of
operations or liquidity of the Partnership.
13. ACQUISITIONS AND DISPOSITIONS
During 2000, the Partnership sold three limited service hotels and received
proceeds of $24,148. This resulted in a gain on sale of assets of $3,495
($3,439, net of tax). The Partnership also purchased a full service hotel for
$19,400. Of the $19,400, $11,400 was paid in cash and $8,000 will be paid from
the hotel's future cash flow within the next five years. The acquisition was
funded using existing cash and borrowings on the Credit Facility.
During 1999, the Partnership acquired one hotel for a purchase price of
$10,642 of cash and $1,488 of OP Units. The acquisition was funded using
existing cash and borrowings on the Credit Facility. The Partnership also sold 2
hotels during 1999 for a total price of $8,900. The resulting gain on the sales
was immaterial.
During 1998, the Partnership acquired 70 hotels (containing 17,332 rooms),
of which 53 were acquired pursuant to the Merger. MeriStar purchased AGH for
approximately $1,306,000. MeriStar contributed the net assets acquired to the
Partnership in exchange for approximately 23,913,000 OP Units. The total
purchase price for the remaining 17 acquired hotels during 1998 was $549,068 of
cash and
F-29
370
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$16,932 of OP Units. The cash portions of these acquisitions were funded through
borrowings on the Credit Facility and a prior credit facility.
The following unaudited pro forma information is presented as if the
Merger, the Spin-Off and all 117 hotels owned at December 31, 1998 had been
acquired at the beginning of 1998. The pro forma information is provided for
informational purposes only. It is based on historical information and does not
necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations of the Company. Pro forma
information for 1998 for total revenue, net income and diluted EPU is $332,299,
$107,698 and $2.44, respectively.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the Partnership's quarterly results of
operations:
2000 1999
--------------------------------------- ---------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- -------- -------- ------- ------- -------- --------
Total revenue........... $67,080 $81,515 $117,607 $134,483 $64,072 $74,034 $103,193 $133,521
Total operating
expenses.............. 41,339 43,331 42,206 43,469 39,210 38,355 37,388 41,568
Net operating income.... 25,741 38,184 75,401 91,014 24,682 35,679 65,805 91,953
Income before
extraordinary (loss)
gain.................. (2,986) 11,851 45,633 60,138 755 9,150 41,145 65,157
Net income.............. 414 11,851 45,633 60,138 755 9,150 36,594 65,157
Diluted earnings per
unit.................. $ (0.06) $ 0.23 $ 0.85 $ 1.15 $ 0.01 $ 0.17 $ 0.75 $ 1.17
15. SUPPLEMENTAL CASH FLOW INFORMATION
2000 1999 1998
-------- ------- ----------
Cash paid for interest:
Interest, net of capitalized interest of $8,613,
$12,540 and $5,182, respectively................ $120,539 $93,491 $ 48,156
Income taxes....................................... 699 1,009 2,388
Non-cash investing and financing activities:
Long-term debt assumed in purchase of property and
equipment....................................... -- -- 543
OP Units issued in purchase of property and
equipment....................................... -- 1,488 16,932
Redemption of redeemable OP Units.................. 24 29,412 31,430
Deferred purchase price............................ 8,000 -- --
Book value of assets distributed to spun-off
affiliate....................................... -- -- 41,449
Book value of liabilities distributed to spun-off
affiliate....................................... -- -- (11,768)
Book value of debt distributed to spun-off
affiliate....................................... -- -- (1,116)
Fair value of assets acquired in Merger............ -- -- 1,306,018
Fair value of liabilities assumed in Merger........ -- -- (26,167)
Fair value of debt assumed in Merger............... -- -- (523,944)
16. SUBSEQUENT EVENTS
On January 26, 2001, the Partnership sold $300,000 of 9.0% senior notes due
2008 and $200,000 of 9.13% senior notes due 2011 (collectively the "Senior
Unsecured Notes"). The notes are unsecured obligations of the Partnership.
MeriStar, together with a number of the Partnership's subsidiaries, guarantee
payment of principal and interest on the notes on a senior unsecured basis. The
net proceeds from the sale of $492,000 were used to repay amounts outstanding
under the Credit Facility and to make
F-30
371
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payments to terminate certain agreements that hedged variable interest rates of
the loans that were repaid. The terminated swap agreements had notional amounts
of $300,000. The Partnership recognized a loss of $9,297 on these terminations.
In the first quarter 2001, the Partnership wrote-off its $2,112 investment
in STS Hotel Net after determining that the carrying value of the investment was
not recoverable.
On May 2, 2001, the Partnership paid $1,504 to acquire four hotel leases
from affiliates of Prime Hospitality Corporation. Concurrently, the Partnership
signed long-term management contracts with OpCo for these properties.
On May 9, 2001, the Partnership and MeriStar entered into an Agreement and
Plan of Merger with Felcor Lodging Trust Incorporated ("Felcor")and its
operating partnership. Under the merger agreement, a wholly-owned subsidiary of
FelCor's operating partnership will merge with and into the Partnership, and
MeriStar will merge with and into Felcor. Holders of MeriStar common stock will
receive 0.784 of a share of Felcor common stock and $4.60 in cash for each share
of MeriStar's common stock. Holders of OP Units will receive $4.60 in cash and
0.784 FelCor operating partnership units. Class D Preferred OP Units will get
Series D preferred units in FelCor operating partnership on a one for one basis.
The merger agreement requires the approval of holders of a majority of
MeriStar's outstanding shares of common stock and holders of a majority of the
outstanding shares of common stock of Felcor. MeriStar currently expects the
merger to close during the third quarter of 2001.
