Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____ to _____
Commission file number 1-11903
AMERICAN GENERAL HOSPITALITY CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 75-2648842
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5605 MacArthur Blvd., Suite 1200
Irving, Texas 75038
(Address of principal executive office) (Zip Code)
(972) 550-6800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $0.01 par value NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT OF THIS
FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK AT MARCH 27, 1998
HELD BY NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $648,928,767.
THE NUMBER OF SHARES OF COMMON STOCK OF AMERICAN GENERAL HOSPITALITY
CORPORATION OUTSTANDING ON MARCH 27, 1998 WAS 24,315,832.
Documents incorporated by reference: None
================================================================================
AMERICAN GENERAL HOSPITALITY CORPORATION
INDEX
FORM 10-K
REPORT
ITEM NO. PAGE
- ------- ----
PART 1
1. Business.................................................................... 3
2. Properties.................................................................. 11
3. Legal Proceedings........................................................... 32
4. Submission of Matters to a Vote of Security Holders......................... 32
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters....... 32
6. Selected Financial Data..................................................... 34
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation................................................................ 37
7A. Quantitative and Qualitative Disclosures About Market Risk.................. 46
8. Financial Statements and Supplementary Data................................. 46
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure............................................................... 46
PART III
10. Directors and Executive Officers of the Registrant.......................... 46
11. Executive Compensation...................................................... 47
12. Security Ownership of Certain Beneficial Owners and Management.............. 54
13. Certain Relationships and Related Transactions.............................. 55
PART IV
14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.......... 56
SIGNATURES
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "RISK FACTORS" AS
SET FORTH IN THE PROSPECTUS SUPPLEMENTS TO THE COMPANY'S REGISTRATION STATEMENT
ON FORM S-3 (FILE NO.333-33007) AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES OCCURRING AFTER
THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
2
ITEM 1: BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
American General Hospitality Corporation (the "Company") was incorporated
and formed on April 12, 1996, as a Maryland corporation. The Company is a
self-administered real estate investment trust ("REIT") that owns a
geographically diverse portfolio of primarily full-service hotels. As of March
27, 1998 the Company owned 53 hotels located in 21 states containing an
aggregate of approximately 12,600 guest rooms (the "Current Hotels").
Substantially all of the Current Hotels are operated under licensing or
franchising agreements with national hotel brands including, but not limited to,
Crowne Plaza(R), Hilton(R), Wyndham(R), Marriott(R), Holiday Inn Select(R),
Radisson(R), Westin(R), DoubleTree Guest Suites(R), Sheraton (R), Holiday Inn(R)
and Hampton Inn(R). On July 31, 1996, the Company commenced operations and
completed an Initial Public Offering ("IPO") of an aggregate of approximately
8,075,000 shares of its common stock, $0.01 par value per share, ("Common
Stock"). The offering price of all shares sold in the IPO was $17.75 per share,
resulting in net proceeds of approximately $129.3 million after deducting IPO
expenses.
Concurrently with the initial closing with respect to the IPO, American
General Hospitality Operating Partnership, L.P. (the "Operating Partnership"),
acquired directly or indirectly the equity interests in thirteen hotels (the
"Initial Hotels"). Since the IPO, the Company has acquired 40 hotels, through
March 27, 1998, with an aggregate of 9,535 guestrooms. See "--Recent
Developments." In addition, during the fiscal year 1997, the Company raised
approximately $326.5 million through public and private issuances of Common
Stock. See "--Equity Financing Transactions."
In order to qualify as a REIT, the Company may not operate hotels. The
Company has leased 45 of the Current Hotels to AGH Leasing, L.P. and its
subsidiary, Twin Towers Leasing, L.P. ("Twin Towers," and together with AGH
Leasing, L.P., "AGH Leasing") and eight of the Current Hotels to independent
lessees that are affiliates of Prime Hospitality, Corp. ("Prime"), a NYSE listed
company (together, the "Prime Lessee" collectively with AGH Leasing, the
"Lessee"), each pursuant to separate participating leases (the "Participating
Leases"). The Participating Leases are designed to allow the Company to achieve
substantial participation in any future growth of revenues generated at the
Current Hotels. Each Participating Lease has a term of ten to twelve years from
the inception of the lease, subject to earlier termination upon the occurrence
of certain events. Under the Participating Leases, the Lessee is obligated to
pay the Company the greater of fixed base rent ("Base Rent") or participating
rent ("Participating Rent") based on a percentage of revenues at each of the
Current Hotels.
In addition, AGH Leasing has entered into separate management agreements
with American General Hospitality, Inc. ("AGHI"), with respect to 44 hotels, and
Wyndham Hotel Corporation ("Wyndham"), with respect to one hotel, to manage the
Current Hotels (the "Management Agreements"). AGH Leasing and AGHI are owned,
in part, by certain executive officers of the Company. The Prime Lessee manages
eight of the Current Hotels, which it leases from the Company. Neither the
Company nor members of its management own an interest in, or participate in the
management of, the Prime Lessee.
Concurrent with the IPO, the Company closed on a secured $100 million
credit facility (the "Credit Facility") which was used primarily for the
acquisition of additional hotels, the renovation of its Current Hotels and for
working capital. Since the IPO, the Credit Facility was increased from $100
million to $150 million in February 1997 and from $150 million to $300 million
in June 1997. On February 13, 1998, the Company replaced its $300 million Credit
Facility with two new unsecured credit facilities with an aggregate principal
amount of $600 million (the "New Credit Facilities"). The New Credit Facilities
are provided by a consortium of banks led by Societe Generale, Southwest Agency,
and Bank One, Texas, N.A., Bank of Nova Scotia and Wells Fargo Bank, National
Association. At December 31, 1997 the Company had aggregate borrowings of $41.3
million outstanding under the Credit Facility. Reference is made to "Item 2.
Properties Credit Facilities" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations Liquidity and Capital
Resources" and to Note 3 of Notes to Consolidated Financial Statements of the
Company referred to in "Item 8. Financial Statements and Supplementary Data,"
for information regarding the New Credit Facilities and other outstanding
indebtedness.
On March 15, 1998 the Company and CapStar Hotel Company ("CapStar") entered
into a definitive agreement (the "Merger Agreement") pursuant to which the
parties agreed, subject to stockholder approval and other
1
conditions and covenants, to merge as equals (the "Proposed Merger").
Accordingly, no assurance can be given that the Proposed Merger will be
consummated. Pursuant to the Merger Agreement, CapStar will spin off (the
"Spin-Off") in a taxable transaction, its hotel operations and management
business to its current stockholders as a new C-Corporation to be called
MeriStar Hotels & Resorts, Inc. ("MeriStar Resorts"). CapStar will subsequently
merge with and into the Company, which will qualify as a reorganization under
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). The
Company will be renamed MeriStar Hospitality Corporation if the Proposed Merger
is consummated. In a separate transaction, which will close immediately after
the closing of the Proposed Merger, MeriStar Resorts will acquire AGH Leasing
and AGHI which acquisition is a condition to closing the Proposed Merger. If the
Proposed Merger is consummated, MeriStar Resorts will become the lessee and
manager of all of the Current Hotels currently leased by AGH Leasing and will
have a right of first refusal to become the lessee of hotels acquired by the
Company in the future except for the Prime Group II Acquisition hotels.
The Merger Agreement defines the exchange ratios for both the Company's and
CapStar's stockholders. CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned. Both exchange
ratios are fixed, with no adjustment mechanism.
The Company expects the Proposed Merger to close in June 1998. The Proposed
Merger will be submitted for approval at separate meetings of the stockholders
of the Company and CapStar. Prior to such stockholder meetings, the Company will
file a registration statement with the Securities and Exchange Commission (the
"SEC") registering under the Securities Act of 1933, as amended, the shares of
MeriStar Hospitality Corporation to be issued in the Proposed Merger.
RECENT DEVELOPMENTS
Recent Acquisitions
- -------------------
During the fiscal year 1997, the Company had completed the acquisition of
14 hotels, with interests in an additional 26 hotels being acquired during the
first quarter of 1998 (through March 27). At December 31, 1997 the Company owned
27 hotels with an aggregate of 6,903 guestrooms (the "December 31 Hotels").
Substantially all of the December 31 Hotels are operated under licensing or
franchising agreements with national hotel brands, including Crowne Plaza,
Hilton, Wyndham, Marriott, Holiday Inn Select, Radisson, Westin, DoubleTree
Guest Suites, Holiday Inn and Hampton Inn. The following table provides certain
information regarding the December 31 Hotels:
Number of
Hotels Number of Aggregate Acquisition
Acquired Guestrooms Price
---------- -------------- ---------------------
1996 (dollars in millions)
- ----
Initial Hotels 13 3,012 $183.5
4th Quarter 2 694 49.0
1997
- ----
1st Quarter 5 927 84.1
2nd Quarter 6 2,030 193.8
3rd Quarter - - -
4th Quarter 1 146 11.8
Additional guestrooms constructed by
the Company at its December 31 Hotels 94
---------- -------------- ---------------------
Total 27 6,903 $522.2
========== ============== =====================
During the first quarter of 1998 (through March 27), the Company has
acquired interests in 26 additional hotels (the "1998 Acquisition Hotels",
together with the December 31 Hotels, the "Current Hotels") with purchase prices
aggregating approximately $542 million and an aggregate of 5,696 guestrooms,
bringing the Company's total
2
portfolio to 53 hotels with an aggregate of approximately 12,600 guestrooms at
March 27, 1998. In addition, the Company has entered into contracts to purchase
13 additional hotels containing approximately 2,560 guestrooms for purchases
prices aggregating approximately $241 million (the "Proposed Acquisition
Hotels", together with the Current Hotels, the "Hotels"). If all of the Proposed
Acquisition Hotels are acquired, the Company will have invested approximately
$783 million since December 31, 1997 in hotel acquisitions and will own 66
hotels containing more than 15,150 guestrooms, an approximate 120% increase in
the Company's hotel portfolio since December 31, 1997, based upon the number of
guestrooms. Set forth below is a listing of the 1998 Acquisition Hotels and the
Proposed Acquisition Hotels:
NUMBER OF GUEST
HOTEL LOCATION FRANCHISE BRAND ROOMS
- ----------------------------------------------------------- ---------------------------------- -------------------
1998 ACQUISITION HOTELS
Prime Group I Acquisition
- -------------------------
Las Vegas, Nevada......................................... St. Tropez All Suite 149
Las Vegas, Nevada......................................... Crowne Plaza Suites 201
Mahwah, New Jersey........................................ Ramada Inn 128
Mahwah, New Jersey........................................ Sheraton 225
Meriden, Connecticut...................................... Ramada Plaza 150
Mount Arlington, New Jersey............................... Four Points by Sheraton 124
Portland, Oregon.......................................... Crowne Plaza 161
Shelton, Connecticut...................................... Ramada Plaza 155
Potomac Portfolio Acquisition
- -----------------------------
Alexandria, Virginia...................................... Ramada 258
Alexandria, Virginia...................................... Holiday Inn Hotel & Suites 178
Annapolis, Maryland....................................... Holiday Inn 220
Hanover (BWI Airport), Maryland (1)....................... Holiday Inn Express 159
Holiday Inn O'Hare International Hotel Acquisition
- --------------------------------------------------
Rosemont (O'Hare International Airport), Illinois.........
Holiday Inn 507
FSA Portfolio Acquisition (2)
- ----------------------------
Century City, California.................................. Courtyard by Marriott 134
Clearwater Beach, Florida................................. DoubleTree Resort 426
Clearwater Beach, Florida................................. Ramada Inn 289
Fort Lauderdale Beach, Florida............................ Holiday Inn 240
Key Largo, Florida (1).................................... Howard Johnson Resort 100
Lake Buena Vista (Walt Disney Village), Florida........... Courtyard by Marriott 323
Maderia Beach, Florida.................................... Holiday Inn 149
Marina Del Rey, California................................ Courtyard by Marriott 276
Mystic, Connecticut....................................... Independent 77
Richmond, Virginia (1).................................... Holiday Inn 280
Rochester, New York....................................... Radisson Inn 171
St. Louis (Forest Park), Missouri......................... Holiday Inn 120
Tampa (Tampa Airport), Florida............................ DoubleTree 496
-------------------
Total 1998 Acquisition Hotels............................. 5,696
-------------------
PROPOSED ACQUISITION HOTELS
Prime Group II Acquisition
- --------------------------
Armonk, New York.......................................... Ramada Inn 140
Danbury, Connecticut...................................... Ramada Inn 181
Elmsford, New York........................................ Ramada Inn 101
Fairfield, New Jersey..................................... Radisson Hotel and Suites 204
Fairfield, New Jersey..................................... Ramada 176
Hasbrouck Heights, New Jersey............................. Crowne Plaza 355
Jamesburg (Monroe), New Jersey............................ Holiday Inn 150
3
NUMBER OF GUEST
HOTEL LOCATION FRANCHISE BRAND ROOMS
- ----------------------------------------------------------- ---------------------------------- -------------------
Princeton, New Jersey..................................... Holiday Inn 240
Saratoga Springs, New York................................ Sheraton 240
Secaucus, New Jersey...................................... Radisson Suites 151
Trevose, Pennsylvania..................................... Radisson 272
Madison Hotel
- -------------
Madison, Wisconsin........................................ Holiday Inn 202
FSA Portfolio Acquisition
- -------------------------
Bloomington, Minnesota.................................... Select Inn 148
-------------------
Total Proposed Acquisition Hotels.......................... 2,560
-------------------
Total 1998 Acquisition Hotels and Proposed
Acquisition Hotels........................................ 8,256
===================
(1) Limited-service hotel
(2) The Company intends to sell up to five of the FSA Portfolio Acquisition
hotels either as a group or individually although it currently has no
binding purchase agreements with respect to such sale.
Equity Financing Transactions
- -----------------------------
On February 7, 1997, the Company completed a follow-on primary offering
(the "1997 Public Offering") of 5,800,000 shares of its Common Stock. The
Company issued an additional 568,300 shares of Common Stock on March 7, 1997,
upon exercise of the underwriters' over-allotment option. The offering price of
all shares sold in the 1997 Public Offering was $27.25 per share, resulting in
net proceeds of approximately $161.7 million after deducting offering expenses.
All of the net proceeds were contributed to AGH GP, Inc. and AGH LP, Inc. which
in turn contributed such proceeds to the Operating Partnership.
On June 27, 1997, the Company issued 266,301 Class B units of limited
partnership interest ("OP Units") in the Operating Partnership ("Class B OP
Units"), as part of the purchase of the Hilton Hotel Cocoa Beach. At the time
of issuance, the Class B OP Units were valued at $24.20 per unit. On July 16,
1997, the Class B OP Units automatically converted into standard OP Units.
On July 14, 1997, as part of the terms of the strategic alliance between
Wyndham and the Company, an affiliate of Wyndham purchased 112,969 shares of
restricted common stock at a negotiated price of $22.13 per share. The shares
were purchased in connection with the conversion of the LeBaron Airport Hotel to
the Wyndham San Jose Airport Hotel. The net proceeds of approximately $2.5
million were contributed to the Operating Partnership
On August 28, 1997, the SEC declared effective the Company's omnibus shelf
registration statement (the "Shelf Registration"), which permits the Company to
offer, from time to time, up to an aggregate of $500 million in Common Stock and
warrants to purchase Common Stock.
On October 14, 1997, the Company issued 1,308 shares of Common Stock to the
Board of Directors for compensation in accordance with their agreement to serve
as directors of the Company. The shares were issued at $26.00 per share.
On November 1, 1997, the Company publicly sold 688,837 shares of its Common
Stock pursuant to the Shelf Registration to certain investment funds and
separate accounts advised by ABKB/LaSalle Securities Limited Partnership at a
negotiated price of $26.131 per share producing net proceeds of approximately
$17.9 million which were contributed to the Operating Partnership. This
transaction was completed pursuant to an agreement entered into on September 9,
1997 for the sale of an aggregate of 2,671,705 shares of Common Stock to various
institutional investors advised by ABKB/LaSalle Securities Limited Partnership
and/or LaSalle Advisors Limited Partnership (the "ABKB/LaSalle Agreements").
On November 13, 1997, the Company publicly sold 4,250,000 shares of Common
Stock at $27.50 per share to the public pursuant to the Shelf Registration (the
"Second 1997 Offering"). The net proceeds of this offering of
4
approximately $110 million were contributed to the Operating Partnership in
exchange for additional equity interests therein and used primarily to repay
borrowings under the Credit Facility.
On November 30, 1997, the Company privately issued 13,650 Class B OP Units
as part of the purchase of the Courtyard by Marriott Durham. At the time of
issuance, the Class B OP Units were valued at $26.85 per unit. On December 31,
1997, these Class B OP Units automatically converted into standard OP Units.
On December 31, 1997, in accordance with the ABKB/LaSalle Agreements, the
Company privately sold an additional 1,368,196 shares of Common Stock to certain
investment funds and separate accounts advised by ABKB/LaSalle Securities
Limited Partnership and LaSalle Advisors Limited Partnership at a negotiated
price of $25.216 generating net proceeds of approximately $34.2 million which
were contributed to the Operating Partnership.
Subsequent to December 31, 1997 the following Equity Financing Transactions
occurred:
On January 2, 1998, in accordance with the ABKB/LaSalle Agreements, the
Company privately sold an additional 495,700 shares of Common Stock to certain
investment funds and separate accounts advised by ABKB/LaSalle Securities
Limited Partnership and LaSalle Advisors Limited Partnership at a negotiated
price of $25.216 generating net proceeds of approximately $12.5 million which
were contributed to the Operating Partnership.
On January 8, 1998, the Company privately issued 518,437 Class B OP Units
as part of the purchase price of the Prime Portfolio Group I Hotels ("Prime
Group I Acquisition Hotels"). At the time of issuance, the Class B OP Units were
valued at $26.697 per unit. On April 16, 1998 the Class B OP Units will
automatically convert into standard OP Units.
On January 15, 1998, in accordance with the ABKB/LaSalle Agreements, the
Company privately sold an additional 118,972 shares of Common Stock to certain
investment funds and separate accounts advised by ABKB/LaSalle Securities
Limited Partnership and LaSalle Advisors Limited Partnership at a negotiated
price of $25.216 generating net proceeds of approximately $3.0 million which
were contributed to the Operating Partnership. With this transaction, all
shares of Common Stock, which were to be issued pursuant to the ABKB/LaSalle
Agreements, had been issued.
On February 3, 1998, the Company privately issued 1,308,406 Class C OP
Units as part of the purchase price of the Holiday Inn O'Hare International
Hotel. At the time of issuance, the Class C OP Units were valued at $27.514 per
unit. The Class C OP Units bear a preferred annual distribution rate of $1.89
per Class C OP Unit until such time the dividend distribution rate for the Class
C OP Units shall equal the distribution rate on the Common Stock. In addition,
the holders of the Class C OP Units are entitled to receive additional OP Units
if the fair market value of the Common Stock (as reported on the New York Stock
Exchange, Inc.) is not trading for at least $30 per share on the anniversary
date of the closing of the acquisition.
On February 18, 1998, the Company sold 1,052,650 shares of Common Stock at
$28.25 per share through a public offering pursuant to the Shelf Registration
generating net proceeds of approximately $28.3 million, which were contributed
to the Operating Partnership and used to repay indebtedness borrowed under the
New Credit Facilities.
On February 23, 1998, the Company sold 1,095,890 shares of Common Stock at
$27.375 per share through a public offering pursuant to the Shelf Registration
generating net proceeds of approximately $28.4 million, which were contributed
to the Operating Partnership and used to repay indebtedness borrowed under the
New Credit Facilities.
On February 27, 1998, the Company sold 362,812 shares of Common Stock at
$27.5625 per share through a public offering pursuant to the Shelf Registration
generating net proceeds of approximately $9.5 million, which were contributed to
the Operating Partnership and used to repay indebtedness borrowed under the New
Credit Facilities.
5
EMPLOYEES
The Company is self-administered and employs Messrs. Jorns, Wiles, Barr,
Valentine and seven additional individuals as well as appropriate support
personnel to manage its operations.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, the presence of hazardous or toxic
substances, or the failure to remediate such property properly, may adversely
affect the owner's ability to use the property, sell the property or borrow by
using such real property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances may also be liable for the costs of
removal or remediation of such substances at the disposal or treatment facility,
whether or not such facility is or ever was owned or operated by such person.
Certain environmental laws and common law principles could be used to impose
liability for releases of hazardous materials, including asbestos-containing
materials ("ACMs"), into the environment, and third parties may seek recovery
from owners or operators of real properties for personal injury associated with
exposure to released ACMs or other hazardous materials.
Environmental laws also may impose restrictions on the manner in which a
property may be used or transferred or in which businesses may be operated, and
these restrictions may require expenditures. In connection with the ownership
of the Company's hotels, the Company or a Lessee may be potentially liable for
any such costs. The cost of defending against claims of liability or
remediating contaminated property and the cost of complying with environmental
laws could materially adversely affect the Company's or the Lessee's results of
operations and financial condition. Phase I environmental site assessments have
been conducted at all of the Hotels, and Phase II environmental site assessments
have been conducted at some of the Hotels by qualified independent environmental
engineers. The purpose of the environmental site assessments is to identify
potential sources of contamination for which the Current Hotels may be
responsible and to assess the status of environmental regulatory compliance.
The environmental site assessments have not revealed any environmental liability
or compliance concerns that the Company believes would have a material adverse
effect on the Company's business, assets, results of operations or liquidity,
nor is the Company aware of any material environmental liability or concerns.
Nevertheless, it is possible that these ESAs did not reveal all environmental
liabilities or compliance concerns or that material environmental liabilities or
compliance concerns exist of which the Company is currently unaware.
In reliance upon the Phase I and Phase II ESAs, the Company believes the
Current Hotels are in material compliance with all federal, state and local
ordinances and regulations regarding hazardous or toxic substances and other
environmental matters. Neither the Company nor, to the knowledge of the Company,
any of the current owners of the Current Hotels has been notified by any
governmental authority of any material noncompliance, liability or claim
relating to hazardous or toxic substances or other environmental substances in
connection with any of its hotels.
GROWTH STRATEGIES
Acquisition Strategies:
- ----------------------
The Company intends to continue to acquire additional hotels that meet one
or more of the investment criteria outlined below. The Company expects to
continue to expand and enhance the value of its hotel portfolio by continuing to
(i) make opportunistic acquisitions of full-service hotels and (ii)
strategically reposition selected hotels through product upgrades, brand
conversions and operational repositionings. The Company will continue to pursue
the acquisition of full-service hotels, primarily in the moderate and lower
upscale segments at prices which management believes are below replacement cost,
and that have attractive yields on investment that the Company believes can be
improved over time. The Company employs four professionals devoted exclusively
to hotel acquisitions.
6
The Company seeks to acquire additional hotels that meet one or more of the
following investment criteria:
. full-service hotels located in major metropolitan markets, including
hotels that are in close proximity to the airports that serve such
markets, as well as selective prominent hotels in major tourist areas;
. hotels that are under-performing and are candidates for implementation
of market repositioning, franchise conversion and turnaround strategies;
. hotels where the Company believes that necessary renovation or
redevelopment can be completed expeditiously and will result in an
immediate improvement in the hotel's revenues and an attractive return
on its renovation or redevelopment investment;
. hotels with sound operating fundamentals that are performing below their
potential because they are owned or controlled by financially distressed
owners or involuntary owners that may have acquired hotels through
foreclosure, including owners that lack the financial resources or the
commitment to make capital improvements appropriate for such hotels;
. hotels in attractive locations that the Company believes would benefit
significantly by changing franchises to a recognized brand affiliation
that is capable of increasing penetration in a particular market;
. nationally franchised hotels in locations with a relatively high demand
for rooms, relatively low supply of competing hotels and high barriers
to entry; and
. portfolios of hotels that exhibit some or all of the other criteria
discussed above, where purchasing several hotels in one transaction
enables the Company to obtain a favorable price, or to purchase
attractive hotels that otherwise would not be available to the Company.
Internal Growth:
- ----------------
The Company believes that, based on the historical operating results of the
December 31 Hotels, the strength of the Company's, AGHI's and the Prime Lessee's
existing management teams and the structure of the Participating Leases, the
Current Hotels provide the Company with the opportunity for significant revenue
growth. The Company believes that it has structured its business relationships
with AGHI and each Lessee to provide incentives to operate and maintain the
Current Hotels in a manner that will increase hotel revenue and the Company's
funds from operations.
AGHI has extensive experience in managing hotels through all stages of the
lodging industry cycle, including industry downturns. During the late 1980's and
early 1990's, AGHI managed over 140 different hotels for institutional owners, a
substantial number of whom acquired the hotels through foreclosure, thus
enhancing AGHI's extensive turnaround and repositioning experience as well as
its management depth and operating systems. In addition, the Prime Lessee's
management has an established track record of performance and profitability in
operating hotels, especially in the northeastern United States.
The Company believes there is significant potential to increase revenues at
its hotels and increase Participating Lease payments by continuing to employ the
following strategies:
. product repositioning through renovation and refurbishment of the hotels;
. brand repositioning through conversion to leading national franchise
affiliations;
. operational repositioning through property-level management and marketing;
and
7
. use of Participating Leases designed to capture increased revenues
attributable to improved marketing and yield management techniques that
AGHI and the Prime Lessee will continue to employ at the Current Hotels and
any additional hotels acquired by the Company and managed by AGHI or
operated by the Prime Lessee.
Product Repositioning. The Company believes that a regular program of
capital improvements, including replacement and refurbishment of FF&E at the
December 31 Hotels, as well as the renovation and redevelopment of selected
Hotels, is essential to maintaining the competitiveness of the hotels and
maximizing revenue growth. Consistent with this strategy, as of December 31,
1997, the Company had invested approximately $69.0 million in capital
improvements and renovations at the December 31 Hotels. The Company has budgeted
an additional $60.7 million, an average of approximately $19,395 per guestroom.
In addition, the Company has budgeted approximately $111.1 million, an average
of approximately $13,227 per guest room, to be spent on capital improvements and
renovations at the 1998 Acquisition Hotels and the Proposed Acquisition Hotels,
respectively (see "Brand Repositioning" below).
The Participating Leases require the Company to establish reserves of 4% of
total hotel revenue for each of the Current Hotels (which, on a consolidated pro
forma basis for the years ended December 31, 1997 and 1996, represented
approximately 5.4% and 5.5% of room revenue respectively), which will be
utilized by AGH Leasing or the Prime Lessee for the replacement and
refurbishment of FF&E and for other capital expenditures designed to enhance the
competitive position of the Current Hotels. The Company and AGH Leasing or the
Prime Lessee, as the case may be, will agree on the use of funds in this reserve
and the Company has the right to approve that Lessee's annual and long-term
capital expenditure budgets. While the Company expects its reserves to be
adequate to fund recurring capital needs (including periodic renovations), the
Company may use funds from operations in excess of distributions paid (subject
to federal income tax restrictions on the Company's ability to retain earnings)
or funds drawn under the Company's credit facility to fund additional capital
improvements as necessary, including major renovations at the Company's hotels.
Brand Repositioning. The Company believes an opportunity exists in certain
major U.S. markets to acquire underperforming hotels that currently operate as
independent hotels or under franchise affiliations that have limited brand
recognition and convert them to stronger, more nationally recognized brand
affiliations, such as Crowne Plaza, DoubleTree, Hilton, Holiday Inn, Holiday Inn
Select, Marriott, Wyndham and Westin brands, in order to improve the operating
performance at these hotels. These brand conversions are subject to, among
other things, final franchisor and lender approval, and there can be no
assurance that such brand conversions and repositioning will occur as planned.
The Company's ability to utilize its brand repositioning strategies will
depend on its ability to access financing. The Company plans to use funds
available under the New Credit Facilities to implement its conversion and brand
repositioning strategy at certain of the Hotels. Substantial renovations of
hotels often disrupt the operations of those hotels due to hotel guestrooms and
common areas being out of service for extended periods. The Company, however,
attempts to schedule renovations and improvements during traditionally lower
occupancy periods in an effort to minimize disruption to the hotels' operations.
Operational Repositioning. The Company expects to achieve internal growth
through the application of AGHI's and Prime's operating strategies, which
stress responsiveness and adaptability to changing market conditions to maximize
revenue growth. The Company's objectives include increasing REVPAR through
increases in occupancy and ADR through AGHI's and Prime's continuing use of (i)
interactive yield management techniques, (ii) highly developed operating
systems and controls, (iii) targeted sales and marketing plans, (iv) pro-active
financial management, (v) extensive training programs and (vi) an
incentive-based compensation structure.
Participating Leases Structure. The Participating Leases are designed to
allow the Company to participate in any increased revenues from the hotels in
which it invests. The Company also believes that AGHI's and Prime's marketing
and yield management techniques contribute to maximizing revenues at the hotels
managed by it, thereby increasing the rent payable to the Company by the Lessee
under the Participating Leases. While the rent provisions of the Participating
Leases are revenue-based, such provisions have been developed with consideration
of the fixed
8
and variable nature of hotel operating expenses and changes in operating margins
typically associated with increases in revenues.
COMPETITION
The hotel industry is highly competitive. Each of the Hotels is located in
a developed area that includes other hotel properties. The number of competitive
hotel properties in a particular area could have a material adverse effect on
occupancy, ADR (as defined below) and REVPAR (as defined below) of the Hotels or
at hotel properties acquired in the future.
The Company may be competing for investment opportunities with entities
that have substantially greater financial resources than the Company. These
entities may generally be able to accept more risk than the Company can
prudently manage, including risks with respect to the creditworthiness of a
hotel operator or the geographic proximity of its investments. Competition may
generally reduce the number of suitable investment opportunities offered to the
Company and increase the bargaining power of property owners seeking to sell.
Further, the Company believes competition from entities organized for purposes
substantially similar to the Company's objectives could increase significantly
if the Company is successful. There is no restriction in the Participating
Leases or the Management Agreements on the Lessee's or AGHI's ability to lease
or manage hotels, which may compete with the Company's hotels. Although not
currently anticipated, AGHI and the Lessee may manage or lease (but may not
acquire or develop) hotels that compete with the Company's hotels.
SEASONALITY
The hotel industry is seasonal in nature. Generally, hotel revenue is
greater in the second and third quarters of a calendar year, although this may
not be true for hotels in major tourist destinations. With the Company's
acquisition of the FSA Portfolio Acquisition hotels, which include several
hotels in tourist destinations, the Company's portfolio may now produce greater
revenues in the first and second quarters. Seasonal variations in revenue at the
Hotels may cause quarterly fluctuations in the Company's lease revenue.
TAX STATUS
The Company elected to be taxed as a REIT under Sections 856 through 860 of
the Code of 1986, as amended, commencing with its initial taxable year ending
December 31, 1996. As a REIT, the Company (subject to certain exceptions) will
not be subject to federal income taxation at the corporate level on its taxable
income that is distributed to the stockholders of the Company. A REIT is subject
to a number of organizational and operational requirements, including a
requirement that it currently distribute at least 95.0% of its annual taxable
income. The Company may, however, be subject to certain state and local taxes on
its income and property. In connection with the Company's election to be taxed
as a REIT, the Company's Charter imposes restrictions on the transfer of shares
of Common Stock. The Company has adopted the calendar year as its taxable year.
ITEM 2: PROPERTIES
The Current Hotels are operated under different national hotel brands and
include 48 full-service hotels and five limited-service hotels. In addition, the
Company plans to reposition certain of the Current Hotels, through an upgrade
and conversion into hotels that operate under the Wyndham Hotel, Hilton Hotel,
Crowne Plaza, Westin, Sheraton, Marriott, Holiday Inn Select and Radisson
brands. The Company believes that, following such upgrading and conversion,
these hotels will experience increases in occupancy and room rates as a result
of the new franchisors' national brand recognition, reservation systems and
group sales organizations.
The following table sets forth certain information with respect to the
Hotels and their statistical operating results for the full year 1997 and 1996,
including their average daily rate ("ADR"), occupancy and revenue per available
room ("REVPAR").
9
Year Built/
Hotel Acquired 1996(1) 1997(1) % Change
- ------------------------------------------------ ------------- -------------- -------------- -----------
December 31 Hotels
- ------------------
Holiday Inn Dallas DFW Airport West(2)
Bedford, Texas.................................. 1974/1995
Occupancy.................................... 72.5% 81.1% 11.9%
ADR.......................................... $ 63.57 $ 62.53 (1.6)
REVPAR....................................... $ 46.11 $ 50.70 10.0
Courtyard by Marriott Meadowlands(2)
Secaucus, New Jersey............................ 1989/1994
Occupancy.................................... 80.3% 85.9% 7.0%
ADR.......................................... $ 92.16 $ 103.25 12.0
REVPAR....................................... $ 73.99 $ 88.67 19.8
Hampton Inn Richmond Airport(2)
Richmond, Virginia.............................. 1987/1995
Occupancy.................................... 74.0% 81.8% 10.5%
ADR.......................................... $ 60.67 $ 66.63 9.8
REVPAR....................................... $ 44.89 $ 54.51 21.4
Hotel Maison de Ville(2)
New Orleans, Louisiana.......................... 1788/1994
Occupancy.................................... 66.2% 68.7% 3.8%
ADR.......................................... $ 241.64 $ 260.56 7.8
REVPAR....................................... $ 159.85 $ 179.09 12.0
Hilton Hotel Toledo(2)
Toledo, Ohio.................................... 1987/1996
Occupancy.................................... 70.6% 67.4% (4.5)%
ADR.......................................... $ 63.52 $ 67.80 6.7
REVPAR....................................... $ 44.84 $ 45.71 1.9
Holiday Inn Select Dallas DFW Airport South(2)
Irving, Texas................................... 1974/1996
Occupancy.................................... 75.6% 73.9% (2.3)%
ADR.......................................... $ 75.49 $ 77.92 3.2
REVPAR....................................... $ 57.05 $ 57.59 1.0
Holiday Inn Select New Orleans International
Airport(2)
Kenner, Louisiana............................... 1973/1996
Occupancy.................................... 74.6% 74.8% 0.3%
ADR.......................................... $ 80.09 $ 84.29 5.2
REVPAR....................................... $ 59.74 $ 63.03 5.5
Hampton Inn Ocean City(2)
Ocean City, Maryland............................ 1989/1996
Occupancy.................................... 50.4% 47.3% (6.2)%
ADR.......................................... $ 78.07 $ 85.21 9.2
REVPAR....................................... $ 39.31 $ 40.32 2.6
Crowne Plaza Madison
Madison, Wisconsin.............................. 1987/1996
Occupancy.................................... 76.5% 74.3% (2.9)%
ADR.......................................... $ 82.39 $ 91.48 11.0
REVPAR....................................... $ 63.04 $ 67.98 7.8
Holiday Inn Park Center Plaza(3)(4)
San Jose, California............................ 1975/1996
Occupancy.................................... 74.7% 70.2% (6.0)%
ADR.......................................... $ 87.95 $ 111.80 27.1
REVPAR....................................... $ 65.69 $ 78.48 19.5
Wyndham Albuquerque Airport Hotel
Albuquerque, New Mexico......................... 1972/1996
Occupancy.................................... 80.4% 75.3% (6.3)%
ADR.......................................... $ 56.08 $ 60.67 8.2
REVPAR....................................... $ 45.07 $ 45.70 1.4
Wyndham San Jose Airport Hotel
San Jose, California............................ 1973/1996
Occupancy.................................... 73.6% 59.3% (19.4)%
ADR.......................................... $ 77.13 $ 115.93 50.3
REVPAR....................................... $ 56.80 $ 68.76 21.1
10
Year Built/
Hotel Acquired 1996(1) 1997(1) % Change
- ------------------------------------------------ ------------- -------------- -------------- -----------
Holiday Inn Select Mission Valley
San Diego, California........................... 1970/1996
Occupancy.................................... 67.4% 72.6% 7.7%
ADR.......................................... $ 67.29 $ 71.99 7.0
REVPAR....................................... $ 45.32 $ 52.25 15.3
Wyndham Safari Resort Lake Buena Vista
Orlando, Florida................................ 1985/1996
Occupancy.................................... 72.5% 66.3% (8.6)%
ADR.......................................... $ 61.12 $ 73.67 20.5
REVPAR....................................... $ 44.31 $ 48.81 10.2
Holiday Inn Resort Monterey(4)(5)
Monterey, California............................ 1971/1996
Occupancy.................................... 67.4% 66.4% (1.5)%
ADR.......................................... $ 100.44 $ 107.33 6.9
REVPAR....................................... $ 67.72 $ 71.29 5.3
Hilton Hotel Durham
Durham, North Carolina.......................... 1987/1997
Occupancy.................................... 75.1% 70.4% (6.3)%
ADR.......................................... $ 83.90 $ 89.23 6.4
REVPAR....................................... $ 63.04 $ 62.80 (0.4)
Wyndham Garden Hotel Marietta
Marietta, Georgia............................... 1985/1997
Occupancy.................................... 63.7% 60.8% (4.6)%
ADR.......................................... $ 82.77 $ 74.55 (9.9)
REVPAR....................................... $ 52.72 $ 45.31 (14.1)
Westin Resort Key Largo
Key Largo, Florida.............................. 1985/1997
Occupancy.................................... 76.6% 76.8% 0.3%
ADR.......................................... $ 118.80 $ 126.87 6.8
REVPAR....................................... $ 90.97 $ 97.19 6.8
DoubleTree Guest Suites Atlanta
Atlanta, Georgia................................ 1985/1997
Occupancy.................................... 70.6% 61.4% (13.0)%
ADR.......................................... $ 107.96 $ 104.90 (2.9)
REVPAR....................................... $ 76.23 $ 64.42 (15.5)
Radisson Hotel Arlington Heights(2)
Arlington Heights, Illinois..................... 1981/1997
Occupancy.................................... 70.2% 74.5% 6.1%
ADR.......................................... $ 76.91 $ 81.72 6.3
REVPAR....................................... $ 54.00 $ 60.88 12.7
Holiday Inn Select Bucks County(3)(4)
Trevose, Pennsylvania........................... 1987/1997
Occupancy.................................... 73.3% 74.4% 1.5%
ADR.......................................... $ 83.92 $ 89.89 7.1
REVPAR....................................... $ 61.51 $ 66.87 8.7
Hilton Hotel Cocoa Beach
Cocoa Beach, Florida............................ 1986/1997
Occupancy.................................... 71.3% 72.2% 1.3%
ADR.......................................... $ 71.64 $ 83.31 16.3
REVPAR....................................... $ 51.10 $ 60.11 17.6
Radisson Twin Towers Orlando
Orlando, Florida................................ 1972/1997
Occupancy.................................... 75.6% 78.5% 3.8%
ADR.......................................... $ 70.58 $ 81.10 14.9
REVPAR....................................... $ 53.34 $ 63.64 19.3
Crowne Plaza Phoenix
Phoenix, Arizona................................ 1981/1997
Occupancy.................................... 71.6% 63.7% (11.0)%
ADR.......................................... $ 67.03 $ 72.83 8.7
REVPAR....................................... $ 47.99 $ 46.29 (3.5)
11
Year Built/
Hotel Acquired 1996(1) 1997(1) % Change
- ------------------------------------------------ ------------- -------------- -------------- -----------
Hilton Airport Hotel Grand Rapids
Grand Rapids, Michigan.......................... 1979/1997
Occupancy.................................... 67.4 % 64.7 % (4.0)%
ADR.......................................... $ 79.24 $ 84.38 6.5
REVPAR....................................... $ 53.42 $ 54.61 2.2
Marriott Houston West Loop
Houston, Texas.................................. 1976/1997
Occupancy.................................... 72.1 % 72.6 % 0.7 %
ADR.......................................... $ 87.36 $ 103.60 18.6
REVPAR....................................... $ 62.95 $ 75.25 19.5
Courtyard by Marriott Durham(2)(14) 1996/1997
Durham, North Carolina..........................
Occupancy.................................... n/a 73.2 % n/a
ADR.......................................... n/a $ 78.98 n/a
REVPAR....................................... n/a $ 57.82 n/a
==============================================================================================================
TOTAL DECEMBER 31 HOTELS
Occupancy.................................... 72.4 % 71.2 % (1.7)%
ADR.......................................... $ 77.28 $ 85.82 11.1
REVPAR....................................... $ 55.98 $ 61.07 9.1
==============================================================================================================
1998 Acquisition Hotels
- ------------------------------------------------
Crowne Plaza Suites Las Vegas
Las Vegas, Nevada............................... 1989/1998
Occupancy.................................... 83.6 % 78.3 % (6.3)%
ADR.......................................... $ 101.41 $ 98.06 (3.3)
REVPAR....................................... $ 84.77 $ 76.74 (9.5)
St. Tropez Suites Las Vegas
Las Vegas, Nevada............................... 1986/1998
Occupancy.................................... 70.8 % 72.5 % 2.4 %
ADR.......................................... $ 107.00 $ 107.83 0.8
REVPAR....................................... $ 75.74 $ 78.21 3.3
Ramada Inn Mahwah(4)(6)
Mahwah, New Jersey.............................. 1982/1998
Occupancy.................................... 72.5 % 74.2 % 2.3 %
ADR.......................................... $ 70.49 $ 77.69 10.2
REVPAR....................................... $ 51.10 $ 57.65 12.8
Sheraton Crossroads Hotel Mahwah
Mahwah, New Jersey.............................. 1986/1998
Occupancy.................................... 76.8 % 76.7 % (0.1)%
ADR.......................................... $ 93.57 $ 103.58 10.7
REVPAR....................................... $ 71.82 $ 79.45 10.6
Ramada Plaza Meriden(4)(6)
Meriden, Connecticut............................ 1985/1998
Occupancy.................................... 67.6 % 69.3 % 2.5 %
ADR.......................................... $ 66.15 $ 70.18 6.1
REVPAR....................................... $ 44.71 $ 48.66 8.8
Four Points Hotel Mt Arlington
Mt. Arlington, New Jersey....................... 1984/1998
Occupancy.................................... 73.8 % 72.6 % (1.6)%
ADR.......................................... $ 88.69 $ 95.62 7.8
REVPAR....................................... $ 65.48 $ 69.45 6.1
Crowne Plaza Portland
Portland, Oregon................................ 1988/1998
Occupancy.................................... 75.3 % 70.4 % (6.5)%
ADR.......................................... $ 95.02 $ 102.37 7.7
REVPAR....................................... $ 71.54 $ 72.09 0.8
Ramada Plaza Hotel Shelton(4)(6)
Shelton, Connecticut............................ 1989/1998
Occupancy.................................... 69.8 % 72.0 % 3.2 %
ADR.......................................... $ 98.58 $ 112.30 13.9
REVPAR....................................... $ 68.79 $ 80.87 17.6
12
Year Built/
Hotel Acquired 1996(1) 1997(1) % Change
- ------------------------------------------------ ------------- -------------- -------------- -----------
Ramada Old Town Alexandria(4)(8)
Alexandria, Virginia............................ 1975/1998
Occupancy.................................... 63.8 % 62.8 % (1.6)%
ADR.......................................... $ 90.32 $ 94.47 4.6
REVPAR....................................... $ 57.61 $ 59.36 3.1
Holiday Inn Historic District Alexandria
Alexandria, Virginia............................ 1985/1998
Occupancy.................................... 70.4 % 71.8 % 2.0 %
ADR.......................................... $ 92.51 $ 101.20 9.4
REVPAR....................................... $ 65.13 $ 72.68 11.6
Holiday Inn Annapolis
Annapolis, Maryland............................. 1975/1998
Occupancy.................................... 62.0 % 59.4 % (4.2)%
ADR.......................................... $ 78.00 $ 82.51 5.8
REVPAR....................................... $ 48.38 $ 49.00 1.3
Holiday Inn Express BWI Airport
Hanover, Maryland............................... 1988/1998
Occupancy.................................... 79.3 % 83.0 % 4.7 %
ADR.......................................... $ 60.39 $ 65.10 7.8
REVPAR....................................... $ 47.88 $ 54.02 12.8
Holiday Inn Chicago O'Hare International(3)(4)
Rosemont, Illinois.............................. 1975/1998
Occupancy.................................... 75.2 % 78.6 % 4.5 %
ADR.......................................... $ 92.93 $ 99.15 6.7
REVPAR....................................... $ 69.90 $ 77.89 11.4
Courtyard by Marriott Century City(2)
Century City, California........................ 1986/1998
Occupancy.................................... 77.9 % 84.1 % 8.0 %
ADR.......................................... $ 100.30 $ 106.02 5.7
REVPAR....................................... $ 78.12 $ 89.13 14.1
Ramada Inn Gulfview Clearwater Beach
Clearwater Beach, Florida....................... 1969/1998
Occupancy.................................... 54.4 % 60.7 % 11.6 %
ADR.......................................... $ 62.45 $ 72.85 16.7
REVPAR....................................... $ 33.95 $ 44.19 30.2
DoubleTree Resort Surfside Clearwater Beach
Clearwater Beach, Florida....................... 1980/1998
Occupancy.................................... 55.9 % 70.9 % 26.8 %
ADR.......................................... $ 87.24 $ 101.12 15.9
REVPAR....................................... $ 48.75 $ 71.72 47.1
Holiday Inn Ft. Lauderdale Beach
Ft. Lauderdale, Florida......................... 1969/1998
Occupancy.................................... 70.8 % 77. 2% 9.0 %
ADR.......................................... $ 68.47 $ 75.95 10.9
REVPAR....................................... $ 48.51 $ 58.66 20.9
Howard Johnson Resort Key Largo(2)(4)(7)
Key Largo, Florida.............................. 1971/1998
Occupancy.................................... 84.0 % 83.4 % 1.6 %
ADR.......................................... $ 78.56 $ 86.06 9.5
REVPAR....................................... $ 65.99 $ 71.77 8.8
Courtyard by Marriot Disney Village(2)
Lake Buena Vista, Florida....................... 1972/1998
Occupancy.................................... 92.8 % 93.8 % (0.7)%
ADR.......................................... $ 88.93 $ 105.41 18.5
REVPAR....................................... $ 82.53 $ 98.89 19.8
Holiday Inn Madeira Beach
Madeira Beach, Florida.......................... 1972/1998
Occupancy.................................... 67.0 % 55.8 % (16.7)%
ADR.......................................... $ 74.35 $ 77.36 4.1
REVPAR....................................... $ 49.79 $ 43.16 (13.3)
13
Hotel Acquired 1996(1) 1997(1) % Change
- ------------------------------------------------ ------------- -------------- -------------- -----------
Courtyard by Marriot Marina del Rey
Marina del Rey, California...................... 1976/1998
Occupancy.................................... 77.6 % 90.4 % 16.5 %
ADR.......................................... $ 70.59 $ 79.78 13.2
REVPAR....................................... $ 54.79 $ 72.09 31.6
The Lodge at the Seaport Mystic(2)
Mystic, Connecticut............................. 1967/1998
Occupancy.................................... 57.9 % 58.0 % 0.2 %
ADR.......................................... $ 68.99 $ 77.63 12.5
REVPAR....................................... $ 39.92 $ 45.06 12.9
Holiday Inn Richmond West
Richmond, Virginia.............................. 1975/1998
Occupancy.................................... 58.2 % 60.9 % 4.6 %
ADR.......................................... $ 57.33 $ 59.67 4.1
REVPAR....................................... $ 33.34 $ 36.36 9.1
Radisson Inn Rochester
Rochester, New York............................. 1971/1998
Occupancy.................................... 71.1 % 72.0 % 1.3 %
ADR.......................................... $ 61.71 $ 65.23 5.7
REVPAR....................................... $ 43.85 $ 46.95 7.1
Holiday Inn Forest Park St. Louis(3)(4)
St. Louis, Missouri............................. 1978/1998
Occupancy.................................... 76.0 % 75.3 % (0.9)%
ADR.......................................... $ 67.05 $ 70.63 5.3
REVPAR....................................... $ 50.93 $ 53.21 4.5
DoubleTree Hotel Tampa Airport
Tampa, Florida.................................. 1972/1998
Occupancy.................................... 49.7 % 68.3 % 37.4 %
ADR.......................................... $ 47.28 $ 64.05 35.5
REVPAR....................................... $ 23.48 $ 43.73 86.2
==============================================================================================================
TOTAL 1998 ACQUISITION HOTELS
Occupancy.................................... 68.9 % 73.1 % 6.1 %
ADR.......................................... $ 79.98 $ 87.43 9.3
REVPAR....................................... $ 55.15 $ 63.93 15.9
==============================================================================================================
Proposed Acquisition Hotels
- ------------------------------------------------
Select Inn Bloomington(10) (13)
Bloomington, Minnesota.......................... 1962
Occupancy.................................... n/a n/a n/a
ADR.......................................... n/a n/a n/a
REVPAR....................................... n/a n/a n/a
Ramada Madison(2)(9)
Madison, Wisconsin.............................. 1965
Occupancy.................................... 52.3 % 44.2 % (15.5)%
ADR.......................................... $ 53.46 $ 54.75 2.4
REVPAR....................................... $ 27.98 $ 24.22 (13.4)
Ramada Inn Elmsford(11)
Elmsford, New Jersey............................ 1973
Occupancy.................................... 84.1 % 82.4 % (2.0)%
ADR.......................................... $ 83.08 $ 93.02 12.0
REVPAR....................................... $ 69.85 $ 76.64 9.7
Radisson Suites Secaucus(4)(6)(11)
Secaucus, New Jersey............................ 1988
Occupancy.................................... 76.6 % 78.5 % 2.5 %
ADR.......................................... $ 99.72 $ 108.22 8.5
REVPAR....................................... $ 76.36 $ 84.91 11.2
Radisson Hotel & Suites Fairfield(11) 1983
Fairfield, New Jersey........................... 74.2 % 73.4 % (1.1)%
Occupancy.................................... $ 98.89 $ 111.82 13.1
ADR.......................................... $ 73.37 $ 82.13 11.9
REVPAR.......................................