F-31
372
MERISTAR HOSPITALITY CORPORATION
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
COSTS SUBSEQUENT
INITIAL COST TO COMPANY TO ACQUISITION
----------------------- ----------------
BUILDING BUILDING
AND AND
ENCUM- IMPROVE- IMPROVE-
DESCRIPTION BRANCES LAND MENTS LAND MENTS
- ----------- ------- --------- ----------- ----- --------
HOTEL ASSETS:
Salt Lake Airport Hilton, UT.............. -- $ 770 $ 12,828 $ -- $ 2,827
Radisson Hotel, Schaumburg, IL............ -- 1,080 5,131 -- 2,282
Sheraton Hotel, Colorado Springs, CO...... (1) 1,071 14,592 1 3,728
Hilton Hotel, Bellevue, WA................ 48 5,211 6,766 -- 3,186
Marriott Hotel, Somerset, NJ.............. (1) 1,978 23,001 -- 4,390
Westin Atlanta Airport, Atlanta, GA....... -- 2,650 15,926 (300) 9,403
Sheraton Hotel, Charlotte, NC............. (1) 4,700 11,057 -- 3,906
Radisson Hotel Southwest, Cleveland, OH... -- 1,330 6,353 -- 4,547
Orange County Airport Hilton, Irvine,
CA...................................... (1) 9,990 7,993 -- 3,133
The Latham Hotel, Washington, DC.......... -- 6,500 5,320 -- 3,889
Hilton Hotel, Arlington, TX............... (1) 1,836 14,689 79 2,828
Hilton Hotel, Arlington, VA............... -- 4,000 15,069 -- 496
Southwest Hilton, Houston, TX............. -- 2,300 15,665 -- 1,244
Embassy Suites, Englewood, CO............. (1) 2,500 20,700 -- 2,782
Holiday Inn, Colorado Springs, CO......... -- 1,600 4,232 -- 1,057
Embassy Row Hilton, Washington, DC........ -- 2,200 13,247 -- 2,240
Hilton Hotel & Towers, Lafayette, LA...... (1) 1,700 16,062 -- 1,808
Hilton Hotel, Sacramento, CA.............. (1) 4,000 16,013 -- 1,678
Santa Barbara Inn, Santa Barbara, CA...... -- 2,600 5,141 -- 1,110
San Pedro Hilton, San Pedro, CA........... -- 640 6,047 -- 2,300
Doubletree Hotel, Albuquerque, NM......... (1) 2,700 15,075 -- 823
Westchase Hilton & Towers, Houston, TX.... (1) 3,000 23,991 -- 1,531
Four Points Hotel, Cherry Hill, NJ........ -- 1,700 4,178 -- 2,181
Sheraton Great Valley Inn, Frazer, PA..... -- 2,150 11,653 11 2,712
Holiday Inn Calgary Airport, Calgary,
Alberta, Canada......................... -- 751 5,011 (36) 1,428
Sheraton Hotel Dallas, Dallas, TX......... -- 1,300 17,268 -- 2,358
Radisson Hotel Dallas, Dallas, TX......... -- 1,800 17,580 -- 1,466
Sheraton Hotel Guildford, Surrey, BC,
Canada.................................. -- 2,366 24,008 (112) (258)
Doubletree Guest Suites, Indianapolis,
IN...................................... 1,000 8,242 -- 893
Ramada Vancouver Centre, Vancouver, BC,
Canada.................................. -- 4,400 7,840 (208) 2,160
Holiday Inn Sports Complex, Kansas City,
MO...................................... -- 420 4,742 -- 1,551
Hilton Crystal City, Arlington, VA........ -- 5,800 29,879 -- 1,036
Doubletree Resort Hotel, Cathedral City,
CA...................................... -- 1,604 16,141 -- 2,837
Radisson Hotel & Suites, Chicago, IL...... 4,870 39,175 -- 1,793
Georgetown Inn, Washington, DC............ -- 6,100 7,103 -- 1,486
Embassy Suites Center City, Philadelphia,
PA...................................... (1) 5,500 26,763 -- 1,457
Doubletree Hotel Austin, Austin, TX....... (1) 2,975 25,678 -- 2,501
Radisson Plaza Hotel, Lexington, KY....... 240 1,100 30,375 -- 6,254
Jekyll Inn, Jekyll Island, GA............. -- -- 7,803 -- 3,218
Holiday Inn Metrotown, Burnaby, BC,
Canada.................................. -- 1,115 5,303 (53) 1,292
Embassy Suites International Airport,
Tucson, AZ.............................. -- 1,640 10,444 -- 2,214
Westin Morristown, NJ..................... -- 2,500 19,128 100 3,501
Doubletree Hotel Bradley International
Airport, Windsor Locks, CT.............. -- 1,013 10,228 87 1,422
Sheraton Hotel, Mesa, AZ.................. -- 1,850 16,938 -- 2,315
Metro Airport Hilton & Suites, Detroit,
MI...................................... -- 1,750 12,639 -- 1,311
Marriott Hotel, Los Angeles, CA........... -- 5,900 48,250 -- 7,208
GROSS AMOUNT AT END OF YEAR
---------------------------------
BUILDING ACCUM-
AND ULATED YEAR OF
IMPROVE- DEPRECIA- CONSTRUC- DATE
DESCRIPTION LAND MENTS TION TION ACQUIRED LIFE
- ----------- -------- ---------- --------- --------- -------- ----
HOTEL ASSETS:
Salt Lake Airport Hilton, UT.............. $ 770 $ 15,655 $ 2,184 1980 3/3/95 40
Radisson Hotel, Schaumburg, IL............ 1,080 7,413 908 1979 6/30/95 40
Sheraton Hotel, Colorado Springs, CO...... 1,072 18,320 2,387 1974 6/30/95 40
Hilton Hotel, Bellevue, WA................ 5,211 9,952 1,108 1979 8/4/95 40
Marriott Hotel, Somerset, NJ.............. 1,978 27,391 3,357 1978 10/3/95 40
Westin Atlanta Airport, Atlanta, GA....... 2,350 25,329 3,084 1982 11/15/95 40
Sheraton Hotel, Charlotte, NC............. 4,700 14,963 1,739 1985 2/2/96 40
Radisson Hotel Southwest, Cleveland, OH... 1,330 10,900 1,190 1978 2/16/96 40
Orange County Airport Hilton, Irvine,
CA...................................... 9,990 11,126 1,255 1976 2/22/96 40
The Latham Hotel, Washington, DC.......... 6,500 9,209 915 1981 3/8/96 40
Hilton Hotel, Arlington, TX............... 1,915 17,517 2,018 1983 4/17/96 40
Hilton Hotel, Arlington, VA............... 4,000 15,565 1,716 1990 8/23/96 40
Southwest Hilton, Houston, TX............. 2,300 16,909 1,728 1979 10/31/96 40
Embassy Suites, Englewood, CO............. 2,500 23,482 2,380 1986 12/12/96 40
Holiday Inn, Colorado Springs, CO......... 1,600 5,289 482 1974 12/17/96 40
Embassy Row Hilton, Washington, DC........ 2,200 15,487 1,482 1969 12/17/96 40
Hilton Hotel & Towers, Lafayette, LA...... 1,700 17,870 1,712 1981 12/17/96 40
Hilton Hotel, Sacramento, CA.............. 4,000 17,691 1,768 1983 12/17/96 40
Santa Barbara Inn, Santa Barbara, CA...... 2,600 6,251 602 1959 12/17/96 40
San Pedro Hilton, San Pedro, CA........... 640 8,347 753 1989 1/28/97 40
Doubletree Hotel, Albuquerque, NM......... 2,700 15,898 1,565 1975 1/31/97 40
Westchase Hilton & Towers, Houston, TX.... 3,000 25,522 2,485 1980 1/31/97 40
Four Points Hotel, Cherry Hill, NJ........ 1,700 6,359 553 1991 3/20/97 40
Sheraton Great Valley Inn, Frazer, PA..... 2,161 14,365 1,190 1971 3/27/97 40
Holiday Inn Calgary Airport, Calgary,
Alberta, Canada......................... 715 6,439 1,261 1981 4/1/97 40
Sheraton Hotel Dallas, Dallas, TX......... 1,300 19,626 1,771 1974 4/1/97 40
Radisson Hotel Dallas, Dallas, TX......... 1,800 19,046 1,746 1972 4/1/97 40
Sheraton Hotel Guildford, Surrey, BC,
Canada.................................. 2,254 23,750 3,558 1992 4/1/97 40
Doubletree Guest Suites, Indianapolis,
IN...................................... 1,000 9,135 824 1987 4/1/97 40
Ramada Vancouver Centre, Vancouver, BC,
Canada.................................. 4,192 10,000 1,605 1968 4/1/97 40
Holiday Inn Sports Complex, Kansas City,
MO...................................... 420 6,293 538 1975 4/30/97 40
Hilton Crystal City, Arlington, VA........ 5,800 30,915 2,681 1974 7/1/97 40
Doubletree Resort Hotel, Cathedral City,
CA...................................... 1,604 18,978 1,557 1985 7/1/97 40
Radisson Hotel & Suites, Chicago, IL...... 4,870 40,968 3,544 1971 7/15/97 40
Georgetown Inn, Washington, DC............ 6,100 8,589 655 1962 7/15/97 40
Embassy Suites Center City, Philadelphia,
PA...................................... 5,500 28,220 2,382 1963 8/12/97 40
Doubletree Hotel Austin, Austin, TX....... 2,975 28,179 2,295 1984 8/14/97 40
Radisson Plaza Hotel, Lexington, KY....... 1,100 36,629 2,876 1982 8/14/97 40
Jekyll Inn, Jekyll Island, GA............. -- 11,021 848 1971 8/20/97 40
Holiday Inn Metrotown, Burnaby, BC,
Canada.................................. 1,062 6,595 890 1989 8/22/97 40
Embassy Suites International Airport,
Tucson, AZ.............................. 1,640 12,658 901 1982 10/23/97 40
Westin Morristown, NJ..................... 2,600 22,629 1,626 1962 11/20/97 40
Doubletree Hotel Bradley International
Airport, Windsor Locks, CT.............. 1,100 11,650 838 1985 11/24/97 40
Sheraton Hotel, Mesa, AZ.................. 1,850 19,253 1,382 1985 12/5/97 40
Metro Airport Hilton & Suites, Detroit,
MI...................................... 1,750 13,950 995 1989 12/16/97 40
Marriott Hotel, Los Angeles, CA........... 5,900 55,458 3,956 1983 12/18/97 40
F-32
373
MERISTAR HOSPITALITY CORPORATION
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
COSTS SUBSEQUENT
INITIAL COST TO COMPANY TO ACQUISITION
----------------------- ----------------
BUILDING BUILDING
AND AND
ENCUM- IMPROVE- IMPROVE-
DESCRIPTION BRANCES LAND MENTS LAND MENTS
- ----------- ------- --------- ----------- ----- --------
Austin Hilton & Towers, TX................ -- 2,700 15,852 -- 2,674
Dallas Renaissance North, TX.............. -- 3,400 20,813 -- 3,550
Houston Sheraton Brookhollow Hotel, TX.... -- 2,500 17,609 -- 2,148
Seelbach Hilton, Louisville, KY........... -- 1,400 38,462 -- 5,550
Midland Hilton & Towers, TX............... -- 150 8,487 -- 1,715
Westin Oklahoma, OK....................... -- 3,500 27,588 -- 1,683
Sheraton Hotel, Columbia, MD.............. -- 3,600 21,393 -- 3,744
Radisson Cross Keys, Baltimore, MD........ -- 1,500 5,615 -- 1,492
Sheraton Fisherman's Wharf, San Francisco,
CA...................................... (1) 19,708 61,751 -- 2,985
Hartford Hilton, CT....................... -- 4,073 24,458 -- 2,824
Holiday Inn Dallas DFW Airport South,
TX...................................... 12,634 3,388 28,847 -- 8
Courtyard by Marriott Meadowlands, NJ..... 3,979 -- 9,649 -- 45
Hotel Maison de Ville, New Orleans, LA.... -- 292 3,015 -- (2)
Hilton Hotel Toledo, OH................... -- -- 11,708 -- 38
Holiday Inn Select Dallas DFW Airport
West, TX................................ -- 947 8,346 -- 213
Holiday Inn Select New Orleans
International Airport, LA............... (1) 3,040 25,616 -- 2,150
Crowne Plaza Madison, WI.................. (1) 2,629 21,634 -- 210
Wyndham Albuquerque Airport Hotel, NM..... -- -- 18,889 -- 112
Wyndham San Jose Airport Hotel, CA........ -- -- 35,743 -- 997
Holiday Inn Select Mission Valley, CA..... 2,410 20,998 -- 176