14
Year Built/
Hotel Acquired 1996(1) 1997(1) % Change
- ------------------------------------------------ ------------- -------------- -------------- -----------
Radisson Hotel Trevose(11)
Trevose, Pennsylvania........................... 1973
Occupancy.................................... 67.0 % 68.6 % 2.4 %
ADR.......................................... $ 71.85 $ 77.74 8.2
REVPAR....................................... $ 48.11 $ 53.35 10.9
Sheraton Hotel Saratoga Springs(11)
Saratoga Springs, New York...................... 1983
Occupancy.................................... 65.1 % 69.4 % 6.6 %
ADR.......................................... $ 106.70 $ 114.28 7.1
REVPAR....................................... $ 69.43 $ 79.32 14.2
Ramada Inn Danbury(11)
Danbury, Connecticut............................ 1972
Occupancy.................................... 71.2 % 71.5 % 0.4 %
ADR.......................................... $ 63.53 $ 69.34 9.2
REVPAR....................................... $ 45.22 $ 49.59 9.7
Ramada Inn Armonk(4)(6)(11)
Armonk, New York................................ 1974
Occupancy.................................... 77.3 % 82.3 % 6.5 %
ADR.......................................... $ 83.95 $ 94.02 12.0
REVPAR....................................... $ 64.92 $ 77.37 19.2
Ramada Inn Fairfield(4)(6)(11)
Fairfield, New Jersey........................... 1972
Occupancy.................................... 72.4 % 71.7% (1.0)%
ADR.......................................... $ 71.56 $ 78.62 9.9
REVPAR....................................... $ 51.80 $ 56.35 8.9
Holiday Inn Princeton(11)
Princeton, New Jersey........................... 1982
Occupancy.................................... 63.0 % 66.5 % 5.6 %
ADR.......................................... $ 78.70 $ 88.95 13.0
REVPAR....................................... $ 49.54 $ 59.16 19.4
Crowne Plaza Hotel Hasbrouck Heights(11)
Hasbrouck Heights, New Jersey................... 1975
Occupancy.................................... 53.9 % 71.5 % 32.7 %
ADR.......................................... $ 90.51 $ 99.95 10.4
REVPAR....................................... $ 48.78 $ 71.43 46.4
==============================================================================================================
TOTAL PROPOSED ACQUISITION HOTELS
Occupancy.................................... 66.5 % 70.2 % 5.6 %
ADR.......................................... $ 82.97 $ 92.32 11.3
REVPAR....................................... $ 55.17 $ 64.84 17.5
==============================================================================================================
==============================================================================================================
TOTAL ALL HOTELS
Occupancy.................................... 70.2 % 71.8 % 2.3 %
ADR.......................................... $ 79.14 $ 87.45 10.5
REVPAR....................................... $ 55.53 $ 62.76 13.0
==============================================================================================================
(1) The information included in this table with respect to the Hotels, for
periods prior to their acquisition by the Company, was obtained from the
prior owners.
(2) This hotel was managed by AGHI prior to its acquisition by the Company.
(3) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Crowne Plaza brand.
(4) There can be no assurance that the brand conversion and repositioning of
this hotel will occur as planned.
(5) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Hilton Hotel brand.
(6) The Company plans to reposition this hotel. The franchise brand has not
been determined.
(7) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Courtyard by Marriott brand.
(8) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Holiday Inn Select brand.
(9) This hotel is currently being redeveloped. Upon completion of the
construction of the hotel, the Company plans to operate the hotel under the
Holiday Inn brand.
(10) The Company expects to acquire this Proposed Acquisition Hotel during the
second quarter of 1998.
15
(11) The Company expects to acquire this Proposed Acquisition Hotel between
September 1998 and March 1999.
(12) This hotel was opened for business in April 1997.
(13) The Company will hold a net lease only on this hotel.
THE PARTICIPATING LEASES
In order for the Company to qualify as a REIT, neither the Company nor the
Operating Partnership may operate hotels or related properties.
AGH Leasing
The Operating Partnership leases 45 of the Current Hotels to AGH Leasing
for a term of twelve years from the inception of the lease pursuant to separate
Participating Leases that provide for rent equal to the greater of Base Rent or
Participating Rent. In addition, the Company and the AGH Leasing are party to a
Lease Master Agreement (the "Lease Master Agreement"), which sets forth the
terms of a pledge of 275,000 OP Units by the partners of AGH Leasing (the "AGH
Leasing Pledge") and certain other matters. Each Participating Lease with AGH
Leasing contains terms substantially similar to those described below. If the
Proposed Merger is consummated, then the Lease Master Agreement will be
terminated.
Participating Lease Terms. Each Participating Lease has a term of twelve
years from the date of the Company's acquisition of the hotel subject to such
lease, subject to earlier termination upon the occurrence of certain
contingencies described in the Participating Lease.
Base Rent; Participating Rent; Additional Charges. Each Participating
Lease requires AGH Leasing to pay (i) fixed weekly Base Rent, (ii) on a monthly
basis, the excess of Participating Rent over Base Rent, with Participating Rent
based on certain percentages of room revenue, food and beverage revenue and
telephone and other revenue at each Current Hotel, and (iii) certain other
amounts, including interest accrued on any late payments or charges
("Additional Charges"). Base Rent and Participating Rent departmental
thresholds (departmental revenue on which the rent percentage is based) are
increased annually by a percentage equal to the percentage increase in the
Consumer Price Index ("CPI") (CPI percentage increase plus 0.75% in the case of
the Participating Rent departmental revenue thresholds) compared to the prior
year. Base Rent is payable weekly in arrears. Participating Rent is payable in
arrears based on a predetermined monthly schedule. The monthly departmental
thresholds and the weekly Base Rent are set based on the each hotel's annual
budget, which reflects the seasonal variations in the hotel's revenues.
Participating Rent payments during each calendar quarter will be adjusted at the
end of each quarter to reflect actual results. A final adjustment of the
Participating Rent for each fiscal year will be made, based on audited
statements of revenue for each hotel.
Prime Lessee
The Operating Partnership leases eight of the Current Hotels to the Prime
Lessee for a term of ten years from the inception of the lease pursuant to
separate Participating Leases that provide for rent equal to the greater of Base
Rent or Participating Rent. The Participating Lease with the Prime Lessee
prohibit the Company from selling the hotels for a period of three years but
otherwise have terms and conditions substantially similar to the Participating
Leases with AGH Leasing.
Participating Lease Terms. Each Participating Lease has a term of ten
years from the date of the Company's acquisition of the hotel subject to such
lease, subject to earlier termination upon the occurrence of certain
contingencies described in the Participating Lease.
Base Rent; Participating Rent; Additional Charges. Each Participating
Lease requires the Prime Lessee to pay (i) fixed weekly Base Rent, (ii) on a
monthly basis, the excess of Participating Rent over Base Rent, with
Participating Rent based on certain percentages of room revenue, food and
beverage revenue and telephone and other revenue at each Current Hotel, and
(iii) certain other amounts, including interest accrued on any late payments or
charges ("Additional Charges"). Base Rent and Participating Rent departmental
thresholds (departmental revenue on
16
which the rent percentage is based) are increased annually by a percentage equal
to the percentage increase in the CPI. Certain of the Participating Leases with
the Prime Lessee contain provisions for an additional 0.75% increase to the
Participating Rent departmental revenue thresholds compared to the prior year.
Base Rent is payable monthly in advance. Participating Rent is payable in
arrears based on a predetermined monthly schedule. The monthly departmental
thresholds and the monthly Base Rent are set based on the each hotel's annual
budget, which reflects the seasonal variations in the hotel's revenues.
Participating Rent payments during each calendar quarter will be adjusted at the
end of each quarter to reflect actual results. A final adjustment of the
Participating Rent for each fiscal year will be made, based on audited
statements of revenue for each hotel.
The table below sets forth (i) the lease expiration date, (ii) the Base
Rent, (iii) the pro forma total revenue and (iv) the pro forma rent that would
have been paid for each hotel pursuant to the terms of the Participating Leases
based on the historical revenues for the year ended December 31, 1997, as if the
Company had owned the hotels and the Participating Leases were in effect during
such twelve-month period and January 1, 1997 was the beginning of the lease
year.
Year Ended December 31, 1997
--------------------------------------------------------------
Pro Forma Participating Rent(1)
Lease --------------------------------
Expiration Base Rent
Date (dollars Pro Forma
(month/ in Total Telephone
Hotel Properties year) thousands)(1) Revenue(2) Room F&B and Other
- ----------------------------------------------- ---------- ------------- ---------- -------- ------- ----------
December 31 Hotels
- ------------------------------------------------
Holiday Inn Dallas DFW Airport West
Bedford, Texas.................................. 7/08 $ 860 $ 6,184 $ 1,822 $ 99 $ 50
Courtyard by Marriott Meadowlands(3)
Secaucus, New Jersey............................ 7/08 983 5,909 2,484 - 67
Hampton Inn Richmond Airport
Richmond, Virginia.............................. 7/08 551 2,592 1,247 - 38
Hotel Maison de Ville
New Orleans, Louisiana.......................... 7/08 283 2,213 501 39 14
Hilton Hotel Toledo
Toledo, Ohio.................................... 7/08 865 6,321 1,048 277 58
Holiday Inn Select Dallas DFW Airport South
Irving, Texas................................... 7/08 2,554 12,275 3,488 482 57
Holiday Inn Select New Orleans International
Airport
Kenner, Louisiana............................... 7/08 2,182 8,783 3,400 153 110
Hampton Inn Ocean City
Ocean City, Maryland............................ 7/08 800 2,542 1,155 - 28
Crowne Plaza Madison
Madison, Wisconsin.............................. 7/08 1,750 8,345 2,564 284 93
Holiday Inn Park Center Plaza
San Jose, California............................ 7/08 1,400 9,070 2,873 76 214
Wyndham Albuquerque Airport Hotel
Albuquerque, New Mexico......................... 7/08 1,450 6,297 1,565 81 62
Wyndham San Jose Le Baron Airport Hotel
San Jose, California............................ 7/08 2,100 11,199 3,896 175 133
Holiday Inn Select Mission Valley
San Diego, California........................... 7/08 1,800 7,516 2,536 63 83
Wyndham Safari Resort Lake Buena Vista
Orlando, Florida................................ 10/08 5,044 10,365 4,856 50 420
Holiday Inn Resort Monterey
Monterey, California............................ 11/08 1,279 6,497 1,916 28 99
17
Year Ended December 31, 1997
--------------------------------------------------------------
Pro Forma Participating Rent(1)
Lease --------------------------------
Expiration Base Rent
Date (dollars Pro Forma
(month/ in Total Telephone
Hotel Properties year) thousands)(1) Revenue(2) Room F&B and Other
- ----------------------------------------------- ---------- ------------- ---------- -------- ------- ----------
Hilton Hotel Durham
Durham, North, Carolina......................... 1/09 1,112 5,652 1,596 160 50
Wyndham Garden Hotel Marietta
Marietta, Georgia............................... 3/09 1,350 5,105 1,269 114 75
Westin Resort Key Largo
Key Largo, Florida.............................. 3/09 2,184 9,896 2,804 74 119
DoubleTree Guest Suites Atlanta
Atlanta, Georgia................................ 3/09 1,373 4,711 1,616 51 49
Radisson Hotel Arlington Heights
Arlington Heights, Illinois..................... 2/09 922 5,236 1,854 135 68
Holiday Inn Select Bucks County
Trevose, PA..................................... 6/09 1,758 8,088 2,373 210 77
Hilton Hotel Cocoa Beach
Cocoa Beach, FL................................. 6/09 1,832 8,362 2,649 135 98
Radisson Twin Towers Orlando
Orlando, FL..................................... 6/09 5,881 25,008 10,912 730 469
Crowne Plaza Phoenix
Phoenix, AZ (4)................................. 4/09 1,376 6,002 1,192 123 61
Hilton Airport Hotel Grand Rapids
Grand Rapids, MI................................ 4/09 1,378 7,660 1,553 504 96
Marriott Houston West Loop
Houston, TX..................................... 6/09 2,354 12,070 2,966 353 127
Courtyard by Marriott Durham
Durham, NC...................................... 11/09 670 2,560 806 - 41
---------- ------------- ---------- -------- ------- ----------
Total December 31 Hotels........................ 46,091 206,458 66,941 4,396 2,856
---------- ------------- ---------- -------- ------- ----------
1998 Acquisition Hotels
- ------------------------------------------------
Crowne Plaza Suites Las Vegas
Las Vegas, NV................................... 1/08 2,044 7,109 2,372 165 87
St. Tropez Suites Las Vegas
Las Vegas, NV................................... 1/08 1,813 4,440 2,062 12 78
Ramada Inn Mahwah
Mahwah, NJ...................................... 1/08 995 2,921 1,187 36 114
Sheraton Crossroads Hotel, Mahwah
Mahwah, NJ...................................... 1/08 3,320 15,072 2,984 1,275 152
Ramada Plaza Meriden
Meriden, CT..................................... 1/08 1,045 5,169 1,146 287 65
Four Points Hotel Mt Arlington
Mt. Arlington, NJ............................... 1/08 1,366 4,404 1,439 15 69
Crowne Plaza Portland
Portland, OR.................................... 1/08 1,749 5,718 2,125 116 133
Ramada Plaza Hotel Shelton
Shelton, CT..................................... 1/08 1,833 5,972 2,428 82 117
Ramada Old Town Alexandria
Alexandria, VA.................................. 1/10 1,663 8,141 2,151 152 74
Holiday Inn Historic District Alexandria
Alexandria, VA.................................. 1/10 1,080 7,277 1,765 189 29
Holiday Inn Annapolis
Annapolis, MD................................... 1/10 1,063 6,066 1,395 118 35
18
Year Ended December 31, 1997
--------------------------------------------------------------
Pro Forma Participating Rent(1)
Lease --------------------------------
Expiration Base Rent
Date (dollars Pro Forma
(month/ in Total Telephone
Hotel Properties year) thousands)(1) Revenue(2) Room F&B and Other
- ----------------------------------------------- ---------- ------------- ---------- -------- ------- ----------
Holiday Inn Express BWI Airport
Hanover, MD..................................... 1/10 893 3,295 1,314 7 47
Holiday Inn Chicago O'Hare International
Rosemont, IL.................................... 2/10 5,040 24,478 6,411 726 309
Courtyard by Marriott Century City
Century City, CA................................ 2/10 1,335 4,840 1,964 - 104
Ramada Inn Gulfview Clearwater Beach
Clearwater Beach, FL............................ 2/10 2,014 5,624 2,037 66 205
DoubleTree Resort Surfside Clearwater Beach
Clearwater Beach, FL............................ 2/10 5,151 17,613 5,657 576 354
Holiday Inn Ft. Lauderdale Beach
Ft. Lauderdale, FL.............................. 2/10 1,485 6,472 2,036 31 114
Howard Johnson Resort Key Largo
Key Largo, FL................................... 2/10 888 2,833 1,218 5 97
Courtyard by Marriot Disney Village
Lake Buena Vista, FL............................ 2/10 3,255 14,197 5,235 54 283
Holiday Inn Madeira Beach
Madeira Beach, FL (4)........................... 2/10 1,072 3,146 987 51 34
Courtyard by Marriot Marina del Rey
Marina del Rey, CA.............................. 2/10 2,059 8,638 2,828 54 41
The Lodge at the Seaport Mystic
Mystic, CT...................................... 2/10 427 1,338 583 - 38
Holiday Inn Richmond West
Richmond, VA.................................... 2/10 937 5,428 1,188 83 84
Radisson Inn Rochester
Rochester, NY................................... 2/10 607 4,409 828 72 39
Holiday Inn Forest Park St. Louis
St. Louis, MO................................... 2/10 552 2,884 858 12 32
DoubleTree Hotel Tampa Airport
Tampa, FL....................................... 2/10 1,902 10,724 2,545 132 54
---------- ------------- ---------- -------- ------- ----------
Total 1998 Acquisition Hotels 45,588 188,208 56,743 4,316 2,788
---------- ------------- ---------- -------- ------- ----------
Proposed Acquisition Hotels
- ------------------------------------------------
Select Inn Bloomington
Bloomington, MN................................. 389 389 - - 389
Ramada Inn Elmsford
Elmsford, NY.................................... 1,476 3,032 1,401 69 71
Radisson Suites Secaucus
Secaucus, NJ.................................... 2,377 7,100 2,446 264 194
Radisson Hotel & Suites Fairfield
Fairfield, NJ................................... 2,873 10,436 2,965 378 170
Radisson Hotel Trevose
Trevose, PA..................................... 2,123 8,507 1,871 370 109
Sheraton Hotel Saratoga Springs
Saratoga Springs, NY............................ 3,645 10,028 3,415 329 86
Ramada Inn Danbury
Danbury, CT..................................... 1,184 3,497 1,266 65 76
Ramada Inn Armonk
Armonk, NY...................................... 2,020 4,921 2,066 49 36
19
Year Ended December 31, 1997
--------------------------------------------------------------
Pro Forma Participating Rent(1)
Lease --------------------------------
Expiration Base Rent
Date (dollars Pro Forma
(month/ in Total Telephone
Hotel Properties year) thousands)(1) Revenue(2) Room F&B and Other
- ------------------------------------------------ ---------- ------------- ---------- --------- -------- ----------
Ramada Inn Fairfield
Fairfield, NJ................................... 1,944 5,333 1,779 191 131
Holiday Inn Jamesburg
Jamesburg, NJ (4)............................... 2,003 5,510 1,666 313 23
Holiday Inn Princeton
Princeton, NJ................................... 2,354 7,422 2,426 196 91
Crown Plaza Hotel Hasbrouck Heights
Hasbrouck Heights, NJ........................... 4,736 14.605 4,564 593 270
Ramada Inn Madison
Madison, WI (4)................................. 637 1,684 610 11 15
------------- ---------- --------- -------- ----------
Total Proposed Acquisition Hotels............... 27,761 477,130 26,475 2,828 1,661
------------- ---------- --------- -------- ----------
Total All Hotels................................ $119,440 $477,130 $150,159 $11,540 $7,305
============= ========== ========= ======== ==========
(1) Represents Base Rent and Participating Rent on a pro forma basis by
applying the rent provisions of the Participating Leases (or the proposed
rent provisions for the Participating Leases with respect to the Proposed
Acquisition Hotels) to the pro forma revenues of the Hotels as if January
1, 1997 were the beginning of the lease year. Under the terms of the
Participating Leases, the Lessee is obligated to pay the greater of Base
Rent or Participating Rent. The rent terms for the Proposed Acquisition
Hotels are based on terms which are substantially similar to the Company's
other leases with the Lessee.
(2) The information included in this table with respect to pro forma total
revenue for periods prior to the acquisition by the Company was obtained
from the prior owners.
(3) If food and beverage ("F&B") revenue exceeds $1 million, Participating Rent
will include 5% of total F&B revenue.
(4) Base Rent exceeds Participating Rent. The excess of Base Rent over
Participating Rent is included in room Participating Rent.
Other than real estate and personal property taxes and assessments, rent
payable under the ground leases, casualty insurance, capital impositions and
capital replacements and refurbishment's (determined in accordance with
generally accepted accounting principles), which are obligations of the Company,
the Participating Leases require the Lessee to pay rent, liability insurance
(see "Insurance and Property Taxes and Assessments"), all costs and expenses and
all utility and other charges incurred in the operation of the Hotels. The
Participating Leases also provide for rent reductions and abatements in the
event of damage or destruction or a partial taking of any Hotel as described
under "Damage to Hotels" and "Condemnation of Hotels."
AGH Leasing
Capitalization; AGH Leasing Pledge. At the time of the IPO, the partners
of AGH Leasing (i) capitalized the Lessee with $500,000 in cash and (ii)
pursuant to the AGH Leasing Pledge, pledged 275,000 OP Units to the Company to
secure AGH Leasing's obligations under the Participating Leases. OP Units
subject to the AGH Leasing Pledge may be released therefrom without duplication,
(a) on a one-for-one basis as AGH Leasing acquires OP Units or shares of Common
Stock or (b) upon the contribution to AGH Leasing of cash or an increase in
undistributed earnings in an amount equal to the then current market value of
the OP Units to be released from the AGH Leasing Pledge. Twin Towers Leasing was
capitalized with $3 million by the 49% limited partner upon commencement of
operations. AGH Leasing, L.P. owns 51% of Twin Towers Leasing and is its sole
general partner.
Distribution Restrictions. AGH Leasing may not pay any distributions to
its partners (except for the purpose of permitting its partners to pay taxes on
the income attributable to them from AGH Leasing and except for distributions
relating to interest or dividends received by AGH Leasing from cash or
securities held by it) or make any other distributions to affiliates of AGH
Leasing, other than limited amounts relating to AGH Leasing's overhead or
pursuant to the Management Agreements, until AGH Leasing's net worth equals the
greater of (i) $6.0 million or (ii) 17.5% of actual rent payments from hotels
leased to AGH Leasing during the preceding calendar year (the "AGH Leasing
Distribution Restriction"). During the period of the AGH Leasing Distribution
Restriction, AGH
20
Leasing will be required, subject to compliance with applicable securities laws,
to purchase annually Common Stock on the open market or, if any such purchase
would violate the ownership limitation in the Company's Charter, or at the
option of the Operating Partnership, OP Units, in an amount equal to AGH
Leasing's cash flow attributable to the Participating Leases for the preceding
fiscal year (after establishing a reserve for partner tax distributions). For
purposes of calculating the net worth threshold for the AGH Leasing Distribution
Restriction, annual rent payments will be determined on a calendar year basis
and will be annualized for any partial calendar year. If AGH Leasing's net worth
exceeds the net worth threshold for the AGH Leasing Distribution Restriction,
AGH Leasing may make distributions to its partners, provided that, after such
distribution, the AGH Leasing's net worth equals or exceeds the net worth
threshold for the AGH Leasing Distribution Restriction and provided that at such
time there exists no Event of Default (as defined in the Participating Leases)
under the Participating Leases. All Common Stock or OP Units acquired by AGH
Leasing during the period of the AGH Leasing Distribution Restriction may not be
sold or transferred for a period of two years after their acquisition (other
than to partners in AGH Leasing) unless, following such transfer, the net worth
threshold for the AGH Leasing Distribution Restriction is satisfied.
Subordination of Management Fees. AGH Leasing has engaged AGHI to operate
44 of the Current Hotels. The Participating Leases provide that effective upon
written notice by the Company of any monetary Event of Default under the
Participating Leases or a default under the Furniture, Fixtures and Equipment
("FF&E") Note, and during the continuance thereof, no management fees will be
paid to AGHI with respect to any Hotel. Any deferred management fee will accrue
without interest until any such default has been cured. In addition, each
Management Agreement which AGH Leasing enters into must provide that AGHI will
repay to the Company any payments made to it by AGH Leasing while any such
default has occurred and is continuing.
Prime Lessee
Capitalization. The Prime Lessee is required to maintain a minimum net
worth of $3.4 million through the end of 1998, and thereafter an amount equal to
17.5% of the aggregate rent paid to the Company in the prior year. Such net
worth must be maintained in the form of cash, marketable securities and/or
letter(s) of credit or any combination thereof. Moreover, Prime, which owns the
Prime Lessee, is contractually obligated to wholly own the Prime Lessee during
the term of the Participating Leases.
Lessee (AGH Leasing and Prime)
Maintenance and Improvements. The Participating Leases obligate the
Company to establish annually a reserve for capital improvements at each Current
Hotel (including the periodic replacement or refurbishment of FF&E). The
aggregate amount of such reserves is equal to 4.0% of total revenue for each
Hotel (which, on a consolidated pro forma basis for the years ended December 31,
1997 and 1996, represented approximately 5.4% and 5.5% of room revenue,
respectively). Any unexpended amounts will remain the property of the Company
upon termination of the Participating Leases. Otherwise, the Lessee will be
required, at its expense, to maintain the Hotels in good order and repair,
except for ordinary wear and tear, and to make non-structural, foreseen and
unforeseen, and ordinary and extraordinary, repairs (other than capital repairs)
which may be necessary and appropriate to keep the Current Hotels in good order
and repair.
The Lessee is not obligated to bear the cost of any capital improvements or
capital repairs to the Current Hotels. With the consent of the Company, however,
the Lessee, at its expense, may make capital additions, modifications or
improvements to the Current Hotels, provided that such action does not
significantly alter their character or purposes and maintains or enhances the
value of the Current Hotels. All such alterations, replacements and improvements
are subject to all the terms and provisions of the Participating Leases and will
become the property of the Company upon termination of the Participating Leases.
The Company owns substantially all personal property (other than inventory) not
affixed to, or deemed a part of, the real estate or improvements at the Current
Hotels, but does not own such personal property which would cause any portion of
the rents under the Participating Leases not to qualify as "rents from real
property" for REIT income test purposes.
Insurance and Property Taxes and Assessments. The Company is responsible
for paying for (i) real estate and personal property taxes and assessments at
the Current Hotels (except to the extent that personal property associated with
the Current Hotels is owned by the Lessee), (ii) casualty insurance on the
Current Hotels and (iii)
21
business interruption insurance covering the Base Rent and Participating Rent.
The aggregate real estate and personal property tax obligations for the Current
Hotels during the years ended December 31, 1997 and 1996 were approximately $6.3
and $4.3 million, respectively. The Lessee is required to pay or reimburse the
Company for all liability insurance on the Current Hotels, with extended
coverage, including comprehensive general public liability, workers'
compensation and other insurance appropriate and customary for properties
similar to the Current Hotels and naming the Company as an additional named
insured.
Events of Default. Events of Default under the Participating Leases and
the Lease Master Agreement include, among others, the following:
(i) the failure by the Lessee to pay Base or Participating Rent when due
and the continuation of such failure for a period of ten days after receipt by
the Lessee of notice from the Company;
(ii) the failure by the Lessee to observe or perform any other term of a
Participating Lease or the Lease Master Agreement and the continuation of such
failure for a period of 30 days after receipt by the Lessee of notice from the
Company thereof, unless the Lessee is diligently proceeding to cure, in which
case the cure period will be extended to 180 days;
(iii) if the Lessee shall generally not be paying its debts as they become
due or file a petition for relief or reorganization or arrangement or any other
petition in bankruptcy, for liquidation or to take advantage of any bankruptcy
or insolvency law of any jurisdiction, make a general assignment for the benefit
of its creditors, consent to the appointment of a custodian, receiver, trustee
or other similar officer with respect to it or any substantial part of its
assets, be adjudicated insolvent or take corporate action for the purpose of any
of the foregoing;
(iv) if the Lessee is liquidated or dissolved or commences proceedings to
effect the same, or ceases to do business or sells all or substantially all of
its assets ;
(v) if the Lessee voluntarily discontinues operations of a Current Hotel
for more than three days, except as a result of damage, destruction,
condemnation or force majeure; or
(vi) if an event of default beyond applicable cure periods occurs under the
Franchise License with respect to any Hotel as a result of any action or failure
to act by the Lessee or its agents (including AGHI).
In addition, a default of the type described above will result in a cross-
default of all other Participating Leases to which the Lessee is a party.
Indemnification. Under each of the Participating Leases, the Lessee has
agreed to indemnify, and is obligated to hold harmless, the Company from and
against all liabilities, costs and expenses (including reasonable attorneys'
fees and expenses) incurred by, imposed upon or asserted against the Company on
account of, among other things, (i) any accident or injury to persons or
property on or about the Current Hotels, including claims under liquor
liability, "dram shop" or similar laws; (ii) any misuse by the Lessee or any of
its agents of the leased property; (iii) any environmental liability (except to
the extent such liability results from a pre-existing condition) (see
"Environmental Matters" below); (iv) taxes and assessments in respect of the
Current Hotels (other than real estate and personal property taxes and
assessments (other than on property owned by the Lessee) and income taxes of the
Company on income attributable to the Current Hotels and capital impositions);
(v) any breach of the Participating Leases by the Lessee; or (vi) any breach of
any subleases related to the Current Hotels, provided, however, that such
indemnification does not require the Lessee to indemnify the Company against the
Company's own negligent acts or omissions or willful misconduct.
Assignment and Subleasing. The Lessee is not permitted to sublet all or
any part of the Hotels or assign its interest under any of the Participating
Leases, other than to an affiliate of the Lessee, without the prior written
consent of the Company. The Company has generally agreed to consent to any
sublease of any portion of any Current Hotel that sells alcoholic beverages to
the Beverage Corporations or of a retail portion of any Current Hotel (provided
such sublease will not cause any portion of the Rents to fail to qualify as
"rents from real property" for
22
REIT income qualification test purposes). See "Sublease" below. No such
assignment or subletting will release the Lessee from any of its obligations
under the Participating Leases.
Damage to Current Hotels. In the event of damage to or destruction of any
Current Hotel covered by insurance which then renders the hotel unsuitable for
its intended use and occupancy, the Company may elect not to repair, rebuild or
restore the hotel, in which event the Participating Lease shall terminate, and
the Company generally shall be entitled to retain any proceeds of insurance
related to such damage or destruction. In the event the Company terminates a
Participating Lease under such circumstances, the Company, at its option, must
either (i) pay the Lessee the fair market value of the Lessee's leasehold
interest in the remaining term of the lease (which amount will be determined by
discounting to present value, for each year of the remainder of the lease term,
cash flow attributable to such lease after deducting the cost component of the
applicable management fees, at an annual discount rate of 12% (for the purposes
of such calculation, the annual cash flow for each remaining year of the lease
term shall be equal to the cash flow attributable to such lease for the twelve
months ended on the lease termination date)) or (ii) offer to lease to the
Lessee a substitute hotel on terms that would create a leasehold interest in
such hotel with a fair market value equal to or exceeding the fair market value
of the Lessee's remaining leasehold interest under the Participating Lease to be
terminated.
In the event that damage to or destruction of a Current Hotel which is
covered by insurance does not render such hotel unsuitable for its intended use
and occupancy as a hotel, the Company or, at the Company's option, the Lessee,
generally will be obligated to repair or restore such hotel. In the event of
material damage to or destruction of any Hotel which is not covered by
insurance, the Company may either repair, rebuild or restore the hotel (at the
Company's expense) to substantially the same condition as existed immediately
prior to such damage or terminate the Participating Lease without penalty. In
the event of non-material damage to a Current Hotel, the Company is required to
repair, rebuild or restore the hotel at its expense. During any period required
for repair or restoration of any damaged or destroyed Hotel, rent will be
equitably abated.
Condemnation of Current Hotels. In the event of a total condemnation of a
Current Hotel, the relevant Participating Lease will terminate with respect to
such hotel as of the date of taking, and the Company and the Lessee will be
entitled to their shares of any condemnation award in accordance with the
provisions of the Participating Lease. In the event of a partial taking which
does not render the hotel unsuitable for the Lessee's use, the Lessee shall
restore the untaken portion of the hotel to a complete architectural unit, and
the Company shall contribute to the cost of such restoration that part of the
condemnation award required for such restoration.
Termination of Participating Leases upon Disposition of the Current Hotels.
In the event the Company enters into an agreement to sell or otherwise transfer
a Current Hotel, the Company will have the right to terminate the Participating
Lease with respect to such hotel upon 30 days' prior written notice upon either
(i) paying the Lessee the fair market value of the Lessee's leasehold interest
in the remaining term of the Participating Lease to be terminated (which amount
will be determined by discounting to present value, for each year of the
remainder of the lease term, cash flow attributable to such lease after
deducting the cost component of the applicable management fees, at an annual
discount rate of 12% (for the purposes of such calculation, the annual cash flow
for each remaining year of the lease term shall be equal to the cash flow
attributable to such lease for the twelve months ended on the lease termination
date)) or (ii) offering to lease to the Lessee a substitute hotel on terms that
would create a leasehold interest in such hotel with a fair market value equal
to or exceeding the fair market value of the Lessee's remaining leasehold
interest under the Participating Lease to be terminated.
Termination of Participating Leases upon Change in Tax Laws. In the event
that changes in federal income tax laws allow the Company or a subsidiary or
affiliate to directly operate hotels, the Company will have the right to
terminate all, but not less than all, Participating Leases with the Lessee, in
which event the Company will pay the Lessee the fair market value of the
remaining term of the Participating Lease.
Franchise Licenses. The Company has agreed that the Lessee will be the
licensee under each of the Franchise Licenses on the Current Hotels. Holiday
Inn, Promus (on behalf of Hampton Inn), Marriott and Hilton have agreed that
upon the occurrence of certain events of default by the Lessee under a Franchise
License, such franchisors will temporarily transfer the Franchise License for
the hotel to an operator designated by the Company and acceptable to such
franchisor to allow the new operator time to apply for a new Franchise License.
23
Sublease. In order to facilitate compliance with state and local liquor
laws and regulations, AGH Leasing subleases those areas of the Current Hotels
(other than the Radisson Hotel Arlington Heights and Wyndham Garden Hotel
Marietta) that comprise the restaurant and other areas where alcoholic beverages
are served to the Beverage Corporations. In accordance with the terms of the
Beverage Subleases, each Beverage Corporation is obligated to pay to the Lessee
rent payments equal to 30% of each such corporation's annual gross revenues
generated from the sale of food and beverages generated from such areas;
however, pursuant to the Participating Leases, such subleases will not reduce
the Participating Rent payments to the Company, which it is entitled to receive
from such food and beverage sales.
Other Lease Covenants. The Lessee has agreed that during the term of the
Participating Leases it will maintain a ratio of total debt to Consolidated Net
Worth (as determined in the Participating Leases) of less than or equal to
50.0%, exclusive of capitalized leases and the FF&E Note. In the event the
Lessee is required to pledge any of its assets to the Company's lenders in
connection with a Company hotel financing, and such assets are subsequently sold
in a foreclosure proceeding, the Lessee will be entitled to be reimbursed by the
Company for the fair market value of such assets.
Inventory. The initial standard inventory of goods and supplies required
in the operation of the hotels has been purchased at the Lessee's expense and is
owned by the Lessee. Any inventory used by the Lessee in the operation of each
Hotel shall, upon termination of its Participating Lease, be purchased by the
Company or its designee for its fair market value.
Approval of Managers by Company. The Company has the right to approve
(which approval will not be unreasonably withheld) the engagement by the Lessee
of any operator of a Current Hotel other than AGHI, an affiliate of AGHI, Prime
or an affiliate of Prime. The Company has the right to approve the payment of
management fees to AGHI under the Management Agreements in excess of 3.5% of the
gross revenues at a particular hotel.
THE MANAGEMENT AGREEMENTS
AGHI
AGH Leasing has engaged AGHI to manage 44 of the Current Hotels pursuant to
the Management Agreements. The following is a summary of the Management
Agreements and certain related agreements:
Management Agreement Terms. Each Management Agreement has an initial
twelve-year term. In the event of the extension or renewal of the term of the
applicable Participating Lease, the Management Agreement will be similarly
extended or renewed.
Management Fees. Each Management Agreement requires AGH Leasing to pay
AGHI a monthly base fee equal to 1.5% of gross revenues, plus an incentive fee
of up to 2.0% of gross revenues. AGHI is entitled to receive an incentive fee
equal to 0.025% of annual gross revenues for each 0.1% increase in annual gross
revenues over the gross revenues for the preceding twelve-month period up to the
maximum incentive fee. Such incentive fee is payable quarterly and is adjusted
at the end of each calendar year to reflect actual results. Every four years the
basis upon which the incentive fee is calculated is required to be renegotiated
between AGH Leasing and the Manager. The payment of the management fees to AGHI
by AGH Leasing are subordinate to AGH Leasing's obligations to the Company under
the Participating Leases. The management fees payable to AGHI during 1996 and
1997, respectively, will be earned only to the extent that AGH Leasing's taxable
income during each such year exceeds the sum of rent payable under the
Participating Leases, plus AGH Leasing overhead expense, plus $50,000. Each
Management Agreement requires AGHI to repay to AGH Leasing within 60 days after
the end of each such year any management fees previously paid but not earned by
AGHI under the Management Agreements. In addition, AGH Leasing has agreed to
reimburse AGHI at cost for all expenses incurred in supervising capital
improvements to be performed at the hotels. AGHI will be reimbursed, at the rate
of $1,500 per month for each full-service hotel and $1,000 per month for each
limited-service hotel (adjusted for the increase in CPI at the beginning of each
year) for accounting and financial services performed by AGHI, which will be
funded by AGH Leasing under the Participating Leases.
24
Termination of Participating Lease. In the event of a termination of a
Participating Lease for a Hotel, the Management Agreement for such hotel also
will terminate.
Obligation to Purchase Common Stock. Messrs. Jorns and Wiles, who are
stockholders of AGHI and are also executive officers of the Company, have agreed
to use 50.0% of the dividends (net of the tax liability attributed to such
dividends) received by them from AGHI that are attributable to AGHI's earnings
from the management of hotels owned by the Company (as determined in good faith
by such officers) to purchase, subject to compliance with applicable securities
laws, annually in the open market, during each of the twelve years following the
closing of the IPO, additional shares of Common Stock, or, if any such purchase
would violate the ownership limitation in the Company's Charter, or at the
option of the Operating Partnership, OP Units. For the year ended December 31,
1996, Messrs. Jorns and Wiles were required to purchase 700 and 200 shares of
common stock respectively.
Certain Transfer Restrictions. The stockholders of AGHI have agreed, for
so long as more than 50.0% of the Management Agreements with respect to the
Initial Hotels remain in place, to grant to AGH Leasing or its designee a right
of first refusal to acquire, under certain circumstances, any stock of AGHI that
is proposed to be sold in a Change of Control Transaction (as defined below).
AGH Leasing assigned this right to the Company or its designee. This right is
subordinate to a right of first refusal in favor of AGHI and the existing
stockholders of AGHI set forth in AGHI's existing stockholders' agreement. For
this purpose, a Change in Control Transaction means a sale of stock in AGHI that
will result in the ability of a person (other than a current stockholder of
AGHI) and his or its controlled Affiliates to elect at least a majority of the
Board of Directors of AGHI. A Change in Control Transaction does not include (i)
an underwritten public offering of common stock of AGHI, (ii) the transfer of
stock to a spouse of an AGHI stockholder, (iii) the transfer of stock to a trust
for the benefit of the spouse and/or children of an AGHI stockholder, or (iv)
the transfer of stock to any corporation or other entity of which a stockholder
controls at least 50.0% of the voting interests. The stockholders of AGHI have
also granted to AGH Leasing or its designee, for so long as more than 50.0% of
the initial Management Agreements remain in place, a right of first offer to
acquire such stockholders' interests in AGHI prior to any proposed merger or
business combination transaction involving AGHI that would result in the
stockholders of AGHI or their affiliates holding less than 25.0% of the
interests in the surviving entity. The Lessee has assigned this right to the
Company or its designee.
Wyndham
AGH Leasing has engaged Wyndham to manage the Wyndham Garden Hotel
Marietta. The management agreement with Wyndham has an initial twelve year term
and provides for the payment of a base management fee equal to 1.5% of gross
revenues at the hotel plus an incentive management fee of up to 1.5% of gross
revenues. Wyndham will be entitled to receive the incentive management fee
during the first two years of the term of the agreement if (i) annualized 1997
gross revenues for the hotel exceed 1996 gross revenues for the hotel by at
least 6% and (ii) 1998 gross revenues for the hotel exceed 1996 gross revenues
for the hotel by at least 12%. Thereafter, the incentive management fee will be
earned if annual gross revenues for the hotel exceed the 1998 gross revenues for
the hotel by at least the cumulative percentage increase in CPI since 1998. AGH
Leasing's payment of the base management fee to Wyndham is subordinated to the
payment of Base Rent under the Participating Lease relating to the hotel, and
the payment of the incentive management fee to Wyndham is subordinated to the
payment of the Base Rent and Participating Rent thereunder. In addition, Wyndham
will be reimbursed by AGH Leasing, at an initial rate of approximately $4,960
per month, for accounting and financial services performed by Wyndham.
MORTGAGE INDEBTEDNESS
December 31 Hotels
The Holiday Inn Select Dallas DFW South is subject to non-recourse mortgage
indebtedness in the outstanding principal amount of $13.7 million as of December
31, 1997 (the "DFW South Loan"). The DFW South Loan was entered into on January
30, 1996, bears interest at the rate of 8.75% per annum and is payable in equal
monthly installments of principal and interest of approximately $125,930 each.
The DFW South Loan matures on February 1, 2011, at which time a balloon payment
in the amount of approximately $6,120,000 will be due and payable. The loan may
not be prepaid in whole or in part until after February 1, 1998 and after such
date may only
25
be prepaid in whole with payment of a yield maintenance premium generally equal
to the discounted present value of all interest payments due between the
prepayment date and maturity of the loan.
The Courtyard by Marriott Meadowlands is subject to non-recourse mortgage
indebtedness that secures two notes in the outstanding principal amounts of
approximately $4.4 million and $440,000, respectively, as of December 31, 1997
(the "Secaucus Loans"). The $4.4 million portion of the Secaucus Loans, which
was entered into on December 30, 1993, bears interest at a rate of 7.5% per
annum and is payable in equal monthly installments of principal and interest of
approximately $36,800 each. This portion of the Secaucus Loans matures on
December 1, 2001, at which time a balloon payment in the amount of approximately
$3,985,000 will be due and payable.
The $440,000 portion of the Secaucus Loans was entered into on January 11,
1996, bears interest at a rate of 7.89% per annum and is payable in equal
monthly installments of principal and interest of approximately $14,000 that
will fully amortize the loan as of January 1, 2001. In connection with the IPO
and the transfer of the Courtyard by Marriott Meadowlands hotel to a subsidiary
of the Operating Partnership, the Company agreed to guarantee to the holder of
the Secaucus Loans payment of rent under the ground lease relating to the hotel
($150,000 per annum), real estate taxes ($176,700 for the twelve months ended
December 31, 1997) and capital reserves required by the Secaucus Loans (4% of
the gross revenues), and guarantee that, after a default under the Secaucus
Loans, Base Rent from the Participating Lease will be applied to the Secaucus
Loans, in each case until such loans are satisfied or such hotel is transferred
(by foreclosure or otherwise) to the holder of such loans.
The DoubleTree Guest Suites Atlanta is subject to a non-recourse mortgage
note encumbering the hotel in the outstanding principal amount, as of December
31, 1997, of approximately $9.4 million (the "DoubleTree Atlanta Loan"). The
DoubleTree Atlanta Loan was entered into on June 14, 1995, bears interest at the
rate of 9.75% per annum and is payable in equal monthly installments of
principal and interest of approximately $93,100 each. The DoubleTree Atlanta
Loan matures on July 1, 2002, at which time a balloon payment of approximately
$8.2 million will be due and payable.
The Radisson Hotel Arlington Heights is subject to a one-year mortgage note
in the principal amount of approximately $8.2 million (the "Radisson Loan"). The
Radisson Loan bears interest at the rate of 7.5% per annum, and will require
quarterly payments in arrears of interest only of $154,100. The Radisson Loan
matured on February 28, 1998, at which time a balloon payment of approximately
$8.2 million was paid.
1998 Acquisition Hotels
The Crowne Plaza Portland is subject to a non-recourse mortgage note
encumbering the hotel in the outstanding principal amount, as of December 31,
1997, of approximately $5.3 million (the "Portland Loan"). The Portland Loan
bears interest at the rate of 10.5% per annum and is payable in equal monthly
installments of principal and interest of approximately $56,000 each. The
Portland Loan matures in December 2004, at which time a balloon payment of
approximately $4.1 million will be due and payable.
The Ramada Plaza Shelton is subject to a non-recourse mortgage note
encumbering the hotel in the outstanding principal amount, as of December 31,
1997, of approximately $4.9 million (the "Shelton Loan"). The Shelton Loan
bears interest at the rate of 10.5% per annum and is payable in equal monthly
installments of principal and interest of approximately $52,000 each. The
Shelton Loan matures in December 2004, at which time a balloon payment of
approximately $3.9 million will be due and payable.
The Holiday Inn O'Hare International Airport is subject to a non-recourse
mortgage note encumbering the hotel in the outstanding principal amount, as of
December 31, 1997, of approximately $21.7 million (the "O'Hare Loan"). The
O'Hare Loan bears interest at the rate of 9.0% per annum and is payable in equal
monthly installments of principal and interest of approximately $228,210 each.
The O'Hare Loan matures on January 1, 2012.
CREDIT FACILITIES
Neither the Company's Bylaws nor its Charter limits the amount of
indebtedness the Company may incur. To ensure that the Company has sufficient
liquidity to conduct its operations, including funding the acquisition of
26
additional hotels, making renovations and capital improvements to hotels and for
working capital requirements, the Company has access to the Credit Facilities.
At December 31, 1997, the Credit Facility was secured by, among other things,
first mortgage liens on all of the hotels then owned by the Company, other than
Holiday Inn Dallas DFW Airport South, Courtyard by Marriott Meadowlands,
Radisson Hotel Arlington Heights and DoubleTree Guest Suites Atlanta. On
February 13, 1998, the Company replaced the Credit Facility with two unsecured
credit facilities in the aggregate principal amount of $600 million (the "New
Credit Facilities"). The financial covenants contained in the New Credit
Facilities require the Company to maintain the debt service coverage ratio of at
least 2.0 to 1.0, and an interest coverage ratio of not less than 2.15 to 1.0
through December 31, 1998 and not less than 2.50 to 1.0 thereafter and to
maintain a minimum net worth of $450 million plus 75% of the net proceeds from
stock offerings and offerings of partnership interests in the Operating
Partnership. In addition, the New Credit Facilities contain limits on total
indebtedness based on a multiple of EBITDA (earnings before interest, taxes,
depreciation and amortization) that adjust downward as of December 31, 1998. As
a result of the adjustment of certain financial covenants that occur on December
31, 1998, the Company expects that it would be required to repay or refinance a
portion of the New Credit Facilities at that time. In addition, the New Credit
Facilities provide that the lenders must consent to any development activities
by the Company other than development in connection with the limited expansion
of existing hotels. Also, the New Credit Facilities' lenders must approve the
lessee, manager and the franchise brand of the Company's Hotels. In addition,
the New Credit Facilities require that the current limited partners of AGH
Leasing own no less than 65% of the limited partnership interests of AGH Leasing
at all times.