Sheraton Safari Hotel, Lake Buena Vista,
FL...................................... -- 4,103 35,263 -- 9,062
Hilton Monterey, CA....................... -- 2,141 17,666 -- 4,964
Hilton Hotel Durham, NC................... -- 1,586 15,577 -- 2,390
Wyndham Garden Hotel Marietta, GA......... -- 1,900 17,077 -- 611
Westin Resort Key Largo, FL............... -- 3,167 29,190 -- 340
Doubletree Guest Suites Atlanta, GA....... 8,678 2,236 18,514 -- 3,798
Radisson Hotel Arlington Heights, IL...... -- 1,540 12,645 -- 6,848
Holiday Inn Select Bucks County, PA....... -- 2,610 21,744 -- 2,773
Hilton Hotel Cocoa Beach, FL.............. -- 2,783 23,076 -- 1,784
Radisson Twin Towers Orlando, FL.......... -- 9,555 73,486 -- 8,209
Crowne Plaza Phoenix, AZ.................. -- 1,852 15,957 -- 3,448
Hilton Airport Hotel Grand Rapids, MI..... (1) 2,049 16,657 -- 539
Marriott West Loop Houston, TX............ (1) 2,943 23,934 -- 2,623
Courtyard by Marriott Durham, NC.......... -- 1,406 11,001 -- 47
Courtyard by Marriott, Marina Del Rey,
CA...................................... (1) 3,450 24,534 -- 359
Courtyard by Marriott, Century City, CA... -- 2,165 16,465 -- 20
Courtyard by Marriott, Lake Buena Vista,
FL...................................... -- -- 41,267 -- 2,438
Crowne Plaza, San Jose, CA................ (1) 2,130 23,404 (24) 1,501
Doubletree Hotel Westshore, Tampa, FL..... -- 2,904 23,476 -- 7,312
Howard Johnson Resort Key Largo, FL....... -- 1,784 12,419 -- 507
Radisson Annapolis, MD.................... -- 1,711 13,671 -- 1,945
Holiday Inn Fort Lauderdale, FL........... -- 2,381 19,419 -- 2,126
Holiday Inn Madeira Beach, FL............. -- 1,781 13,349 -- 26
Holiday Inn Chicago O'Hare, IL............ 19,080 4,290 72,631 -- 12,812
Holiday Inn & Suites Alexandria, VA....... -- 1,769 14,064 -- 52
Hilton Clearwater, FL..................... -- -- 69,285 -- 3,608
Radisson Rochester, NY.................... -- -- 6,499 -- 2,520
Radisson Old Towne Alexandria, VA......... -- 2,241 17,796 -- 3,690
GROSS AMOUNT AT END OF YEAR
---------------------------------
BUILDING ACCUM-
AND ULATED YEAR OF
IMPROVE- DEPRECIA- CONSTRUC- DATE
DESCRIPTION LAND MENTS TION TION ACQUIRED LIFE
- ----------- -------- ---------- --------- --------- -------- ----
Austin Hilton & Towers, TX................ 2,700 18,526 1,291 1974 1/6/98 40
Dallas Renaissance North, TX.............. 3,400 24,363 1,708 1979 1/6/98 40
Houston Sheraton Brookhollow Hotel, TX.... 2,500 19,757 1,467 1980 1/6/98 40
Seelbach Hilton, Louisville, KY........... 1,400 44,012 3,017 1905 1/6/98 40
Midland Hilton & Towers, TX............... 150 10,202 708 1976 1/6/98 40
Westin Oklahoma, OK....................... 3,500 29,271 2,159 1977 1/6/98 40
Sheraton Hotel, Columbia, MD.............. 3,600 25,137 1,513 1972 3/27/98 40
Radisson Cross Keys, Baltimore, MD........ 1,500 7,107 417 1973 3/27/98 40
Sheraton Fisherman's Wharf, San Francisco,
CA...................................... 19,708 64,736 4,356 1975 4/2/98 40
Hartford Hilton, CT....................... 4,073 27,282 1,642 1975 5/21/98 40
Holiday Inn Dallas DFW Airport South,
TX...................................... 3,388 28,855 1,747 1974 8/3/98 --
Courtyard by Marriott Meadowlands, NJ..... -- 9,694 581 1993 8/3/98 40
Hotel Maison de Ville, New Orleans, LA.... 292 3,013 181 1778 8/3/98 40
Hilton Hotel Toledo, OH................... -- 11,746 708 1987 8/3/98 40
Holiday Inn Select Dallas DFW Airport
West, TX................................ 947 8,559 812 1974 8/3/98 40
Holiday Inn Select New Orleans
International Airport, LA............... 3,040 27,766 1,610 1973 8/3/98 40
Crowne Plaza Madison, WI.................. 2,629 21,844 1,384 1987 8/3/98 40
Wyndham Albuquerque Airport Hotel, NM..... -- 19,001 1,146 1972 8/3/98 40
Wyndham San Jose Airport Hotel, CA........ -- 36,740 2,194 1974 8/3/98 40
Holiday Inn Select Mission Valley, CA..... 2,410 21,174 1,282 1970 8/3/98 40
Sheraton Safari Hotel, Lake Buena Vista,
FL...................................... 4,103 44,325 2,437 1985 8/3/98 40
Hilton Monterey, CA....................... 2,141 22,630 1,219 1971 8/3/98 40
Hilton Hotel Durham, NC................... 1,586 17,967 973 1987 8/3/98 40
Wyndham Garden Hotel Marietta, GA......... 1,900 17,688 1,038 1985 8/3/98 40
Westin Resort Key Largo, FL............... 3,167 29,530 1,814 1985 8/3/98 40
Doubletree Guest Suites Atlanta, GA....... 2,236 22,312 1,310 1985 8/3/98 40
Radisson Hotel Arlington Heights, IL...... 1,540 19,493 954 1981 8/3/98 40
Holiday Inn Select Bucks County, PA....... 2,610 24,517 1,335 1987 8/3/98 40
Hilton Hotel Cocoa Beach, FL.............. 2,783 24,860 1,494 1986 8/3/98 40
Radisson Twin Towers Orlando, FL.......... 9,555 81,695 4,701 1972 8/3/98 40
Crowne Plaza Phoenix, AZ.................. 1,852 19,405 1,145 1981 8/3/98 40
Hilton Airport Hotel Grand Rapids, MI..... 2,049 17,196 1,033 1979 8/3/98 40
Marriott West Loop Houston, TX............ 2,943 26,557 1,563 1976 8/3/98 40
Courtyard by Marriott Durham, NC.......... 1,406 11,048 659 1996 8/3/98 40
Courtyard by Marriott, Marina Del Rey,
CA...................................... 3,450 24,893 1,531 1976 8/3/98 40
Courtyard by Marriott, Century City, CA... 2,165 16,485 1,016 1986 8/3/98 40
Courtyard by Marriott, Lake Buena Vista,
FL...................................... -- 43,705 2,565 1972 8/3/98 40
Crowne Plaza, San Jose, CA................ 2,106 24,905 1,501 1975 8/3/98 40
Doubletree Hotel Westshore, Tampa, FL..... 2,904 30,788 1,596 1972 8/3/98 40
Howard Johnson Resort Key Largo, FL....... 1,784 12,926 767 1971 8/3/98 40
Radisson Annapolis, MD.................... 1,711 15,616 829 1975 8/3/98 40
Holiday Inn Fort Lauderdale, FL........... 2,381 21,545 1,225 1969 8/3/98 40
Holiday Inn Madeira Beach, FL............. 1,781 13,375 811 1972 8/3/98 40
Holiday Inn Chicago O'Hare, IL............ 4,290 85,443 4,638 1975 8/3/98 40
Holiday Inn & Suites Alexandria, VA....... 1,769 14,116 882 1985 8/3/98 40
Hilton Clearwater, FL..................... -- 72,893 4,298 1980 8/3/98 40
Radisson Rochester, NY.................... -- 9,019 438 1971 8/3/98 40
Radisson Old Towne Alexandria, VA......... 2,241 21,486 1,223 1975 8/3/98 40
F-33
374
MERISTAR HOSPITALITY CORPORATION
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
COSTS SUBSEQUENT
INITIAL COST TO COMPANY TO ACQUISITION
----------------------- ----------------
BUILDING BUILDING
AND AND
ENCUM- IMPROVE- IMPROVE-
DESCRIPTION BRANCES LAND MENTS LAND MENTS
- ----------- ------- --------- ----------- ----- --------
Ramada Inn Clearwater, FL................. -- 1,270 13,453 -- 89
Richmond Hotel and Conference Center...... -- 245 3,380 -- 58
Crowne Plaza Las Vegas, NV................ -- 3,006 24,011 -- 15
Crowne Plaza Portland, OR................. 4,917 2,950 23,254 -- 58
Four Points Hotel, Mt Arlington, NJ....... 4,328 6,553 6,058 -- 64
Ramada Inn Mahwah, NJ..................... -- 1,117 8,994 -- 121
Ramada Plaza Meriden, CT.................. -- 1,247 10,057 -- 12
Ramada Plaza Shelton, CT.................. 4,567 2,040 16,235 -- 28
Sheraton Crossroads Mahwah, NJ............ -- 3,258 26,185 -- 188
St. Tropez Suites, Las Vegas, NV.......... -- 3,027 24,429 -- 24
Doral Forrestal, Princeton, NJ............ -- 9,578 57,555 -- 7,135
South Seas Plantation, Captiva, FL........ -- 3,084 83,573 -- 7,161
Radisson Suites Beach Resort, Marco
Island, FL.............................. -- 7,120 35,300 -- 2,103
Best Western Sanibel Island, FL........... -- 3,868 3,984 17 302
The Dunes Golf & Tennis Club, Sanibel
Island, FL.............................. -- 7,705 3,043 9 21
Sanibel Inn, Sanibel Island, FL........... -- 8,482 12,045 -- (74)
Seaside Inn, Sanibel Island, FL........... -- 1,702 6,416 22 73
Song of the Sea, Sanibel Island, FL....... -- 339 3,223 19 31
Sundial Beach Resort, Sanibel Island,
FL...................................... -- 320 12,009 -- 556
Holiday Inn, Madison, WI.................. -- 4,143 6,692 -- 78
Safety Harbor Resort and Spa, Sanibel
Island, FL.............................. -- 732 19,618 -- 1,538
-------- ---------- ----- --------
$317,460 $2,207,320 $(388) $253,769
======== ========== ===== ========
GROSS AMOUNT AT END OF YEAR
---------------------------------
BUILDING ACCUM-
AND ULATED YEAR OF
IMPROVE- DEPRECIA- CONSTRUC- DATE
DESCRIPTION LAND MENTS TION TION ACQUIRED LIFE
- ----------- -------- ---------- --------- --------- -------- ----
Ramada Inn Clearwater, FL................. 1,270 13,542 1,612 1969 8/3/98 40
Richmond Hotel and Conference Center...... 245 3,438 712 1975 8/3/98 40
Crowne Plaza Las Vegas, NV................ 3,006 24,026 2,593 1989 8/3/98 40
Crowne Plaza Portland, OR................. 2,950 23,312 2,623 1988 8/3/98 40
Four Points Hotel, Mt Arlington, NJ....... 6,553 6,122 645 1984 8/3/98 40
Ramada Inn Mahwah, NJ..................... 1,117 9,115 898 1972 8/3/98 40
Ramada Plaza Meriden, CT.................. 1,247 10,069 974 1985 8/3/98 40
Ramada Plaza Shelton, CT.................. 2,040 16,263 1,529 1989 8/3/98 40
Sheraton Crossroads Mahwah, NJ............ 3,258 26,373 2,785 1986 8/3/98 40
St. Tropez Suites, Las Vegas, NV.......... 3,027 24,453 2,360 1986 8/3/98 40
Doral Forrestal, Princeton, NJ............ 9,578 64,690 3,726 1981 8/11/98 40
South Seas Plantation, Captiva, FL........ 3,084 90,734 6,525 1975 10/1/98 40
Radisson Suites Beach Resort, Marco
Island, FL.............................. 7,120 37,403 4,106 1983 10/1/98 40
Best Western Sanibel Island, FL........... 3,885 4,286 665 1967 10/1/98 40
The Dunes Golf & Tennis Club, Sanibel
Island, FL.............................. 7,714 3,064 246 1964 10/1/98 40
Sanibel Inn, Sanibel Island, FL........... 8,482 11,971 989 1964 10/1/98 40
Seaside Inn, Sanibel Island, FL........... 1,724 6,489 481 1964 10/1/98 40
Song of the Sea, Sanibel Island, FL....... 358 3,254 280 1964 10/1/98 40
Sundial Beach Resort, Sanibel Island,
FL...................................... 320 12,565 806 1975 10/1/98 40
Holiday Inn, Madison, WI.................. 4,143 6,770 337 1965 1/11/99 40
Safety Harbor Resort and Spa, Sanibel