Outside of the New Credit Facilities, the Company and its subsidiaries may
incur up to $70 million in additional qualified debt, including the debt assumed
in connection with the acquisitions of the Holiday Inn Select Dallas DFW Airport
South, Courtyard by Marriott Meadowlands, Radisson Hotel Arlington Heights,
DoubleTree Guest Suites Atlanta, Crowne Plaza Portland, Ramada Plaza Shelton and
the Holiday Inn O'Hare International Airport without prior consent of its New
Credit Facilities' lenders. The New Credit Facilities have a three-year term
and bear interest based upon the 30-day, 60-day or 90-day LIBOR (5.6875%,
5.6875% and 5.6875% as of March 27, 1998) at the option of the Company, plus an
applicable margin for all or part of the Facilities (the "Margins"). The
Margins, which are adjusted on a quarterly basis, range from a minimum of 1.40%
per annum to a maximum of 2% per annum, based upon certain leverage ratios. As
of March 27, 1998 the Margins were 1.875% per annum. Economic conditions could
result in higher interest rates, which could increase debt service requirements
on borrowings under the New Credit Facilities and which could reduce the amount
of cash available for distribution.
GROUND LEASES
Fifteen of the Hotels are subject to ground leases with third parties with
respect to the land underlying each such hotel. The ground leases are triple
net leases which require the tenant to pay all expenses of owning and operating
the hotel, including real estate taxes and structural maintenance and repair.
One other Hotel is subject to a ground lease with the state of Florida for
certain offshore real property accessible by the guests of the hotel.
December 31 Hotels
The Courtyard by Marriott-Meadowlands is subject to a ground lease with
respect to approximately 0.37 acres. The ground lease terminates in March 2036,
with two ten-year options to renew. The lease requires a fixed rent payment
equal to $150,000 per year, subject to a 25.0% increase every five years
thereafter beginning in 2001 and a percentage rent payment equal to 3.0% of
gross room revenues.
The Wyndham Albuquerque Airport Hotel is subject to a ground lease with
respect to approximately 10 acres. The ground lease terminates in December
2013, with two five-year options to renew. The lease requires a fixed rent
payment equal to $19,180 per year subject to annual consumer price index
adjustment and a percentage rent payment equal to 5.0% of gross room revenues,
3.0% of gross receipts from the sale of alcoholic beverages, 2.0% of gross
receipts from the sale of food and non-alcoholic beverages and 1.0% of gross
receipts from the sale of other merchandise or services. The lease also
provides the landlord with the right, subject to certain conditions, to require
the Company, at its expense, to construct 100 additional hotel rooms if the
occupancy rate at the hotel is 85.0% or more for 24 consecutive months and to
approve any significant renovations scheduled at the hotel. The occupancy rate
at the Wyndham Albuquerque Airport Hotel for the years ended December 31, 1997
and 1996 was 75.3% and 80.4%, respectively.
27
The Hilton Hotel Toledo is subject to a ground lease with respect to
approximately 8.8 acres. The ground lease terminates in June 2026, with four
successive renewal options, each for a ten-year term. The lease requires annual
rent payments equal to $25,000, increasing to $50,000 or $75,000 if annual gross
room revenues exceed $3.5 million or $4.5 million, respectively.
The Wyndham Airport Hotel San Jose is subject to a ground sublease with
respect to approximately 5.3 acres, which in turn is subject to a ground lease
covering a larger tract of land. The sublease terminates in 2022, with one 30-
year option to renew. The sublease requires the greater of a fixed minimum
annual rent of $75,945 (increasing to an annual minimum rent of $100,000 if the
option is exercised) or, in the aggregate, 4.0% of gross room revenues, 2.0% of
gross food receipts, and 3.0% of gross bar and miscellaneous operations
receipts. The sublease also provides the sublessor with the right to approve
any significant renovations scheduled at the hotel.
The Westin Resort Key Largo property includes approximately 42,500 square
feet of off-shore bay bottom land in Florida Bay on which a commercial marina is
operated pursuant to a lease from the Board of Trustees of the Internal
Improvement Trust Fund of the State of Florida, as lessor. The lease, which
terminates in May 2021, requires an annual lease fee of approximately $3,100.
SKL of Florida, Inc., the lessee under the lease and the seller of the hotel,
gave a quit claim assignment of its interest in the lease to the Company upon
the closing of the purchase of the hotel.
1998 Acquisition Hotels
The Sheraton Four Point Hotel Mt. Arlington is encumbered by a lease on the
building and underlying land. The lease expires in August 1998 and has 99 one
year renewal options. Renewals will be automatic unless the lessor is notified
in writing, at least 60 days before the end of the initial term or any renewal
term, of the lessee's election not to renew. In the event the lessee notifies
the lessor of its election not to renew the lease, the lessor shall have the
option to convert the lease to a management agreement between the lessor, as
owner, and the lessee, as managing agent. Management fee payments would equal
5% of gross receipts from the operation of the hotel and would expire five years
after its commencement. Minimum annual lease payments are based on i) an amount
equal to the required monthly bond payments due from the lessor to the New
Jersey Economic Development authority, ii) monthly installments due to the
lessor of $5,833 and iii) a percentage rent due to the lessor payable annually,
in the amount of 5% of gross room receipts in excess of $20,000, multiplied by
the number of guest rooms, less applicable use and occupancy taxes.
The DoubleTree Resort Surfside Clearwater Beach is encumbered by a ground
lease expiring in February 2079. Annual lease payments are based upon the
greater of $283,970 base rent or a percentage rent equal to 3% of gross room
revenues and 1% of gross receipts from the sale of food and beverage. The
annual base rent shall be adjusted every 10 years to equal the average rental
payments for the preceding 10 year period.
The Courtyard by Marriott Disney Village is encumbered by a ground lease
expiring on September 30, 2046. Annual lease payments are based upon the
greater of a $500,000 base rent or a percentage rent equal to 8.5% of gross room
revenues, 4% of gross receipts from the sale of food, 6% of gross receipts from
the sale of beverages, 25% of gross receipts from subleases, concessionaires and
rent of exhibition and meeting and conference facilities and 7% of gross
receipts from all other sources, including sale of merchandise, service charges
and vending machines. The annual base rent shall be adjusted every five years
to the greater of the minimum annual rent during the prior five years or 75% of
the average total rent paid during such five year period.
The Radisson Inn Rochester is encumbered by a ground lease expiring on
December 31, 2021 with two 25 year renewal options. The lease requires minimum
annual rent payments of $60,000 through 1999 and thereafter an annual rent of
$60,000 plus a percentage rent payment equal to 1% of gross receipts in excess
of minimum annual rent.
28
Proposed Acquisition Hotels
The Radisson Hotel and Suites Secaucus is encumbered by a ground lease
expiring in June 2062. The lease requires minimum rent payments equal to the
sum of the number of guest rooms times $1,000 and percentage rent payments equal
to 10% of the gross room revenue in excess of the number guest rooms times
$23,500.
The Ramada Inn Fairfield is encumbered by a ground lease expiring in November
2000 with two extensions options of 10 years each and one extension option of 20
years. The lease requires minimum annual lease payments of $364,440 payable in
equal monthly installments.
The Ramada Inn Armonk is encumbered by a ground lease expiring in June 2000
with five additional five year renewal options. The lease requires minimum
annual lease payments of $261,468 plus a percentage rent equal to 10% of gross
room receipts in excess of $7,000, multiplied by the number of guest rooms at
the hotel, less applicable use and occupancy taxes.
The Radisson Hotel and Suites Fairfield is encumbered by a lease on the
building and underlying land. The lease expires in December 1999 and has three
renewal options of 10 years each. Minimum annual lease payments are based upon
the amount due under existing mortgages held by the lessor plus an amount equal
to 10% of net operating income.
The Holiday Inn Princeton is encumbered by a lease on the building and
underlying land. The lease expires in December 2004 and has three renewal
options of 10 years each. Minimum annual lease payments are based upon the
amount due under existing mortgages held by the lessor plus a percentage of net
operating income, as defined, ranging from 5% to 22.5%.
The Ramada Inn Elmsford is encumbered by a lease on the building and
underlying land. The lease expires in December 2003 and has five renewal
options of five years each. The lease requires minimum annual lease payments of
$273,552 plus a percentage rent of 10% of gross room receipts in excess of
$7,500, multiplied by the number of guest rooms at the hotel, less all
applicable use and occupancy taxes.
The Sheraton Hotel Saratoga Springs is encumbered by a lease on the building,
underlying land and certain equipment. The lease expires in December 2007.
Minimum annual lease payments are based on an amount equal to one-sixth of the
amount payable by the lessor as interest on the next interest payment date and
one-twelfth of the amount payable by the lessor as principal on the next bond
payment date.
FRANCHISE AGREEMENTS
Fifty-one of the Current Hotels are operated under Franchise Licenses with
nationally recognized hotel companies. All of the Proposed Acquisition Hotels
are operated under Franchise Licenses and the Company anticipates that most of
the additional hotels in which it invests will be operated under Franchise
Licenses. The Franchise Licenses generally specify certain management,
operating, record keeping, accounting, reporting, and marketing standards and
procedures with which the Lessee must comply. The Franchise Licenses obligate
the Lessee to comply with each franchisor's standards and requirements with
respect to training of operational personnel, safety, maintaining specified
insurance, the types of services and products ancillary to guest room services
that may be provided by the Lessee, display of signage, and the type, quality,
and age of FF&E included in guest rooms, lobbies, and other common areas.
The Franchise Licenses provide for termination at each franchisor's option
upon the occurrence of certain events, including the Lessee's failure to pay
royalties and fees or perform its other covenants under the respective license
agreement, bankruptcy, abandonment of the franchise, commission of a felony,
assignment of the license without the consent of the franchisor, or failure to
comply with applicable law in the operation of the relevant hotel. Certain of
the Franchise Licenses require that the Company guarantee the payment of
franchise fees, liquidated damages and termination fees on behalf of the Lessee.
The Lessee is not entitled to terminate the Franchise Licenses unless it
receives the prior written consent of the Company. The Franchise Licenses do
not renew automatically upon expiration. The Lessee is responsible for making
all payments under the Franchise Licenses to
29
the franchisors. Under the franchise agreements, the Lessee pays franchise
royalty fees ranging from 2.0% to 5.0% of room revenue.
INSURANCE
The Company carries comprehensive liability, fire, extended coverage and
business interruption insurance with respect to the Current Hotels, with policy
specifications, insured limits and deductibles customarily carried for similar
hotels. The Company will carry similar insurance with respect to any other
hotels developed or acquired in the future. There are, however, certain types
of losses (such as losses arising from wars, certain losses arising from
hurricanes and earthquakes, and losses arising from other acts of nature) that
are not generally insured because they are either uninsurable or not
economically insurable. Should an uninsured loss or a loss in excess of insured
limits occur, the Company could lose its capital invested in the affected hotel,
as well as the anticipated future revenues from such hotel, and would continue
to be obligated on any mortgage indebtedness or other obligations related to the
hotel. Any such loss could adversely affect the business of the Company.
Management of the Company believes the Current Hotels are reasonably insured in
accordance with industry practices.
ITEM 3: LEGAL PROCEEDINGS
Neither the Company nor the Operating Partnership is currently involved in any
material litigation nor, to the Company's knowledge, is any material litigation
currently threatened against the Company or the Operating Partnership. AGHI and
the Lessee have advised the Company that they currently are not involved in any
material litigation, other than routine litigation arising in the ordinary
course of business, substantially all of which is expected to be covered by
liability insurance.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year ended December 31, 1997.
PART II
Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET AND DISTRIBUTION INFORMATION
The Company's Common Stock began trading on the NYSE on July 26, 1996 under
the symbol "AGT." On March 27, 1998, the last reported sale price per share of
Common Stock on the NYSE was $26.6875 and there were 99 holders of record of
the Company's Common Stock. The following table sets forth the quarterly high
and low closing sale prices per share of Common Stock reported on the NYSE and
the cash distributions declared per share by the Company with respect to each
such period.
30
Cash
Price Range Distribution
------------------------------ Declared Per
High Low Share
------------ ----------- ---------------
1996
Third Quarter from July 26, 1996 $ 19 $17 1/2 $0.2476 (1)
Fourth Quarter 23 3/4 18 7/8 $ 0.4075
1997
First Quarter 28 3/8 23 1/8 $ 0.4075
Second Quarter 27 1/8 23 $ 0.4075
Third Quarter 29 1/4 24 3/8 $ 0.4275
Fourth Quarter 29 7/8 24 5/8 $ 0.4275
1998
First Quarter through March 27, 1998 28 1/4 26 3/8 (2)
(1) Represents a pro rata distribution of the Company's initial quarterly
distribution of $0.4075 per share of Common Stock, based on a partial
calendar quarter beginning on July 31, 1996 (the closing date of the IPO)
through September 30, 1996.
(2) On March 12, 1998, the Company declared a distribution of $0.4275 per share
relating to the first quarter of 1998 that will be paid on April 30, 1998
to stockholders of record as of April 15, 1998.
The Company intends to make regular quarterly distributions to its
stockholders. Future distributions by the Company will be at the discretion of
the Board of Directors and will depend on the Company's financial condition, its
capital requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Directors deems
relevant. There can be no assurance that any such distributions will be made by
the Company.
In order to maintain its qualification as a REIT, the Company must make annual
distributions to its stockholders of at least 95% of its taxable income
(excluding net capital gains). Under certain circumstances, the Company may be
required to make distributions in excess of cash available for distribution in
order to meet such distribution requirements. In such event, the Company would
seek to borrow the amount to obtain the cash necessary to make distributions to
retain its qualification as a REIT for federal income tax purposes. The
distribution made in 1997 and 1996 represent a 6.1% and an 18% return of
capital, respectively.
RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1997, each of the Company's private issuances of shares of
Common Stock and the Operating Partnership's private issuances of OP Units has
been in reliance on an exemption from registration under Section 4(2) of the Act
in the amounts and for the consideration set forth below.
On June 27, 1997, the Company privately issued 266,301 Class B OP Units as
part of the purchase of the Hilton Hotel Cocoa Beach. At the time of issuance,
the Class B OP Units were valued at $24.20 per unit. On July 16, 1997 the Class
B OP Units automatically converted into standard OP Units.
On July 14, 1997, as part of the terms of the strategic alliance between
Wyndham and the Company, an affiliate of Wyndham purchased 112,969 shares of
restricted Common Stock at a negotiated price of $22.13 per share. The shares
were purchased in connection with the conversion of the LeBaron Airport Hotel to
the Wyndham San Jose Airport Hotel.
On October 14, 1997, the Company issued under the Company's Non-Employee
Directors' Incentive Plan, 1,308 shares of Common Stock to the Board of
Directors for compensation in accordance with their agreement to serve as
directors of the Company. The shares were issued at $26.00 per share.
On November 30, 1997, the Company privately issued 13,650 Class B OP Units as
part of the purchase of the Courtyard by Marriott Durham. At the time of
issuance, the Class B OP Units were valued at $26.85 per unit. On December 31,
1997, these Class B OP Units automatically converted into standard OP Units.
31
On December 31, 1997, in accordance with the ABKB/LaSalle Agreements, the
Company privately sold an additional 1,368,196 shares of its Common Stock to
certain investment funds and separate accounts advised by ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited Partnership at a
negotiated price of $25.216 generating net proceeds of approximately $34.2
million.
Subsequent to December 31, 1997 the following Sales of Unregistered Securities
occurred:
On January 2, 1998, in accordance with the ABKB/LaSalle Agreements, the
Company privately sold an additional 495,700 shares of Common Stock to certain
investment funds and separate accounts advised by ABKB/LaSalle Securities
Limited Partnership and LaSalle Advisors Limited Partnership at a negotiated
price of $25.216 generating net proceeds of approximately $12.5 million.
On January 8, 1998, the Company privately issued 518,437 Class B OP Units as
part of the purchase price of the Prime Portfolio Group I Hotels ("Prime Group I
Acquisition Hotels"). At the time of issuance, the Class B OP Units were valued
at $26.697 per unit. On April 16, 1998 the Class B OP Units will automatically
convert into standard OP Units.
On January 15, 1998, in accordance with the ABKB/LaSalle Agreements, the
Company privately sold the balance of 118,972 shares of its Common Stock to
certain investment funds and separate accounts advised by ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited Partnership at a
negotiated price of $25.216 generating net proceeds of approximately $3.0
million. With the January 15 transaction, all shares of Common Stock, which
were to be issued pursuant to the ABKB/LaSalle Agreements, had been issued.
On February 3, 1998, the Company privately issued 1,308,406 Class C OP as part
of the purchase price of the Holiday Inn O'Hare International Hotel. At the
time of issuance, the Class C OP Units were valued at $27.514 per unit. The
Class C OP Units bear a preferred annual distribution rate of $1.89 per Class C
OP Unit until such time as the dividend distribution rate for the Class C OP
Units shall equal the distribution rate on the Common Stock. In addition, the
holders of the Class C OP Units are entitled to receive additional OP Units if
the fair market value of the Common Stock (as reported on the New York Stock
Exchange, Inc.) is not trading for at least $30 per share on the anniversary
date of the closing of the acquisition.
ITEM 6: SELECTED FINANCIAL DATA
The following tables set forth selected historical financial data for the
Company as of December 31, 1997 and for the period from July 31, 1996 through
December 31, 1996 and selected pro forma consolidated financial data for the
Company as of and for the years ended December 31, 1997 and 1996.
The pro forma and other data are presented as if all equity offerings since
the IPO through March 27, 1998 (the "Offerings"), the acquisition of all Hotels
and the consummation of the pro forma 1998 Offering as defined in footnote 1 to
the Selected Historical and Pro Forma Financial Data and the application of the
net proceeds therefrom had occurred on January 1, 1996 and therefore incorporate
certain assumptions that are included in the Notes to the Pro Forma Statements
of Operations. The pro forma balance sheet data is presented as if the
acquisition of the Hotels and the consummation of the Offerings had occurred on
December 31, 1997. The pro forma statements of operations do not include income
on the pro forma cash and cash equivalents in accordance with the rules and
regulations of the Commission.
The pro forma information does not purport to represent what the Company's
financial position or the Company's results of operations would have been if the
Offerings, the acquisition of all Hotels and the consummation of the pro forma
1998 Offering had, in fact, occurred on such dates, or to project the Company's
financial position or results of operations at any future date or for any future
period.
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and all of the financial statements and notes thereto included
elsewhere in this document.
32
AMERICAN GENERAL HOSPITALITY CORPORATION
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
Pro Forma (1)
Historical For the Year Ended
------------------------------------------ ---------------------------------
July 31, 1996
Year Ended through
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------------------------------------ -------------- --------------
STATEMENTS OF OPERATIONS DATA:
Participating Lease revenue (2) $ 59,934,337 $ 13,387,719 $ 169,004,147 $ 146,399,212
Office building rental income 1,205,465 - 2,340,046 2,143,833
Interest income 771,955 108,075 771,955 99,473
-------------------- ----------------- -------------- -------------
Total revenue 61,911,757 13,495,794 172,116,148 148,642,518
-------------------- ----------------- -------------- -------------
Depreciation 13,970,289 2,635,380 48,962,064 46,175,382
Amortization 1,105,898 273,425 1,532,606 1,532,606
Real estate and personal property taxes and
property insurance 7,073,323 1,444,592 18,477,801 16,270,694
Office building operating expenses 596,939 - 1,255,550 1,344,552
General and administrative (3) 1,999,923 822,113 3,066,571 3,000,136
Ground lease expense 1,271,639 545,279 7,147,355 6,666,322
Amortization of unearned officers'
compensation (4) 125,729 36,979 125,729 88,750
Interest expense 9,048,898 1,412,117 39,498,866 36,861,263
-------------------- ----------------- -------------- -------------
Total expenses 35,192,638 7,169,885 120,066,542 111,939,705
-------------------- ----------------- -------------- -------------
Income before minority interest 26,719,119 6,325,909 52,049,606 36,702,813
Minority interest (5) 3,234,189 1,196,728 5,764,179 4,064,615
-------------------- ----------------- -------------- -------------
Net income applicable to common stockholders $ 23,484,930 $ 5,129,181 $ 46,285,427 $ 32,638,198
==================== ================= ============== =============
Net income per basic common share $ 1.60 $ 0.63 1.48 $ 1.04
==================== ================= ============== =============
Weighted average number of basic shares of
Common Stock outstanding 14,678,160 8,122,139 31,275,051 31,267,768
==================== ================= ============== =============
Net income per diluted common share $ 1.58 $ 0.63 $ 1.47 $ 1.04
==================== ================= ============== =============
Weighted average number of diluted shares of
Common Stock outstanding 14,841,343 8,164,774 31,438,234 31,310,404
==================== ================= ============== =============
Historical Pro Forma (1)
----------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------------
1997 1996 1997
----------------------- ------------------------- ---------------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 800,255 $ 3,888,281 $ 800,255
Investments in hotel properties, net 569,589,828 230,760,818 1,347,669,003
Total assets 585,088,049 243,115,355 1,364,667,125
Debt 77,452,236 76,622,398 545,399,692
Minority interest in Operating Partnership 43,356,608 29,125,020 88,400,006
Stockholders' equity 443,249,547 127,461,111 709,837,769
Pro Forma (1)
Historical For the Year Ended
------------------------------------------ -------------------------------------
July 31, 1996
Year Ended through
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------------ --------------------- -------------- -----------------
Funds From Operations (6) $ 35,764,199 $ 7,266,474 $ 89,825,239 $ 73,699,936
Cash Available for Distribution (7) 30,954,486 6,105,233 79,134,133 64,256,834
Net cash provided by operating activities (8) 42,430,319 8,825,793 102,670,005 84,499,552
Net cash used in investing activities (9) (328,193,431) (186,447,491) (13,821,749) (12,364,900)
Net cash provided by (used in) financing
activities (10) $ 282,675,087 $ 181,509,979 $(53,998,076) $(52,745,443)
Weighted average number of basic shares of
Common Stock and OP Units outstanding 16,705,155 10,067,025 35,174,984 35,167,701
Weighted average number of diluted shares of
Common Stock and OP Units outstanding 16,868,338 10,067,025 35,338,167 35,210,337
33
AGH LEASING, L.P.