Island, FL.............................. 732 21,156 1,547 1926 5/31/00 40
-------- ---------- --------
$317,072 $2,461,089 $188,647
======== ========== ========
- ---------------
(1) These properties secure the New Secured Facility which, as of December 31,
2000, had an outstanding balance of $324,554.
F-34
375
MERISTAR HOSPITALITY CORPORATION
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
The components of hotel property and equipment are as follows:
PROPERTY AND ACCUMULATED
EQUIPMENT DEPRECIATION
------------ ------------
Land........................................................ $ 317,072 $ --
Building and Improvements................................... 2,461,089 188,647
Furniture and equipment..................................... 338,350 98,582
Construction in progress.................................... 77,219 --
---------- --------
Total property and equipment...................... $3,193,730 $287,229
========== ========
A reconciliation of the Company's investment in hotel property and
equipment and related accumulated depreciation is as follows:
2000 1999 1998
---------- ---------- ----------
Hotel property and equipment
Balance, beginning of period..................... $3,118,723 $2,957,543 $ 947,597
Acquisitions during period....................... 19,618 12,081 1,865,142
Improvements and construction-in-progress........ 78,911 160,294 144,804
Cost of real estate sold......................... (23,522) (11,195) --
---------- ---------- ----------
Balance, end of period........................... 3,193,730 3,118,723 2,957,543
---------- ---------- ----------
Accumulated depreciation
Balance, beginning of period..................... 182,430 83,797 26,858
Additions-depreciation expense................... 107,363 99,297 56,939
Cost of real estate sold......................... (2,564) (664) --
---------- ---------- ----------
Balance, end of period........................... 287,229 182,430 83,797
---------- ---------- ----------
Net hotel property and equipment, end of
period......................................... $2,906,501 $2,936,293 $2,873,746
========== ========== ==========
F-35
376
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The charter of FelCor Lodging Trust Incorporated ("FelCor"), generally,
limits the liability of FelCor's directors and officers to FelCor and the
stockholders for money damages to the fullest extent permitted from time to time
by the laws of the State of Maryland. The Maryland General Corporation Law
("MGCL") authorizes Maryland corporations to limit the liability of directors
and officers to the corporation and its stockholders for money damages except
(i) to the extent that it is proved that the director or officer actually
received an improper benefit or profit in money, property or services, for the
amount of the benefit or profit actually received or (ii) to the extent that a
judgment or other final adjudication adverse to the director or officer is
entered in a proceeding based on a finding in the proceeding that the director's
or officer's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding.
The charter also provides, generally, for the indemnification of, and
advance of expenses on behalf of, directors and officers, among others, to the
fullest extent permitted by Maryland law. The MGCL authorizes Maryland
corporations to indemnify present and past directors and officers of the
corporation or of another corporation for which they serve at the request of the
corporation against judgments, penalties, fines, settlements and reasonable
expenses (including attorneys' fees) actually incurred in connection with any
threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation in respect of which the person is adjudicated to be
liable to the corporation), in which they are made parties by reason of being or
having been directors or officers, unless it is proved that (i) the act or
omission of the person was material to the matter giving rise to the proceeding
and was committed in bad faith or was the result of active and deliberate
dishonesty, (ii) the person actually received an improper personal benefit in
money, property or services or (iii) in the case of any criminal proceeding, the
person had reasonable cause to believe that the act or omission was unlawful.
The MGCL also provides that, unless limited by the corporation's charter, a
corporation shall indemnify present and past directors and officers of the
corporation who are successful, on the merits or otherwise, in the defense of
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, against reasonable expenses
(including attorneys' fees) incurred in connection with the proceeding. FelCor's
charter does not limit the extent of this indemnity.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Securities Act") may be permitted to directors and officers of FelCor
pursuant to the foregoing provisions or otherwise, FelCor 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.
FelCor may purchase director and officer liability insurance for the
purpose of providing a source of funds to pay any indemnification described
above. The MGCL authorizes Maryland corporations to purchase and maintain
insurance for former or existing directors or officers of the corporation
against any liability assisted against and incurred by such person in that
capacity or arising out of such person's position, whether or not the
corporation would have the power to indemnify against liability under the MGCL.
FelCor's charter does not limit this authority to obtain insurance. FelCor
currently maintains director and officer liability insurance and will maintain
"tail" insurance for former MeriStar officers and directors, as required by the
merger agreement.
Section 6.7 of the Amended and Restated Agreement of Limited Partnership of
FelCor Lodging Limited Partnership ("FelCor Partnership" and, together with
FelCor, the "Registrants"), as amended (the "Partnership Agreement"), provides
that, to the fullest extent permitted by law, but subject to the limitations
expressly provided in the Partnership Agreement, FelCor, or its successors or
assigns (the "General Partner"), and any person who is or was an officer or
director of the General Partner shall be indemnified and held harmless by FelCor
Partnership from and against any and all losses, claims,
II-1
377
damages, liabilities (joint or several), expenses (including, without
limitation, legal fees and expenses), judgments, fines, settlements and other
amounts arising from any and all claims, demands, actions, suits or proceedings,
whether civil or criminal, administrative or investigative, in which any such
party may be involved, or is threatened to be involved, as a party or otherwise,
by reason of its status as (i) the General Partner, or any of its affiliates,
(ii) an officer, director, employee, partner, agent or trustee of the General
Partner, or any of its affiliates or (iii) a person serving at the request of
FelCor Partnership in another entity in a similar capacity; provided, that in
each case such party acted in good faith, in a manner which such party believed
to be in, or not opposed to, the best interests of FelCor Partnership and, with
respect to any criminal proceeding, had no reasonable cause to believe its
conduct was unlawful. Any indemnification pursuant to Section 6.7 shall be made
only out of FelCor Partnership assets.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2.1 -- Agreement and Plan of Merger by and between FelCor,
FelCor Partnership, MeriStar Hospitality Corporation and
MeriStar Hospitality Limited Partnership dated as of May
9, 2001 (included as Appendix A in the joint proxy
statement/ prospectus).
2.2 -- Form of First Amendment to Agreement and Plan of Merger,
dated as of July 1, 2001 (included in Appendix A in the
joint proxy statement/prospectus).
4.1 -- Articles of Amendment and Restatement dated June 22,
1995, amending and restating the Charter of FelCor, as
amended or supplemented by Articles of Merger dated June
23, 1995, Articles Supplementary dated April 30, 1996,
Articles of Amendment dated August 8, 1996, Articles of
Amendment dated June 16, 1997, Articles of Amendment
dated October 30, 1997, Articles Supplementary dated May
6, 1998, Articles of Merger and Articles of Amendment
dated July 27, 1998, and Certificate of Correction dated
March 11, 1999 (filed as Exhibit 3.1 to FelCor's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998 and incorporated herein by reference).
4.2 -- Bylaws of FelCor, as amended (filed as Exhibit 3.2 to
FelCor's Registration Statement on Form S-11 (file no.
333-98332) and incorporated herein by reference).
4.3 -- Form of Share Certificate for Common Stock (filed as
Exhibit 4.1 to FelCor's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, and incorporated herein
by reference).
4.4 -- Form of Second Amended and Restated Agreement of Limited
Partnership of FelCor Partnership.
4.5 -- Indenture dated as of September 15, 2000, by and among
FelCor Partnership, FelCor, the Subsidiary Guarantors
named therein, and SunTrust Bank, as Trustee (filed as
Exhibit 4.3 to FelCor Partnership's Registration
Statement on Form S-4 (file no. 333-47506) and
incorporated herein by reference).
4.6 -- Indenture dated as of June 4, 2001, by and among FelCor
Partnership, FelCor, the Subsidiary Guarantors named
therein, and SunTrust Bank, as Trustee (filed as Exhibit
4.9 to FelCor's Current Report on Form 8-K filed on June
14, 2001, and incorporated herein by reference).
5.1 -- Opinion of Jenkens & Gilchrist, a Professional
Corporation.
5.2 -- Opinion of Miles & Stockbridge P.C.
8.1 -- Opinion of Hunton & Williams as to tax matters.
8.2 -- Opinion of Jenkens & Gilchrist, a Professional
Corporation, as to tax matters.
8.3 -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison as to
tax matters.
12.1 -- Statements regarding computation of ratios.
23.1 -- Consent of Jenkens & Gilchrist, a Professional
Corporation (included in Exhibit 5.1).
23.2 -- Consent of Miles & Stockbridge P.C. (included in Exhibit
5.2).
23.3 -- Consent of Hunton & Williams (included in Exhibit 8.1).
23.4 -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(included in
Exhibit 8.3).
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
23.5 -- Consent of PricewaterhouseCoopers L.L.P.
23.6 -- Consent of KPMG LLP.
23.7 -- Consent of Deloitte & Touche LLP.
24.1* -- Power of Attorney (included on signature page).
24.2 -- Power of Attorney of Richard J. O'Brien.
99.1 -- Form of Proxy Card for FelCor Lodging Trust Incorporated.
99.2 -- Form of Proxy Card for MeriStar Hospitality Corporation.
99.3* -- Consent of Paul Whetsell.
99.4* -- Consent of Steven Jorns.
99.5* -- Consent of Salomon Smith Barney Inc.
99.6* -- Consent of Deutsche Banc Alex. Brown Inc.
99.7* -- Consent of J.P. Morgan Securities Inc.
- ---------------
* Previously filed.
(b) Financial Statement Schedules. None.