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
Pro Forma (1)
Historical For the Year Ended
------------------------------------------ -------------------------------------
July 31, 1996
Year Ended through
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------------ --------------------- -------------- -----------------
STATEMENTS OF OPERATIONS DATA:
Room revenue $ 123,965,649 $ 26,725,200 $ 252,513,441 $ 221,451,484
Food and beverage revenue 35,595,835 8,374,459 76,703,050 71,764,245
Other revenue 8,031,070 1,691,472 16,327,231 15,906,776
Minority interest income 1,802,558 2,874,156 1,284,177
------------------ --------------------- -------------- -----------------
Total revenue 169,395,112 36,791,131 348,417,878 310,406,682
------------------ --------------------- -------------- -----------------
Hotel operating expenses 110,622,712 24,051,041 228,830,255 209,035,972
Depreciation and amortization 103,997 33,003 103,997 69,753
Interest expense 26,808 13,314 264,064 31,689
Other expense 158,113 27,093 411,226 359,009
Participating Lease expense (2) 59,934,337 13,387,719 120,128,336 103,506,853
------------------ --------------------- -------------- -----------------
Net loss $ (1,450,855) $ (721,039) $ (1,320,000) $ (2,596,594)
================== ===================== ============== =================
PRIME LESSEE
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
Pro Forma (1)
For the Year Ended
-------------------------------------------------
December 31, 1997 December 31, 1996
--------------------- ----------------------
STATEMENTS OF OPERATIONS DATA:
Room revenue $ 88,079,205 $ 75,762,299
Food and beverage revenue 38,979,060 35,149,769
Other revenue 4,135,657 3,557,400
Minority interest income --
--------------------- ----------------------
Total revenue 131,193,922 114,469,468
--------------------- ----------------------
Hotel operating expenses 80,624,469 73,749,873
Depreciation and amortization --
Interest expense --
Other expense 1,566,606 1,638,525
Participating Lease expense 44,486,543 42,544,359
--------------------- ----------------------
Net loss $ 4,516,304 $ (3,463,289)
===================== ======================
(1) The pro forma information does not purport to represent what the Company's
financial position or the Company's and the Lessee's results of operations
would actually have been if the IPO, the Offerings, the acquisitions of all
Hotels and the consummation of a pro forma follow-on primary offering of
approximately 7.1 million shares of common stock (the "Pro Forma 1998
Offering") at $26.6875 per share (the last reported sale price of the Common
Stock on the New York Stock Exchange) and the application of the net
proceeds therefrom, in fact, occurred on such dates, or to project the
Company's or the Lessee's financial position or the Company's or the
Lessee's results of operations at any future date or for any future period.
(2) Pro forma amounts represent lease payments from the Lessee to the Operating
Partnership pursuant to the Participating Leases calculated on a pro forma
basis by applying the rent provisions of the Participating Leases to the
revenues of the Hotels. The departmental revenue thresholds in the
Participating Leases are seasonally adjusted for interim periods and certain
of the Participating Lease formulas adjust beginning in January 1997 or
January 1998.
(3) Pro forma amounts represent salaries and wages, professional fees,
directors' and officers' insurance, allocated rent, supplies and other
operating expenses to be paid by the Company. These amounts are based on
historical general and administrative expenses as well as adjusted for
expenses associated with the acquisitions.
(4) Represents amortization of unearned officer's compensation, represented by
an aggregate of 50,000 shares of restricted Common Stock issued to executive
officers, 10% of which shares vested at the date of grant (5,000 shares at
$17.75 per share, the price per share of Common Stock issued in the IPO),
20% of which shares vested on the first anniversary date of the IPO.
(5) Calculated as 12.1% for the historical period ended December 31, 1997 and as
18.9% for the historical period from July 31, 1996 (inception of operations)
through December 31, 1996. Calculated as 11.1% of income before minority
interest for all pro forma periods presented.
(6) Represents Funds From Operations of the Company. The items added back to net
income applicable to common stockholders have been adjusted by the Company's
ownership percentage in the Operating Partnership of 87.9% for the
historical period ended December 31, 1997,
34
81.1% for the historical period from July 31, 1996 (inception of operations)
through December 31, 1996 and 88.9% for all pro forma periods presented. The
following table computes Funds From Operations under the NAREIT definition.
Funds From Operations consists of net income applicable to common
stockholders (computed in accordance with generally accepted accounting
principles) excluding gains (losses) from debt restructuring and sales of
property (including furniture and equipment) plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs) and after adjustments for unconsolidated partnerships and joint
ventures. The Company considers Funds From Operations to be an appropriate
measure of the performance of an equity REIT. Funds From Operations should
not be considered as an alternative to net income or other measurements
under generally accepted accounting principles as an indicator of operating
performance or to cash flows from operating, investing or financing
activities as a measure of liquidity. Although Funds From Operations has
been calculated in accordance with the NAREIT definition, Funds From
Operations as presented may not be comparable to other similarly titled
measures used by other REITs. Funds From Operation does not reflect cash
expenditures for capital improvements or principal amortization of
indebtedness on the Hotels.
Pro Forma (1)
Historical For the Year Ended
------------------------------------------ -------------------------------------
July 31, 1996
Year Ended through
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------------ --------------------- ----------------- -----------------
Net income applicable to common stockholders $ 23,484,930 $ 5,129,181 $ 46,285,427 $ 32,638,198
Depreciation 12,279,269 2,137,293 43,539,812 41,061,738
------------------ --------------------- ----------------- -----------------
Funds From Operations $ 35,764,199 $ 7,266,474 $ 89,825,239 $ 73,699,936
================== ====================== ================= ==================
Weighted average number of basic shares of
Common Stock outstanding 14,678,160 8,122,139 31,275,051 31,267,768
Weighted average number of diluted shares of
Common Stock outstanding 14,841,343 8,164,774 31,438,234 31,310,404
(7) Cash Available for Distribution represents Funds From Operations of the
Company plus the Company's ownership percentage in the Operating Partnership
of 87.9% for the historical period ended December 31, 1997; 81.1% for the
historical period from July 31, 1996 (inception of operations) through
December 31, 1996 and 88.9% for all pro forma periods presented multiplied
by the sum of amortization of deferred financing costs, franchise transfer
costs and unearned officers' compensation. This amount is then reduced by
the Company's same percentage share of the sum of 4.0% of total revenue for
each of the Hotels that is required to be set aside by the Operating
Partnership for refurbishment and replacement of FF&E, capital expenditures
and other non-routine items as required by the terms of the Participating
Leases. Cash Available for Distribution does not include the interest
expense allocated to borrowings under the New Credit Facilities that are
expected to be made in order to fund capital expenditures at the Hotels. In
addition, Cash Available for Distribution does not include the effects of
any revenue increases expected to result from capital expenditures at the
Hotels.
(8) Pro forma amounts represent net income plus minority interest, depreciation,
amortization, and amortization of unearned officers' compensation. There are
no pro forma adjustments for changes in working capital items.
(9) Pro forma amounts represent cash used in investing activities and includes
the Operating Partnership's obligation to make available to the Lessee an
amount equal to 4.0% of total revenue for each of the Hotels for the
periodic replacement or refurbishment of FF&E, capital expenditures, and
other non-routine items as required by the Participating Leases. The Company
intends to cause the Operating Partnership to spend amounts in excess of
such obligated amounts to comply with the reasonable requirements of any
Franchise License and otherwise to the extent that the Company deems such
expenditures to be in the best interests of the Company.
(10) Pro forma amounts represent pro forma distributions to be paid based on the
current annual distribution rate of $1.71 and $1.63 per share of Common
Stock and OP Unit, respectively for 1997 and 1996 and an aggregate of
31,315,832 shares of Common Stock and OP Units outstanding plus the debt
service on the indebtedness collateralized by the Holiday Inn Dallas DFW
Airport South, Courtyard by Marriott Meadowlands, French Quarter Suites
Hotel, and the Radisson Hotel Arlington Heights, the Crowne Plaza Portland,
the Ramada Plaza Hotel Shelton and the Holiday Inn Chicago O'Hare
International.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW AND RECENT DEVELOPMENTS
The following should be read in conjunction with the Company's consolidated
financial statements and the selected financial information included elsewhere
in this report. Certain statements in this Form 10-K constitute "forward-looking
statements" as that term is defined under the Private Securities Reform Act of
1995 and the Securities
35
and Exchange Commission. The words "believe", "expect", "anticipate", "intend",
"estimate" and other expressions which are predictions of or indicate future
events and trends, and which do not relate to historical matters, identify
forward-looking statements. Although the Company believes that such forward-
looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved.
The Company was incorporated and formed on April 12, 1996, as a Maryland
corporation. The Company is a self-administered real estate investment trust
("REIT") that owns a geographically diverse portfolio of primarily full-service
hotels. As of March 27, 1998 the Company owned 53 hotels located in 21 states
containing an aggregate of approximately 12,600 guest rooms (the "Current
Hotels"). Substantially all of the Current Hotels are operated under licensing
or franchising agreements with national hotel brands including, but not limited
to, Crowne Plaza, Hilton, Wyndham, Marriott, Holiday Inn Select, Radisson,
Westin, DoubleTree Guest Suites, Sheraton, Holiday Inn and Hampton Inn. On July
31, 1996, the Company commenced operations and completed an IPO of an aggregate
of approximately 8,075,000 shares of its Common Stock. Concurrently with the
closing of the IPO, the Operating Partnership acquired directly or indirectly
the equity interests in the Initial Hotels for an aggregate of 1,896,996 OP
Units and approximately $91.0 million in cash to parties unaffiliated with the
Primary Contributors. In addition, during the fiscal year 1997, the Company
raised approximately $326.5 million through public and private issuances of
Common Stock. See "--Equity Financing Transactions".
During the fiscal year 1997, the Company acquired 14 hotels and acquired 26
additional hotels during the first quarter of 1998. December 31, 1997 the
Company owned 27 hotels with an aggregate of 6,903 guestrooms (the "December 31
Hotels"). Substantially all of the December 31 Hotels are operated under
licensing or franchising agreements with national hotel brands, including Crowne
Plaza, Hilton, Wyndham, Marriott, Holiday Inn Select, Radisson, Westin,
DoubleTree Guest Suites, Holiday Inn and Hampton Inn. The following table
provides certain information regarding the December 31 Hotels:
Number of Aggregate
Hotels Number of Acquistion
Acquired Guestrooms Price
------------------ ------------------- -------------------------
1996 (dollars in millions)
- ----
Initial Hotels 13 3,012 $183.5
4th Quarter 2 694 49.0
1997
- ----
1st Quarter 5 927 84.1
2nd Quarter 6 2,030 193.8
3rd Quarter 0 0 0.0
4th Quarter 1 146 11.8
Additional guestrooms constructed by the
Company at its December 31 Hotels
94
------------------ ------------------- -------------------------
Total 27 6,903 $522.2
================== =================== =========================
During the first quarter of 1998 (through March 24), the Company has
acquired interests in 26 additional hotels (the "1998 Acquisition Hotels",
together with the December 31 Hotels, the "Current Hotels") with an aggregate
purchase price of approximately $542 million and an aggregate guestroom count of
5,696. As of March 20, 1998, the Company owns a total portfolio of 53 hotels in
21 states with approximately 12,600 guestrooms.
In addition, the Company has entered into contracts to purchase 13
additional hotels containing an aggregate of approximately 2,560 guestrooms for
purchases prices totaling approximately $241 million (the "Proposed Acquisition
Hotels", together with the Current Hotels, the "Hotels"). If all of the
Proposed Acquisition Hotels are acquired, the Company will have invested
approximately $783 million since December 31, 1997 in hotel acquisitions
36
and will own 66 hotels containing more the 15,150 guestrooms, an approximate
120% increase in the Company's hotel portfolio since December 31, 1997 based
upon the number of guestrooms.
In order for the Company to qualify as a REIT, neither the Company nor the
Operating Partnership can operate hotels. The Operating Partnership leases the
Hotels to the Lessee for terms of 10 to 12 years pursuant to separate
Participating Leases providing for the payment of base rent and participating
rent. The principal source of revenue for the Operating Partnership and the
Company is lease payments paid by the Lessee under the Participating Leases. The
Lessee's ability to make payments to the Operating Partnership under the
Participating Leases is dependent on the ability of the Lessee, AGHI and any
other lessees or operators to generate cash flow from the operations of the
Hotels. The Lessee has entered into management agreements whereby 44 of the
Current Hotels are managed by AGHI and one Hotel is managed by Wyndham.
RESULTS OF OPERATIONS
Actual for the Year Ended December 31, 1997
For the year ended December 31, 1997, the Company had revenues of $61,911,757
consisting of Participating Lease revenue of $59,934,337, office building rental
income of $1,205,465 and interest income of $771,955. The interest income
earned was primarily from the excess cash from the Company's 1997 Public
Offering and from excess cash balances of the Company's subsidiaries.
Depreciation expense for the year was $13,970,289 reflecting the additional
depreciation expense related to the Company's property acquisitions.
Amortization expense was comprised of amortization of deferred financing costs
related to the Company's Credit Facility and the two subsequent increases to the
Credit Facility of $977,109, franchise transfer fees of $98,311, other deferred
expenses, such as organization costs of $30,478 and amortization relating to the
restricted stock grants issued at the IPO of $125,729. Real estate and personal
property taxes and property insurance for the year were $7,073,323. Operating
expenses related to the office building were $596,939 for the portion of the
year which the Company owned the office building since acquiring it in June,
1997. The Company reported $9,048,898 of interest expense for the period which
consists of $1,213,683 attributable to the indebtedness on the Holiday Inn
Select Dallas DFW Airport South, $381,333 attributable to the indebtedness on
the Courtyard by Marriott Meadowlands, $520,521 attributable to the indebtedness
on the Radisson Hotel Arlington Heights, $723,208 attributable to the
indebtedness on the DoubleTree Guest Suites Atlanta and $6,210,153 attributable
to the borrowings on the Company's Credit Facility. The balance outstanding on
the Credit Facility at December 31, 1997 was approximately $41.3 million. The
minority interest in income for the period was $3,234,189. The resulting net
income applicable to the common stockholders was $23,484,930 or $1.60 per basic
common share and $1.58 per diluted common share.
The Company believes that the Hotels it acquires will generally experience
increases in revenues (and accordingly, provide the Company with increases in
Participating Lease revenues) following the completion of the renovation and
conversion process; however, as individual hotels undergo such renovations,
their performance has been, and is expected to continue to be, adversely
affected by such temporary factors as rooms out-of-service and disruptions of
hotel operations. (A more detailed discussion of hotel revenue is contained in
"The Lessee - Actual" section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
Actual for the period from July 31, 1996 (inception of operations) through
December 31, 1996
The Company earned $13,387,719 in Participating Lease revenue from AGH
Leasing. Interest income, which was $108,075 for the period, consisted
primarily of income earned on excess cash balances. Depreciation of the
Company's investment in hotel properties was $2,635,380. Amortization,
consisting primarily of deferred financing costs and franchise transfer fees,
was $310,404 and real estate and personal property taxes and insurance were
$1,444,592. The Company reported $1,412,117 of interest expense for the period
which consists of $512,936 attributable to the indebtedness on the Holiday Inn
Select Dallas DFW Airport South, $166,737 attributable to the indebtedness on
the Courtyard by Marriott Meadowlands and $732,444 attributable to borrowings on
the Company's Credit Facility. The borrowings on the Credit Facility included
$10 million borrowed at the IPO and repaid with the proceeds of the
underwriters' over-allotment option and $57.5 million borrowed throughout the
period for property acquisitions, renovations and working capital needs. The
minority interest in income was $1,196,728 and the
37
resulting net income applicable to the common stockholders was $5,129,181 for
the period. On a per share basis net income to the common stockholder was $0.63
for basic and fully diluted weighted average shares.
Pro forma Comparison for the Years Ended December 31, 1997 and 1996
On a pro forma basis, the Company's Participating Lease revenue increased
15.4% to $169.0 million from $146.4 million which reflects the increase in
operations as a result of the improving market conditions in certain markets in
which the Company owns hotels, as well as, the impact Company's repositioning
strategies at the Hotels. Total revenues for the Company of $172.1 million
represents a 15.8% increase from $148.6 million in 1996. Total expenses of the
Company increased 7.2% to $120.1 million in 1997 from $111.9 million in 1996.
The notable expense increases include: real estate and personal property taxes
and insurance which increased 13.6% year over year due primarily to the
increased property valuation in certain taxing jurisdictions; ground lease
expense increased 7.2% from $6.7 million to $7.1 million which is in direct
correlation to the increase in hotel revenues on the pro forma financial
statements of the Lessee; and interest expense increased 7.2% to $39.5 million
which reflects the impact of borrowings made under the Company's New Credit
Facilities for capital renovations and refurbishments at its Hotels. For the
pro forma periods, the Company had flow through on its increased revenues of
41.2% which increased the per share net income applicable to its common
stockholders to $1.48 from $1.04 on basic Common Stock outstanding and to $1.47
from $1.04 on diluted Common Stock outstanding.
Funds from Operations
Actual Funds from Operations for the year ended December 31, 1997 and the
period from July 31, 1996 (inception of operations) through December 31, 1996,
calculated using the NAREIT definition of Funds from Operations, was $35,764,199
and $7,266,474, respectively, which is the sum of net income applicable to
common stockholders and the Company's share of depreciation.
The Company considers Funds from Operations to be a key measure of the
performance of an equity REIT. Funds from Operations should not be considered
an alternative to net income or other measurements under generally accepted
accounting principles as an indicator of operating performance, or an
alternative to cash flows from operating, investing or financing activities, as
a measure of liquidity.
The following is a reconciliation of pro forma net income applicable to common
stockholders to pro forma Funds from Operations and illustrates the difference
in the two measures of operating performance:
December 31, 1997 December 31, 1996
-------------------------- --------------------------
Pro forma net income applicable to common stockholders $46,285,427 $32,638,198
Depreciation (Company share) 43,539,812 41,061,738
-------------------------- --------------------------
Funds from Operations $89,825,239 $73,699,936
========================== ==========================
Weighted average number of basic shares of Common Stock
outstanding 31,275,051 31,267,768
Weighted average number of diluted shares of Common
Stock outstanding 31,438,234 31,310,404
AGH LEASING
AGH Leasing refers to the consolidated operations of AGH Leasing, L.P. and
Twin Towers Leasing. Twin Towers Leasing commenced operations on June 25, 1997,
with the acquisition of the Radisson Twin Towers Hotel in Orlando, Florida.
Twin Towers Leasing is owned 51% by AGH Leasing, L.P., which is the sole general
partner, and 49% by Regent Carolina Corporation, which is an affiliate of the
selling entity of the Radisson Twin Towers
38
Orlando and the sole limited partner. Regent Carolina Corporation is allocated
100% of the losses of Twin Towers Leasing up to their capital contribution of $3
million.
Actual for the Year Ended December 31, 1997
For the year ended December 31, 1997 AGH Leasing's revenues were $169,395,112
consisting of room revenues of $123,965,649, food and beverage revenues of
$35,595,835, other revenues of $8,031,070 and an allocation of minority interest
for the investment in Twin Towers Leasing of $1,802,558.
Participating Lease payments and property operating costs and expenses were
$59,934,337 and $110,911,630, respectively. The resulting net loss for the
period was $1,450,855.
Certain December 31 Hotels are performing below the Company's expectations and
below last year's performance due to increases in market supply of hotel rooms,
disruptions in operations due to renovations and capital improvements and a
slower than expected improvements in operations created by the renovations and
rebranding process. Hotels which have completed the renovation process are
generally reflecting marked improvements in operations. The Company expects
these trends to continue for the remainder of the current year and into the
following year.
Actual for the Period from July 31, 1996 (inception of operations) through
December 31, 1996
For the period of operations in 1996, AGH Leasing had total revenue of
$36,791,131 which was comprised of room revenues of $26,725,200, food and
beverage revenues of $8,374,459 and other revenues of $1,691,472. For this same
period, the expenses incurred for Participating Lease payments and property
operating costs were $13,387,719 and $24,124,451, respectively. The net loss
for the period was $721,039.
Summary Operational Highlights
------------------------------
Twelve Months
----------------------------------------------------------------
1997 1996(1) % Change
----------------------------------------------------------------
Revenue Per Available Room (REVPAR)
December 31 Hotels $61.10 $56.01 9.1 %
Initial Hotels $60.30 $54.67 10.3 %
Occupancy
December 31 Hotels 71.1 % 72.4 % (1.8) %
Initial Hotels 71.7 % 73.0 % (1.8) %
Average Daily Rate (ADR)
December 31 Hotels $85.91 $77.31 11.1 %
Initial Hotels $84.08 $74.89 12.3 %
(1) 1996 results represent pro forma numbers and are calculated as if the
company owned the hotels included above for the full period from January 1,
1996 through December 31, 1996
For 1997, the Company's 26 hotels, excluding the Courtyard by Marriott in
Durham, North Carolina which opened in April 1997, generated REVPAR increases of
9.1% to $61.10 from $56.01. ADR rose 11.1% to $85.91 for the year, while
occupancy slightly decreased to 71.1 % from 72.4 %.
The Company's Initial Hotels generated REVPAR increases of 10.3% to $60.30,
while ADR increased 12.3% to $84.08. Occupancy for these hotels decreased by
1.8% from 73.0% to 71.7%, reflecting the impact of rooms out of service during
renovation work. The performance of the Initial Hotels reflects the benefits of
the Company's repositioning strategies and the internal growth that can be
generated as a result of these strategies.
39
Pro Forma Operations for the Years Ended December 31, 1997 and 1996
The following table sets forth pro forma financial information for AGH
Leasing, as a percentage of revenue, for the years ended December 31, 1997 and
1996:
December 31, December 31,
1997 1996
----------------------- -----------------------
Room revenue 72.5 % 71.4 %
Food and beverage revenue 22.0 23.1
Other revenue 4.7 5.1
Minority interest income 0.8 0.4
----------------------- -----------------------
Total revenue 100.0 100.0
----------------------- -----------------------
Hotel operating expenses 65.7 67.2
Other corporate expenses 0.2 0.2
Participating Lease expense 34.5 33.4
----------------------- -----------------------
Net loss ( 0.4 %) ( 0.8 %)
======================= =======================
On a pro forma basis, hotel room revenues increased 14% to $252,513,441 from
$221,451,484 which is attributable to the improving market conditions in certain
markets in which the company owns hotels, as well as, the impact of the
Company's repositioning strategies, the increased contribution by the new
franchisor to room reservations and certain markets absorbing the increase
supply of limited service rooms into the market. Total revenues for the pro
forma periods increased 12.2% to $348,417,878.
Pro forma hotel operating expenses increase 9.5% which reflects the increase
in incremental costs and additional franchise related assessments associated
with the increased revenues. Pro forma Participating Lease expense increase 16%
to $120,128,336.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to stockholders, is its share of the Operating
Partnership's cash flow from the Participating Leases. For the year ended
December 31, 1997, cash flow provided by operating activities, consisting
primarily of Participating Lease revenue, was $42,430,318 and Funds from
Operations (as previously defined) was $35,764,199. AGH Leasing's obligations
under the Participating Leases are collateralized by the pledge of 275,000 OP
Units by the partners of AGH Leasing and the remaining capital of $1.2 million
contributed by the 49% limited partner of Twin Towers Leasing. The Lessee's
ability to make rent payments under the Participating Leases and the Company's
liquidity, including its ability to make distributions to stockholders, are
substantially dependent on the ability of the Lessee, AGHI and other operators
and managers to generate sufficient cash flow from the operation of the Hotels.
During the year ended December 31, 1997, the Company completed the 1997 Public
Offering, issued shares pursuant to the Wyndham Alliance, completed the Second
1997 Public Offering and partially completed the ABKB placement producing
combined net proceeds to the Company of $274.4 million. In addition, the
Company increased its Credit Facility from $100 million to $150 million in
February 1997 and from $150 million to $300 million in June 1997. The June 1997
amendment to the Company's Credit Facility decreased the applicable interest
rate from 1.85% plus LIBOR to 1.75% plus LIBOR and increased the advance rate
from 40% of the qualified borrowing base to 50% of the qualified borrowing base,
subject to other financial ratio tests and limitations. At December 31, 1997,
the Company had approximately $41.3 million outstanding on its Credit Facility.
The Company's borrowing capacity under the Credit Facility at December 31, 1997,
was approximately $247 million.
To provide for additional financing flexibility, the Company has registered up
to an aggregate of $500 million in Common Stock and warrants to purchase Common
Stock pursuant to a shelf registration (the "Shelf Registration") filed on
August 6, 1997, and declared effective by the SEC on August 28, 1997. Under the
terms of
40
the registration, the Company may decide the amount of securities to sell from
time to time. Any proceeds from such a sale would be for various purposes, which
may include, without limitation, the repayment of outstanding indebtedness, the
acquisition of additional hotels, the improvement and/or expansion of one or
more of its hotel properties or for working capital purposes. As of December 31,
1997 the Company had $365,125,000 remaining on its Shelf Registration.
At December 31, 1997, the Company had $800,255 in cash and cash equivalents
and $41.3 million outstanding under the Credit Facility. The Credit Facility
balance outstanding at December 31, 1996, and the additional borrowings made
before the Company's 1997 Public Offering were substantially repaid with the net
proceeds from the 1997 Public Offering. The Company subsequently borrowed
approximately $181 million to fund property acquisitions, renovations, capital
improvements and working capital needs which was substantially repaid with the
net proceeds from the Second 1997 Public Offering and the ABKB placement.
Borrowings under the Credit Facility bear interest at 30-day, 60-day or 90-day
LIBOR (5.72%, 5.75% and 5.81% at December 31, 1997) plus 1.75% per annum,
payable monthly in arrears or one-half percent in excess of the prime rate at
the option of the Company.
On February 13, 1998, the Company replaced its $300 million secured credit
facility with two unsecured credit facilities with an aggregate principal amount
of $600 million (the "New Credit Facilities"). The financial covenants
contained in the New Credit Facilities require the Company to maintain the debt
service coverage ratio of at least 2.0 to 1.0, and an interest coverage ratio of
not less than 2.15 to 1.0 through December 31, 1998 and not less than 2.50 to
1.0 thereafter and to maintain a minimum net worth of $450 million plus 75% of
the net proceeds from stock offerings and offerings of partnership interests in
the Operating Partnership. In addition, the New Credit Facilities contain
limits on total indebtedness based on a multiple of EBITDA (earnings before
interest, taxes, depreciation and amortization) that adjust downward as of
December 31, 1998. As a result of the adjustment of certain financial covenants
that occur on December 31, 1998, the Company expects that it would be required
to repay or refinance a portion of the New Credit Facilities at that time. In
addition, the New Credit Facilities provide that the lenders must consent to any
development activities by the Company other than development in connection with
the limited expansion of existing hotels. Also, the New Credit Facilities'
lenders must approve the lessee, manager and the franchise brand of the
Company's Hotels. In addition, the New Credit Facilities require that the
current limited partners of AGH Leasing own no less than 65% of the limited
partnership interests of AGH Leasing at all times.
Outside of the New Credit Facilities, the Company and its subsidiaries may
incur up to $70 million in additional qualified debt, including the debt assumed
in connection with the acquisitions of the Holiday Inn Select Dallas DFW Airport
South, Courtyard by Marriott Meadowlands, Radisson Hotel Arlington Heights,
DoubleTree Guest Suites Atlanta, Crowne Plaza Portland, Ramada Plaza Shelton and
the Holiday Inn O'Hare International Airport without prior consent of its Credit
Facilities' lenders. The New Credit Facilities have a three-year term and bear
interest based upon the 30-day, 60-day or 90-day LIBOR (5.6875%, 5.6875% and
5.6875% as of March 27, 1998) at the option of the Company, plus an applicable
margin for all or part of the Facilities (the "Margins"). The Margins, which
are adjusted on a quarterly basis, range from a minimum of 1.40% per annum to a
maximum of 2% per annum, based upon certain leverage ratios. As of March 27,
1998 the Margins were 1.875% per annum. Economic conditions could result in
higher interest rates, which could increase debt service requirements on
borrowings under the New Credit Facilities and could reduce the amount of Cash
Available for Distribution.
During the first quarter of 1998 (through March 27), the Company has acquired
the 1998 Acquisition Hotels for an aggregate purchase price of approximately
$542 million. The 1998 Acquisition Hotels were funded with borrowings under the
Credit Facility and New Credit Facilities, the assumption of mortgage
indebtedness and the issuance OP Units. As of March 27, 1998 the amount
outstanding on the New Credit Facilities was $442 million.
In addition to the 1998 Acquisition Hotels, the Company has entered into
contracts to purchase the Proposed Acquisition Hotels for purchase prices
aggregating approximately $241 million. The Company expects that the Proposed
Acquisition Hotels will be completed and funded with borrowings under the New
Credit Facilities or permanent debt or equity financing. To the extent that the
New Credit Facilities are not sufficient to make the
41
additional property acquisitions, complete the renovation and capital
improvement programs and for working capital, the Company expects that it will
seek additional equity or pursue alternative financing opportunities.
Cash and cash equivalents as of December 31, 1997, were $800,255. Restricted
cash of $765,048 includes escrow deposits on the Holiday Inn Select Dallas DFW
Airport South, the Courtyard by Marriott Secaucus and the DoubleTree Guest
Suites Atlanta as required by their loan agreements. Cash flow from operating
activities of the Company was $42,430,318 for year ended December 31, 1997,
which primarily represents the collection of rents under the Participating
Leases, less the Company's operating expenses for the period, adjusted for
changes in other working capital components. Cash flow used in investing
activities during that period in the amount of $328,193,431 reflects the
purchase of and improvements made to the Current Hotels. Cash flows from
financing activities of $282,675,087 during this period were primarily related
to the receipt of proceeds from the 1997 Public Offering, the Second 1997 Public
Offering, the ABKB placement and borrowings on the credit facility, net of
principal payments on borrowings and payments for deferred loan costs. The
Company also paid dividends of $24,932,747 on Common Stock and OP Units
outstanding.
On January 2, 1998, in accordance with the ABKB/LaSalle Agreements, the
Company privately sold an additional 495,700 shares of its Common Stock to
certain investment funds and separate accounts advised by ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited Partnership at a
negotiated price of $25.216 generating net proceeds of approximately $12.5
million which were contributed to the Operating Partnership.
On January 8, 1998, the Company privately issued 518,437 Class B OP Units as
part of the purchase price of the Prime Group I Acquisition Hotels. At the time
of issuance, the Class B OP Units were valued at $26.697 per unit. On April 16,
1998, the Class B OP Units will automatically convert into standard OP Units.
On January 15, 1998, in accordance with the ABKB/LaSalle Agreements, the
Company privately sold the balance of 118,972 shares of its Common Stock to
certain investment funds and separate accounts advised by ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited Partnership at a
negotiated price of $25.216 generating net proceeds of approximately $3.0
million which were contributed to the Operating Partnership. With the January
15 transaction, all shares of Common Stock, which were to be issued pursuant to
the ABKB/LaSalle Agreements, had been issued.
On February 3, 1998, the Company privately issued 1,308,406 Class C OP Units
as part of the purchase price of the Holiday Inn O'Hare International Hotel. At
the time of issuance, the Class C OP Units were valued at $27.514 per unit. The
Class C OP Units bear a preferred annual distribution rate of $1.89 per Class C
OP Unit until such time the dividend distribution rate for the Class C OP Units
shall equal the distribution rate on the Common Stock. In addition, the holders
of the Class C OP Units are entitled to receive additional OP Units if the fair
market value of the Common Stock (as reported on the New York Stock Exchange,
Inc.) is not trading for at least $30 per share on the anniversary date of the
closing of the acquisition.
On February 18, 1998, the Company sold 1,052,650 shares of Common Stock at
$28.25 per share through a public offering generating net proceeds of
approximately $28.3 million, which were contributed to the Operating Partnership
and used to repay indebtedness borrowed under the New Credit Facilities.
On February 23, 1998, the Company sold 1,095,890 shares of Common Stock at
$27.375 per share through a public offering generating net proceeds of
approximately $28.4 million, which were contributed to the Operating partnership
and used to repay indebtedness borrowed under the New Credit Facilities.
On February 27, 1998, the Company sold 362,812 shares of Common Stock at
$27.5625 per share through a public offering generating net proceeds of
approximately $9.5 million, which were contributed to the Operating Partnership
and used to repay indebtedness under the New Credit Facilities.
On March 15, 1998, the Company and CapStar Hotel Company ("CapStar") entered
into a definitive agreement (the "Merger Agreement") pursuant to which the
parties agreed, subject to stockholder approval and other conditions and
covenants, to merge as equals (the "Proposed Merger"). Accordingly, no assurance
can be given that the Proposed Merger will be consummated. Pursuant to the
Merger Agreement,
42
CapStar will spin off (the "Spin-Off") in a taxable transaction, its hotel
operations and management business to its current stockholders as a new C-
Corporation to be called MeriStar Hotels & Resorts, Inc. ("MeriStar Resorts").
CapStar will subsequently merge with and into the Company, which will qualify as
a reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"). The Company will be renamed MeriStar Hospitality
Corporation if the Proposed Merger is consummated. In a separate transaction,
which will close immediately after the closing of the Proposed Merger, MeriStar
Resorts will acquire AGH Leasing and AGHI which acquisition is a condition to
closing the Proposed Merger. If the Proposed Merger is consummated, MeriStar
Resorts will become the lessee and manager of all of the Current Hotels
currently leased by AGH Leasing and will have a right of first refusal to become
the lessee of hotels acquired by the Company in the future except for the Prime
Group II Acquisition hotels.
The Merger Agreement defines the exchange ratios for both the Company's and
CapStar's stockholders. CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned. Both exchange
ratios are fixed, with no adjustment mechanism.
The Company expects the Proposed Merger to close in June 1998. The
Proposed Merger will be submitted for approval at separate meetings of the
stockholders of the Company and CapStar. Prior to such stockholder meetings,
the Company will file a registration statement with the SEC registering under
the Securities Act of 1933, as amended, the shares of MeriStar Hospitality
Corporation to be issued in the Proposed Merger.
RENOVATIONS AND OTHER CAPITAL IMPROVEMENTS
The Participating Leases require the Company to establish annual minimum
reserves equal to 4.0% of total revenue of the Current Hotels which will be
utilized by the Lessee for the replacement and refurbishment of FF&E and other
capital expenditures to enhance the competitive position of the Current Hotels.
The Company and the Lessee will jointly determine the use of funds in this
reserve, and the Company will have the right to approve the Lessee's capital
expenditure budgets. While the Company expects its reserve to be adequate to
fund recurring capital needs, the Company expects to use cash available for
distribution in excess of distributions paid or funds drawn under the New Credit
Facilities or other borrowings or equity to fund additional capital
improvements, as necessary, including major renovations at the Company's Hotels.
The Company has budgeted $129.7 million to fund capital improvements and
renovations at the Current Hotels. As of December 31, 1997, the Company had
invested approximately $69.0 million on capital improvements and renovations and
has budgeted to invest the remaining $60.7 million on the Current Hotels in 1998
and 1999. In certain circumstances such capital improvements are being
completed in connection with franchisor requirements. The Company has also
budgeted approximately $111.1 million to be invested in the 1998 Acquisition
Hotels and the Proposed Acquisition Hotels. The amounts are budgeted to be
expended during 1998, 1999 and 2000.
The Company intends to use borrowings under the New Credit Facilities and the
FF&E reserve established under the Participating Leases to fund these
expenditures. There can be no assurance that the Company will be able to
complete the scheduled capital improvements within the expected time frames or
that the anticipated costs for the capital improvements will not exceed the
amounts budgeted for that purpose. Changes in the scope of the work are inherent
in large renovation projects such as the ones undertaken by the Company. The
Company has increased the scope of the work in certain projects in response to
market conditions, building code, franchisor and other requirements. The
Company attempts to schedule renovations and improvements during traditionally
lower occupancy periods in an effort to minimize disruption to the hotels'
operations; however, the impact of rooms out-of-service and public area
construction remains significant. As individual hotels undergo such renovation
and capital improvements, their performance may be adversely affected, although
such effects are expected to be temporary.
INFLATION
Operators of hotels, in general, possess the ability to adjust room rates
quickly. Competitive pressures may, however, limit the Lessee's ability to raise
room rates at the rate of inflation.
43
SEASONALITY
The hotel industry is seasonal in nature. Generally, hotel revenue is greater
in the second and third quarters of a calendar year, although this may not be
true for hotels in major tourist destinations. With the Company's acquisition of
the FSA Portfolio Acquisition hotels, the Company's portfolio may now produce
greater revenues in the first and second quarters. Seasonal variations in
revenue at the Hotels may cause quarterly fluctuations in the Company's lease
revenue. To the extent that cash flow from operations may be insufficient
during any quarter to pay distributions at its current distribution rate due to
temporary or seasonal fluctuations in lease revenues, the Company expects to
utilize other cash on hand or borrowings under the New Credit Facilities to make
such distributions.
RISKS RELATING TO YEAR 2000 ISSUE
Many existing computer programs were designed and developed without
considering the impact of the upcoming change in the century. The problem
exists when a computer program uses only two digits to identify a year in the
date field. Extensive problems can result to a company's business, requiring
substantial resources to remedy. The Company believes that the "Year 2000"
problem is not material to the Company's business and operations. Although the
Company is addressing the problem with respect to its business operations, there
can be no assurance that the "Year 2000" problem will be properly or timely
resolved, which could have a material adverse effect on the Company's results of
operations and, in turn, cash available for distribution.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The independent auditor's reports, financial statements and financial
statement schedules listed in the accompanying index are included in Item 14 of
this report. See Index to Financial Statements and Financial Statement
Schedules on page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors consists of five members, four of whom are Independent
Directors, persons who are not officers or employees of the Company, affiliates
of officers or employees of the Company or affiliates of any advisor to the
Company under an advisory agreement, any lessee or contract manager of any hotel
of the Company, any of its subsidiaries, or any partnership which is an
affiliate of the Company (each such person, an "Independent Director"). The
Board of Directors is divided into three classes serving staggered three-year
terms. The Company has
44
five executive officers and six other professional and appropriate support
staff. Certain information regarding the directors and executive officers of the
Company is set forth below.
Class/Term
Name Position Age Expiration
- -------------------------------- ------------------------------------------- ------------- --------------------
Steven D. Jorns Chairman of the Board, Chief Executive 49 Class I / 2000
Officer and President
Bruce G. Wiles Executive Vice President 46 --
Kenneth E. Barr Executive Vice President, Chief 49 --
Financial Officer, Secretary and
Treasurer
Russ C. Valentine Senior Vice President Acquisitions 51 --
John P. Buza Senior Vice President/Asset Manager 36 --
H. Cabot Lodge Independent Director 41 Class II / 1998
James R. Worms Independent Director 51 Class II / 1998
James McCurry Independent Director 48 Class III / 1999
Kent R. Hance Independent Director 54 Class III / 1999
Steven D. Jorns became the Chairman of the Board, Chief Executive Officer and
President of the Company in April 1996. Mr. Jorns is the founder of and has
served since its formation in 1981 as Chairman of the Board, Chief Executive
Officer and President of AGHI. Prior to forming AGHI, Mr. Jorns spent seven
years with an affiliate of General Growth Companies overseeing that company's
hotel portfolio. Prior to that, Mr. Jorns was associated with Hospitality Motor
Inns, a division of Standard Oil of Ohio, and held marketing positions with
Holiday Inns, Inc. Mr. Jorns is a graduate of Oklahoma State University with a
degree in Hotel and Restaurant Administration. He has been honored by that
University as one of its distinguished alumni. He has served on the Hotel and
Restaurant Advisory Boards for two universities and was selected by Lodging
Hospitality Magazine as a "Rising Star" of the Industry in 1992.
Bruce G. Wiles became an Executive Vice President of the Company in April
1996. Mr. Wiles has served since 1989 as an Executive Vice President of AGHI,
where he is responsible for AGHI's acquisition and development activities. Mr.
Wiles has more than fourteen years of experience in the hospitality industry.
Prior to joining AGHI in 1989, Mr. Wiles was a Senior Vice President for
Integra, a Dallas-based NYSE hotel management and restaurant company. At
Integra, his duties included evaluating hotel acquisitions and overseeing real
estate development, as well as the acquisition and negotiation of all real
estate based financing. Prior to joining Integra in 1986, Mr. Wiles was a
founder and President of Bruce G. Wiles and Associates, Ltd., a Honolulu-based
real estate syndicator and developer of condominiums and commercial space. Mr.
Wiles was also previously associated with KPMG Peat Marwick and Grant Thornton,
serving the real estate development and lending industries. Mr. Wiles graduated
Summa Cum Laude from Georgetown University and became a Certified Public
Accountant in 1973.
Kenneth E. Barr became an Executive Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company in April 1996. Mr. Barr has served since
1994 as a Senior Vice President of AGHI, where he directs the Accounting and
Finance Department. At AGHI, Mr. Barr is responsible for financial management
and controllership functions, including financial, accounting and reporting,
management information systems, risk management, internal audits, treasury
activities, and training functions. Prior to joining AGHI, Mr. Barr held a
senior financial position with Richfield Hotel Management, Inc., a national
hotel management company. Prior to joining Richfield Hotel Management, Inc. in
1991, Mr. Barr served as the partner in charge of the audit practice of
Laventhol & Horwath in Dallas and was also a member of that firm's National
Audit Advisory Board. Mr. Barr holds a Bachelor of Business Administration from
the University of Oklahoma. He is a Certified Public Accountant in Texas,
Oklahoma and Puerto Rico.
Russ C. Valentine became Senior Vice-President-Acquisitions of the Company in
April 1996. Mr. Valentine has served since 1990 as a Senior Vice
President-Acquisitions of AGHI. Prior to joining AGHI, Mr. Valentine was a
Principal with Laventhol & Horwath, in charge of the firm's Dallas and Southwest
Real Estate and
45
Hospitality Consulting Practice. Prior to joining Laventhol & Horwath in January
1983, Mr. Valentine was a Senior Vice President-Acquisitions for Prime Financial
Partnership, L.P., a real estate and development company listed on the American
Stock Exchange. Mr. Valentine's responsibilities with Prime Financial included
acquisition, negotiation and financing of hotel and other real estate
investments, Mr. Valentine received his Master of Business Administration degree
from the School of Hotel, Restaurant and Institutional Management at Michigan
State University. He also earned a Master of Arts degree from Wayne State
University and a Bachelor of Arts degree from Louisiana State University.
John P. Buza became Senior Vice-President and Asset Manager of the Company in
January 1998. Mr. Buza joined the Company after spending the last 11 years with
Salomon Brothers, Inc where he served as Director and was responsible for all of
the Salomon Brothers, Inc. investments. Mr. Buza has 10 years of real estate
experience and has spent portions of the last six years working in the hotel
industry. Mr. Buza was directly responsible for the financial restructuring,
financing and renovation of Salomon's hotel portfolio and the construction and
sale of the Courtyard by Marriott Durham in Durham, North Carolina which was
recently purchased by the Company. Mr. Buza has been a member of the Board of
Directors of Hudson Hotels Corporation since November 1996, as well as, a member
of two Advisory Committees for certain real estate joint venture funds for
Trammell Crow. Prior to Salomon Brothers, Inc. Mr. Buza worked for Touche Ross
& Co. Mr. Buza is a Certified Public Accountant and is a member of the New
Jersey State Society of CPA's. He holds a Bachelor of Arts degree in
Accounting/Business Administration from Muhlenberg College.
H. Cabot Lodge III became a director of the Company in July 1996. Mr. Lodge
is a co-founder and has served since October 1995 as Chairman of the Board of
Superconducting Core Technologies, Inc., a wireless telecommunications equipment
manufacturer. From August 1983 to August 1995, he was a Managing Director and
Executive Vice President of W.P. Carey & Co., a New York real estate investment
bank that specializes in long term net-leases with corporations and manages in
excess of $1.5 billion in assets, nine real estate public limited partnerships
and three real estate investment trusts. Mr. Lodge also is a principal of
Carmel Lodge, LLC, a New York based merchant bank. Mr. Lodge earned a Bachelor
of Arts degree from Harvard College and a Masters of Business Administration
degree from the Harvard Business School. He is a member of the Board of
Directors of TelAmerica Media, Inc., High Voltage Engineering Corp., and
Monument Realty.
James R. Worms became a director of the Company in July 1996. Mr. Worms has
served since August 1995 as a Managing Director of William E. Simon & Sons
L.L.C., a private investment firm and merchant bank and President of William E.
Simon & Sons Realty, through which the firm conducts its real estate activities.
Prior to joining William E. Simon & Sons, Mr. Worms was employed since March
1987 by Salomon Brothers Inc, an international investment banking firm, most
recently as a Managing Director. Mr. Worms received a Bachelor of Arts degree
from the University of California, Los Angeles, a Masters of Business
Administration from the University of California at Los Angeles' Anderson School
of Business, and a Juris Doctor degree from the Hastings College of Law.
James B. McCurry became a director of the Company in July 1996. Mr. McCurry
served from December 1994 through December 1996 as Chief Executive Officer of
NeoStar Retail Group, Inc. ("NeoStar"), a specialty retailer of consumer
software. NeoStar filed a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code in September 1996. Currently, Mr. McCurry is a partner at Bain
& Company, an international management consulting firm specializing in corporate
strategy. From April 1983 to December 1994, Mr. McCurry was the Chairman of
Babbage's Inc., a consumer software retailer, which merged with Software Etc.
Stores, Inc. in December of 1994 to form NeoStar. Mr. McCurry received a
Masters of Business Administration with High Distinction from Harvard Business
School and a Bachelor of Arts with High Honors from the University of Florida.
He is a member of the Board of Directors of Pacific Sunwear of California, Inc.
Kent R. Hance became a director of the Company in July 1996. Mr. Hance has
been since 1994 a law partner in the firm Hance, Scarborough, Woodward &
Weisbart, L.L.P., Austin, Texas, and from 1991 to 1994 he was a law partner in
the firm of Hance and Gamble. From 1985 to 1987, Mr. Hance was a law partner
with Boyd, Viegal and Hance. Mr. Hance served as a member of the Texas Railroad
Commission from 1987 until 1991 and as its Chairman from 1989 until 1991. From
1979 to 1985, he served as a member of the United States Congress. Mr. Hance
served as a State Senator in the State of Texas from 1975 to 1979 and was a
professor of business law at
46
Texas Tech University from 1969 to 1973. Mr. Hance earned a Bachelor of Business
Administration degree from Texas Tech University and a Juris Doctor degree from
the University of Texas Law School.
BOARD OF DIRECTORS AND COMMITTEES
The Company is managed by a five-member Board of Directors, a majority of whom
are Independent Directors. The Board of Directors has an Audit Committee, a
Compensation Committee and a Leasing Committee.
Audit Committee. The Audit Committee consists of Messrs. Hance and McCurry.
The Audit Committee makes recommendations concerning the engagement of
independent public accountants, reviews with the independent public accountants
the plans and results of the audit engagement, approves professional services
provided by the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit fees,
and reviews the adequacy of the Company's internal accounting controls.
Compensation Committee. The Compensation Committee consists of Messrs. Hance
and Worms. The Compensation Committee determines compensation of the Company's
executive officers and administers the Company's 1996 Stock Incentive Plan.
Leasing Committee. The Leasing Committee consists of Messrs. Lodge and Worms.
The Leasing Committee reviews not less frequently than annually the Lessees'
compliance with the terms of the Participating Leases and reviews and approves
the terms of any new leases between the Company and the Lessees.
The Company may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated by
the Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act of 1934, as amended ("Section 16(a)"),
requires the Company's executive officers and directors and persons who
beneficially own more than 10% of a registered class of the Company's equity
securities (collectively, "Section 16 reporting persons"), to file with the SEC
initial reports of ownership and reports of changes in ownership of common stock
or other equity securities of the Company. Section 16 reporting persons are
required by the SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
report furnished to the Company and on written representations that no other
reports were required, during the fiscal year ended December 31, 1997, the
Section 16 reporting persons complied with all Section 16(a) requirements
applicable to them except that Mr. Jorns inadvertently failed to file a Form 4
with the SEC with respect to one acquisition of Class B OP Units by an entity
which he owns by indirect interest in connection with the Company's acquisition
of the Courtyard by Marriott Durham. Mr. Jorns reported that acquisition of
Class B OP Units on a Form 5 filed on a timely basis with the SEC. All such
other filings have been made.
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended December 31, 1997
and 1996, information regarding the compensation of the Company's executive
officers.