(c) Report, Opinion or Appraisal: The opinions of Deutsche Banc Alex.
Brown Inc., J.P. Morgan Securities Inc. and Salomon Smith Barney Inc. are
included in the joint proxy statement/prospectus.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrants have
duly caused this Amendment No. 1 to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on
July 20, 2001.
FELCOR LODGING TRUST INCORPORATED
FELCOR LODGING LIMITED PARTNERSHIP
By: FelCor Lodging Trust Incorporated,
its General Partner
By: /s/ LAWRENCE D. ROBINSON
----------------------------------------
Lawrence D. Robinson
Executive Vice President
Pursuant to the requirements of the Securities Act, this Amendment No. 1
has been signed below by the following persons on behalf of the Registrants and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board and July , 2001
- ----------------------------------------------------- Director
Donald J. McNamara
* President and Director (Chief July , 2001
- ----------------------------------------------------- Executive Officer)
Thomas J. Corcoran, Jr.
/s/ RICHARD J. O'BRIEN Executive Vice President (Chief July 19, 2001
- ----------------------------------------------------- Financial Officer)
Richard J. O'Brien
* Senior Vice President and July , 2001
- ----------------------------------------------------- Controller (Principal
Lester C. Johnson Accounting Officer)
* Director July , 2001
- -----------------------------------------------------
Melinda J. Bush
Director July , 2001
- -----------------------------------------------------
Richard S. Ellwood
* Director July , 2001
- -----------------------------------------------------
Richard O. Jacobson
* Director July , 2001
- -----------------------------------------------------
Charles A. Ledsinger, Jr.
* Director July , 2001
- -----------------------------------------------------
Robert H. Lutz, Jr.
* Director July , 2001
- -----------------------------------------------------
Richard C. North
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381
SIGNATURE TITLE DATE
--------- ----- ----
* Director July , 2001
- -----------------------------------------------------
Michael D. Rose
* Director July , 2001
- -----------------------------------------------------
Charles N. Mathewson
* Director July , 2001
- -----------------------------------------------------
Thomas A. McChristy
*By: /s/ LAWRENCE D. ROBINSON
------------------------------------------------
Lawrence D. Robinson
his or her attorney-in-fact
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2.1 -- Agreement and Plan of Merger by and between FelCor,
FelCor Partnership, MeriStar Hospitality Corporation and
MeriStar Hospitality Limited Partnership dated as of May
9, 2001 (included as Appendix A in the joint proxy
statement/ prospectus).
2.2 -- Form of First Amendment to Agreement and Plan of Merger,
dated as of July 1, 2001 (included in Appendix A in the
joint proxy statement/prospectus).
4.1 -- Articles of Amendment and Restatement dated June 22,
1995, amending and restating the Charter of FelCor, as
amended or supplemented by Articles of Merger dated June
23, 1995, Articles Supplementary dated April 30, 1996,
Articles of Amendment dated August 8, 1996, Articles of
Amendment dated June 16, 1997, Articles of Amendment
dated October 30, 1997, Articles Supplementary dated May
6, 1998, Articles of Merger and Articles of Amendment
dated July 27, 1998, and Certificate of Correction dated
March 11, 1999 (filed as Exhibit 3.1 to FelCor's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998 and incorporated herein by reference).
4.2 -- Bylaws of FelCor, as amended (filed as Exhibit 3.2 to
FelCor's Registration Statement on Form S-11 (file no.
333-98332) and incorporated herein by reference).
4.3 -- Form of Share Certificate for Common Stock (filed as
Exhibit 4.1 to FelCor's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, and incorporated herein
by reference).
4.4 -- Form of Second Amended and Restated Agreement of Limited
Partnership of FelCor Partnership.
4.5 -- Indenture dated as of September 15, 2000, by and among
FelCor Partnership, FelCor, the Subsidiary Guarantors
named therein, and SunTrust Bank, as Trustee (filed as
Exhibit 4.3 to FelCor Partnership's Registration
Statement on Form S-4 (file no. 333-47506) and
incorporated herein by reference).
4.6 -- Indenture dated as of June 4, 2001, by and among FelCor
Partnership, FelCor, the Subsidiary Guarantors named
therein, and SunTrust Bank, as Trustee (filed as Exhibit
4.9 to FelCor's Current Report on Form 8-K filed on June
14, 2001, and incorporated herein by reference).
5.1 -- Opinion of Jenkens & Gilchrist, a Professional
Corporation.
5.2 -- Opinion of Miles & Stockbridge P.C.
8.1 -- Opinion of Hunton & Williams as to tax matters.
8.2 -- Opinion of Jenkens & Gilchrist, a Professional
Corporation, as to tax matters.
8.3 -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison as to
tax matters.
12.1 -- Statements regarding computation of ratios.
23.1 -- Consent of Jenkens & Gilchrist, a Professional
Corporation (included in Exhibit 5.1).
23.2 -- Consent of Miles & Stockbridge P.C. (included in Exhibit
5.2).
23.3 -- Consent of Hunton & Williams (included in Exhibit 8.1).
23.4 -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(included in
Exhibit 8.3).
23.5 -- Consent of PricewaterhouseCoopers L.L.P.
23.6 -- Consent of KPMG LLP.
23.7 -- Consent of Deloitte & Touche LLP.
383
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
24.1* -- Power of Attorney (included on signature page).
24.2 -- Power of Attorney of Richard J. O'Brien.
99.1 -- Form of Proxy Card for FelCor Lodging Trust Incorporated.
99.2 -- Form of Proxy Card for MeriStar Hospitality Corporation.
99.3* -- Consent of Paul Whetsell.
99.4* -- Consent of Steven Jorns.
99.5* -- Consent of Salomon Smith Barney Inc.
99.6* -- Consent of Deutsche Banc Alex. Brown Inc.
99.7* -- Consent of J.P. Morgan Securities Inc.
- ---------------
* Previously filed.