47
Summary Compensation Table
Annual Compensation Long Term Compensation
---------------------------------- ---------------------------------------------
Other Annual Restricted Securities All Other
Salary Bonus Compensation Stock Awards Underlying Options Compensation
Name and Principal Position Year ($) ($) ($) ($)(1) (#) ($)
- ------------------------------------ ----------------------------------------------- --------------------------------------------
Steven D. Jorns
Chairman, Chief Executive Officer 1997 100,000 60,000 None None 250,000 (2) None
and President 1996(4) 41,667 None None 532,500 225,000 (3) None
Bruce G. Wiles
Executive Vice President 1997 90,000 45,000 None None 237,796 (2) None
1996(4) 37,500 None None 177,500 75,000 (3) None
Kenneth E. Barr
Executive Vice President, Chief
Financial Officer, Secretary and 1997 80,000 40,000 None None 212,796 (2) None
Treasurer 1996(4) 33,333 None None 106,500 40,000 (3) None
(1) In connection with the IPO, the Company granted Messrs. Jorns, Wiles and
Barr stock awards of 30,000, 10,000 and 6,000 shares of restricted Common
Stock, respectively. The restricted stock awards vest 10% on the date of
the IPO, 20% on the first and second anniversary dates of the IPO and 25%
on the third and fourth anniversary dates of the IPO. The calculation is
based on a per share price of Common Stock of $17.75, the offering price in
connection with the IPO.
(2) Represents shares purchasable pursuant to options granted in 1997. See
"Option Grants" below.
(3) Represents shares purchasable pursuant to options granted at the IPO. The
options are comprised of both incentive stock options ("ISOs") and
nonqualified options. Messrs. Jorns, Wiles and Barr have 22,532 ISOs with
the remainder of the IPO options being nonqualified stock options.
(4) Includes compensation only during the period from July 31, 1996 (inception
of operations) through December 31, 1996.
The executive officers, including Messrs. Jorns, Wiles and Barr, receive
health and disability insurance benefits which do not exceed 10% of their
respective salaries. These benefits are also provided to all other employees of
the Company.
Option Grants
The following table sets forth information regarding grants of stock options
to the Company's executive officers during the 1997 fiscal year. The options
were granted pursuant to the 1996 plan.
Option/SAR Grants in Last Fiscal Year
Potential Realizable Value at Assumed
Annual Rate of Stock Price
Individual Grants Appreciation for Option Term
------------------------------------------------------------------------------ ------------------------------
% of Total
Number of Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Granted Employees in Base Price Expiration
Name (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ---------------- -------------------- ------------- ------------ ---------- ------------- -------------
Steven D. Jorns 65,118 30.3% 23.25 01/02/07 952,142 2,412,916
184,882 18.9% 26.625 11/14/07 3,095,723 7,845,171
Bruce G. Wiles 37,796 17.6% 23.25 01/02/07 552,646 1,400,512
200,000 20.4% 26.625 11/14/07 3,349,000 8,486,679
Kenneth E. Barr 37,796 17.6% 23.25 01/02/07 552,646 1,400,512
175,000 17.9% 26.625 11/14/07 2,930,256 7,425,844
Russ C. Valentine 17,811 8.3% 23.25 01/02/07 260,429 659,978
150,000 15.3% 26.625 11/14/07 2,511,648 6,365,009
48
The options granted to Messrs. Jorns, Wiles, Barr and Valentine on January 2,
1997 were granted at an exercise price of $23.25 per share, the per share price
of the Common Stock at the date of grant. Each of such options becomes
exercisable over four equal annual installments, commencing on the first
anniversary date of grant and expires on the tenth anniversary of the date of
grant. These options also included dividend equivalent rights ("DERs") on the
vested portion of the options if the Company achieves an overall 15% annualized
return (stock price appreciation plus dividends) on the Common Stock for the
year.
The options granted to Messrs. Jorns, Wiles, Barr and Valentine on November
14, 1997 were granted at an exercise price of $26.625 per share, the per share
price of the Common Stock at the date of grant. Each of such options becomes
exercisable as follows: 25% of the option award will vest on each of the third
and fourth anniversary of the grant date and 50% will vest on the fifth
anniversary of the grant date.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs at In-the-Money Options/SARs at
December 31, 1997 (#) December 31, 1997 ($)(2)
-------------------------------------------- -------------------------------------
Name Exercisable (1) Unexercisable Exercisable Unexercisable
- ------------------------------ ------------------------- ---------------- ------------- ---------------------
Steven D. Jorns 112,500 362,500 1,012,500 1,263,523
Bruce G. Wiles 37,500 275,296 337,500 494,786
Kenneth E. Barr 20,000 232,796 180,000 334,161
Russ C. Valentine 10,000 177,811 90,000 171,089
(1) No options were exercised in 1997.
(2) Based on the difference between the option exercise price and the closing
sales price for the Common Stock on the New York Stock Exchange for
December 31, 1997, which was $26.75.
Employment Agreements
At the closing of the IPO, the Company entered into an employment agreement
with Mr. Jorns, pursuant to which Mr. Jorns serves as Chairman of the Board of
Directors, Chief Executive Officer and President of the Company for a term of
five years at an initial annual base compensation of $100,000, subject to any
increases in base compensation approved by the Compensation Committee. In
addition, at the closing of the IPO, the Company entered into employment
agreements with Messrs. Wiles, Barr and Valentine, pursuant to which Mr. Wiles
serves as Executive Vice President, Mr. Barr serves as Executive Vice President
& Chief Financial Officer and Mr. Valentine serves as Senior Vice President
Acquisitions, each for a term of five years, at an annual base compensation of
$90,000, $80,000 and $60,000, respectively, subject to any increases in base
compensation approved by the Compensation Committee. At its July 17, 1997
meeting, the Compensation Committee approved amendments to the employment
agreements of each of Messrs. Jorns, Wiles, Barr and Valentine that, among other
things, set their respective 1998 base salaries as follows: Steven D. Jorns -
$125,000; Bruce G. Wiles - $110,000; Kenneth E. Barr - $95,000; and Russ C.
Valentine - $75,000.
In addition to base salary, each such Executive Officer is eligible to receive
a performance-based bonus in the discretion of the Compensation Committee. For
1997, 50% of each Executive Officer's bonus compensation was conditioned upon
the Company attaining specific FFO targets. The balance of the bonus was
subject to the discretion of the Compensation Committee based on individual and
overall corporate performance.
Upon termination of an officer's employment agreement other than for cause, or
by such officer for "good reason" (as such term is defined in each officer's
employment agreement), each of such officers is entitled to receive severance
benefits in an amount equal to the greater of (i) the aggregate of all
compensation due such officer during the balance of the term of the employment
agreement or (ii) 1.99 times the "base amount" as determined in the Internal
Revenue code of 1986, as amended (the "Code").
49
At its July 17, 1997 meeting, in addition to adjusting the 1998 base salaries
of certain Executive Officer's, the Compensation Committee approved amendments
to the employment agreements of Messrs. Jorns, Wiles, Barr and Valentine, the
(i) added evergreen renewal options and (ii) provided for greater severance
benefits following a change in control of the Company, including the vesting of
all incentive compensation (i.e. options and restricted stock), subject to
"golden parachute" limitations.
REPORT OF THE COMPENSATION COMMITTEE
of the Board of Directors of the Company
Introduction. The Compensation Committee of the Board of Directors was
established in July 1996 and is comprised of Messrs. Worms and Hance, neither of
whom is or was an employee or officer of the Company prior to or during 1997.
The Compensation Committee is authorized to determine the compensation of the
Company's executive officers, administer the Company's stock incentive plans,
including determining the terms and conditions of the benefits and the
recipients thereof in accordance with the plans, review all existing and
proposed employee benefit plans and advise the Board of Directors regarding the
results and benefits thereof, and perform such other functions as necessary,
advisable or appropriate in the efficient discharge of its duties. The
Compensation Committee is in the process of devising and implementing
compensation policies for the Company's executive officers for the fiscal year
1998, which are commensurate with their positions, but, with the exception of
approving base salaries for fiscal year 1998, has not yet developed or adopted
any such policies.
Objectives of Executive Compensation. The Company's executive compensation
program is intended to attract, retain and reward experienced, highly motivated
executives who are capable of leading the Company effectively and continuing its
long-term growth. The compensation program for executives is comprised of base
salary, annual incentives and long-term incentive awards. Base salary is
targeted to be within a reasonable range of compensation for comparable
companies and for comparable levels of expertise by executives. Annual
incentives are based upon the achievement of one or more performance goals. The
Company also utilizes equity-based compensation as a long-term incentive.
Compensation Committee Procedures. The Compensation Committee engaged
Deloitte & Touche LLP in November 1996 to advise the Compensation Committee with
respect to executive compensation matters, including, among other things,
compensation amounts and the relative allocation of compensation among base
salary and short-term incentive compensation. The report addressed (i) 1998
base salaries for Company executives, (ii) performance standards for the
allocation of annual incentives to Company executives, (iii) long-term
incentives, including stock options and dividend equivalent rights ("DERs"), and
(iv) an increase in the number of shares under the Incentive Plan using a ten
percent (10%) evergreen limitation.
Subsequently, the Compensation Committee engaged FPL Associates Consulting
(the "Compensation Consultant") to further develop long-term incentive
compensation arrangements for the Company. The Compensation Committee, working
with the Compensation Consultant and in collaboration with senior management, is
also establishing quantitative and qualitative performance targets for the year
ending December 31, 1998 for both annual and short-term compensation awards.
The results of this review will be reflected in the annual incentive and short-
term compensation decisions for the fiscal year ending December 31, 1998.
Members of the Compensation Committee consult periodically by telephone
prior to the meeting at which compensation decisions are made. The Compensation
Committee exercises its independent discretion in determining the compensation
of the executive officers.
Each element of the Company's executive compensation, as well as
compensation of the Chief Executive Officer, is discussed separately below.
Employment Agreements. At its July 17, 1997 meeting, the Compensation
Committee approved amendments to the employment agreements of each of Messrs.
Jorns, Wiles, Barr and Valentine, that (i) added evergreen renewal options and
(ii) provided for greater severance benefits following a change in control of
the
50
company, including the vesting of all incentive compensation (i.e., options and
restricted stock), subject to "golden parachute" limitations.
Base Salary. Base salaries are determined by the Compensation Committee
after reviewing salaries paid by real estate investment trusts of similar size,
makeup and performance. The Compensation Committee generally sets base salaries
at a level to weight total compensation in favor of annual and long-term
performance-based compensation.
For the year ended December 31, 1997, the executive officers (other than
its Chief Executive Officer, who is discussed separately below) received the
same base salaries as in 1996: Bruce Wiles $90,000; Kenneth Barr $80,000; and
Russ Valentine $60,000. The Compensation Committee set the 1998 base salaries
for the executive officers at its July 17, 1997 meeting as follows (other than
its Chief Executive Officer, who is discussed separately below): Bruce Wiles
$110,000; Kenneth Barr $95,000; and Russ Valentine $75,000.
Annual Incentives. Annual incentives are provided in the form of cash
bonuses. Annual incentives are designed to reward executives and management for
the annual growth and achievement of the Company. The Compensation Committee
awards cash bonuses based primarily upon the Company's total earnings and
earnings growth, including growth in funds from operations.
At the July 17, 1997 Compensation Committee meeting, the Committee approved
the payment of the following target bonus for 1997, determined in accordance
with the policy stated above and as recommended by Deloitte & Touche LLP,
pending certification of certain performance criteria (the Chief Executive
Officer is discussed separately below): Bruce Wiles - 50% of base salary,
Kenneth Barr - 50% of base salary and Russ Valentine - 45% of base salary.
Fifty percent of the target bonus is subject to attaining or exceeding targeted
funds from operations. The balance is subject to the discretion of the
Compensation Committee based on individual and corporate performance. With
respect to assessing the performance of senior management, the Compensation
Committee will seek the input of the Chief Executive Officer.
Long-Term Incentives. Long-term incentives are provided primarily through
the grant of stock options. These grants are designed to align executives with
the long-term goals of the Company and the interests of the Company's
stockholders and encourage high levels of stock ownership among executives.
Long-term incentive compensation depends upon quantitative and objectives, as
well as qualitative measures of corporate performance. The Compensation
Committee uses long-term incentive compensation awards to reward management for
achieving favorable results based on predefined performance measures. Primary
emphasis of the total compensation package for all executives is placed on the
long-term component.
The Compensation Committee approved the grant of stock options as of
January 2, 1997 and November 14, 1997 for the fiscal year ended December 31,
1997 in accordance with the policy stated above, after reviewing the preliminary
and final recommendations of both Deloitte & Touche LLP and the Compensation
Consultant. The executive officers (other than its Chief Executive Officer, who
is discussed separately below) received the following options: Bruce Wiles
237,796; Kenneth Barr 212,796; and Russ Valentine 167,811.
The Compensation Committee also approved the grant of DERs. DERs entitle
holders to receive a cash bonus equivalent to the dividends paid during a
particular year on the number of shares subject to vested options if the Company
achieves total shareholder return (stock price appreciation plus dividends) of
at least 15 percent during that year. The executive officers (other than its
Chief Executive Officer who is discussed separately below) received DERs with
respect to the following options: Bruce Wiles - 37,796; Kenneth Barr - 37,796;
and Russ Valentine - 17,811, no cash payments were made with respect to DER's
for 1997 as none had vested in that year.
Compensation of Chief Executive Officer. Like senior management, Mr.
Jorns' 1997 base salary was the same as his 1996 salary: $100,000. For fiscal
year 1998, the Compensation Committee has approved a base salary for Mr. Jorns
of $125,000, representing a 25% increase over his 1997 base salary.
Mr. Jorns' target bonus for 1997 was determined by the Compensation
Committee substantially in accordance with the policies described above relating
to all executive officers and in accordance with the
51
recommendation of Deloitte & Touche LLP. Additionally, the Compensation
Committee considered a subjective evaluation of Mr. Jorns' ability to influence
the Company's long-term growth and profitability. For the year ended December
31, 1997, Mr. Jorns' target bonus, pending certification of certain performance
criteria, is 60% of his base salary.
The Compensation Committee determined Mr. Jorns' grant of stock options and
other long-term compensation for the year ended December 31, 1997 substantially
in accordance with the policies described above relating to all executive
officers. Mr. Jorns received a total of 250,000 Non-Qualified Stock Options for
the fiscal year ended December 31, 1997. Mr. Jorns also received a grant of
DERs with respect to 65,118 options. At its November 14, 1997 meeting, the
Compensation Committee approved an additional stock option award to Mr. Jorns,
effective January 2, 1998, of 237,381 Non-Qualified Stock Options, based on the
recommendations of the Compensation Consultant.
Tax Deductibility of Compensation. Section 162(m) of the Code limits the
deductibility in the Company's tax return of compensation over $1 million to any
of the executive officers unless, in general, the compensation is paid pursuant
to a plan which is performance-related, non-discretionary and has been approved
by the Company's stockholders. The Compensation Committee's policy with respect
to Section 162(m) is to make every reasonable effort to ensure that compensation
is deductible to the extent permitted while simultaneously providing Company
executives with appropriate rewards for their performance. The Company did not
pay any compensation during 1997 that would be subject to the limitations of
Section 162(m).
Submitted by the Compensation Committee:
Kent R. Hance
James R. Worms
STOCK PERFORMANCE GRAPH
The following graph provides a comparison of the cumulative total stockholder
return for the period from July 26, 1996 (the date upon which the Common Stock
was issued in the IPO at $17.75 per share) through December 31, 1997 (assuming
reinvestment of any dividends) among the Company, the Standard & Poor's ("S&P")
500 Index and the National Association of Real Estate Investment Trust Equity
Index (the "NAREIT Equity Index"). On the graph, total return equals
appreciation in stock price plus dividends paid. The Company will provide upon
request the names of the companies included in the NAREIT Equity Index. The
NAREIT Equity Index is published monthly by the National Association of Real
Estate Investment Trusts ("NAREIT") in its publication, REITWatch. The index is
available to the public upon request to NAREIT.
[Stock Performance Graph]
52
The foregoing graph is based upon the following data:
07/26/96 09/30/96 12/31/96 03/31/97 06/30/97 09/30/97 12/31/97
- -----------------------------------------------------------------------------------------------------------------------------
The Company $ 100.00 $ 107.04 $ 138.00 $ 158.34 $ 146.07 $ 174.74 $ 165.62
NAREIT Equity Index 100.00 113.77 114.19 122.40 164.54 166.07 149.96
S&P 500 Index 100.00 107.86 116.85 119.98 140.93 151.48 155.83
There can be no assurance that the Company's share performance will continue
into the future with the same or similar trends depicted in the graph above.
The Company will not make or endorse any predictions as to future share
performance.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 27, 1998 certain information
regarding the beneficial ownership of shares of Common Stock by (i) each
director of the Company, (ii) each executive officer of the Company (iii) by all
directors and executive officers of the Company as a group and (iv) by persons
who own more than 5.0% of the shares of Common Stock. Except as otherwise
described below, all shares are owned directly and the indicated person has
53
sole voting and investment power. The number of shares of Common Stock includes
the number of shares of Common Stock that such person could receive if he
exchanged his units of limited partnership ("OP Units") in the Operating
Partnership for shares of Common Stock under certain circumstances.
Number of Shares Percent of
Name of Beneficial Owner Beneficially Owned(1) Class(1)
- --------------------------------------------------------------------- --------------------- --------
Kenneth E. Barr (2).................................................. 46,228 *
Kent R. Hance (3) ................................................... 9,852 *
Steven D. Jorns (4).................................................. 255,427 1.2%
H. Cabot Lodge III (5)............................................... 7,352 *
James McCurry (5).................................................... 7,352 *
Russ C. Valentine (6)................................................ 22,133 *
Bruce G. Wiles (7)................................................... 87,722 *
James R. Worms (8)................................................... 8,352 *
Executive officers and directors as a group 444,418 2.1%
(8 persons).....................................................
ABKB/LaSalle Securities Limited Partnership (9)...................... 1,548,728 6.3%
LaSalle Advisors Capital Management, Inc. (9)........................ 1,335,505 5.5%
The Equitable Companies Incorporated (10)............................ 1,357,400 5.5%
Boston Partners Asset Management, L.P., Boston Partners, Inc. and
Desmond John Heathwood (11)......................................... 1,233,135 5.0%
* Represents less than 1.0% of the class.
(1) Assumes that all OP Units held by each named person are exchanged for
shares of Common Stock. The total number of shares outstanding used in
calculating the percentage assumes that none of the OP Units held by other
persons are exchanged for shares of Common Stock. Pursuant to the exchange
rights agreement among the Company, the Operating Partnership and its
limited partners (other than AGH LP, Inc.), OP Units issued at the IPO are
exchangeable for shares of Common Stock beginning July 31, 1997, the first
anniversary date of the closing of the IPO and subsequently issued OP Units
are exchangeable for share of Common Stock after the first year anniversary
of the date of the issuance of such OP Units.
(2) Includes (a) 29,449 shares of Common Stock that have vested under options
granted, (b) 6,000 shares of restricted Common Stock that constitute stock
awards, (c) 79 shares of Common Stock held by AGHI's Retirement Savings
Plan (the "Plan") and attributable to Mr. Barr, (d) 10,000 OP Units issued
to Mr. Barr in connection with the principal transaction associated with
the formation of the Company and the acquisition of the Initial Hotels (the
"Formation Transactions") and (e) 100 shares of Common Stock purchased by
Mr. Barr through open market transactions since the IPO, as custodian on
behalf of a family member, with respect to which Mr. Barr disclaims
beneficial ownership.
(3) Includes (a) 6,666 shares of Common Stock that have vested under options
granted pursuant to the Company's Non-Employee Directors' Incentive Plan
(the "Directors' Plan") and (b) 686 shares of Common Stock issued pursuant
to the Directors' Plan.
(4) Includes (a) 128,780 shares of Common Stock that have vested under options
granted, (b) 30,000 shares of restricted Common Stock that constitute stock
awards, (c) 74,376 OP Units issued to Mr. Jorns in connection with the
Formation Transactions, (d) 19,104 OP Units issued to Mr. Jorns' wife in
connection with the Formation Transaction with respect to which Mr. Jorns
disclaims beneficial ownership and (e) 2,167 shares of Common Stock held by
the Plan and attributable to Mr. Jorns.
(5) Includes (a) 6,666 shares of Common Stock that have vested under options
granted pursuant to the Directors' Plan and (b) 686 shares of Common Stock
issued pursuant to the Directors' Plan.
(6) Includes (a) 14,453 shares of Common Stock that have vested under options
granted, (b) 4,000 shares of restricted Common Stock that constitute stock
awards and (c) 1,840 shares of Common Stock held by the Plan and
attributable to Mr. Valentine.
(7) Includes (a) 46,949 shares of Common Stock that have vested under options
granted, (b) 10,000 shares of restricted Common Stock that constitute stock
awards, (c) 2,352 shares of Common Stock held by the Plan and attributable
to Mr. Wiles and (d) 28,121 OP Units issued to Mr. Wiles in connection with
the Formation Transactions.
(8) Includes (a) 6,666 shares of Common Stock that have vested under options
granted pursuant to the Directors' Plan, and (b) 686 shares of Common Stock
issued pursuant to the Directors' Plan.
(9) Beneficial ownership information is based on the Schedule 13G jointly filed
by LaSalle Advisors Capital Management, Inc. (200 East Randolph Drive,
Chicago, Illinois 60601) and ABKB/LaSalle Securities Limited Partnership
(200 East Randolph Drive, Chicago, Illinois 60601), dated February 13,
1998.
(10) Beneficial ownership information is based on Schedule 13G jointly filed by
Alpha Assurances Vie Mutuelle (100 101 Terrasse Boieldieu, 92042 Paris la
Defense France), AXA Assurances I.A.R.D. Mutuelle and AXA Assurances Vie
Mutuelle (21, rue de Chateaudun, 75009 Paris France), AXA Courtage
Assurance Mutuelle (26, rue de le Grand, 75002
54
Paris France), AXA-UAP (23, avenue Matignon, 75008 Paris France) and The
Equitable Companies Incorporated (1290 Avenue of the Americas, New York,
New York 10104), dated February 17, 1998.
(11) Beneficial ownership information is based on the Schedule 13G jointly filed
by Boston Partners Asset Management, L.P., Boston Partners, Inc. and
Desmond John Heathwood (all located at One Financial Center, 43rd Floor,
Boston, MA 02111), dated February 13, 1998.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationships Among Officers and Directors
Mr. Jorns is an executive officer, director and securityholder of each of the
Company, AGH Leasing, AGHI and the beverage corporations (the "Beverage
Corporations") that sublease from AGH Leasing the portion of certain of the 45
Current Hotels owned by the Company where alcoholic beverages are sold. Mr.
Wiles is an executive officer and stockholder of the Company and is an executive
officer, director and securityholder of each of AGH Leasing and AGHI. Mr. Barr
is an executive officer and stockholder of the Company, an executive officer and
securityholder of AGH Leasing and an executive officer of AGHI. Mr. Valentine
is an executive officer and stockholder of the Company and is an executive
officer of AGHI.
Acquisition of Interest in the Courtyard by Marriott Durham
One or more of Messrs. Jorns and Wiles and their respective affiliates owned
equity interests relating to the Courtyard by Marriott in Durham, North Carolina
acquired by the Company in December 1997. Such persons and affiliates received
an aggregate of 13,650 OP Units in exchange for such interests in the Durham
hotel. Upon exercise of their rights to exchange such OP Units (which rights are
not exercisable until December 1998), such persons and entities may receive cash
or, at the Company's option, an aggregate of 13,650 shares of Common Stock. In
addition, in connection with the acquisition of the Courtyard by Marriott
Durham, the Company paid an additional $132,000 to such persons as consideration
for entering into an indemnification agreement in connection with certain
representations and warranties that were made with respect to such hotel.
Proposed Acquisition of Madison Hotel
In June 1997, the Company entered into an agreement to acquire the 202-room
Madison Hotel in Madison, Wisconsin (the "Madison Acquisition") for an aggregate
purchase price of approximately $12 million payable through a combination of
cash and the issuance of OP Units. This acquisition will occur following the
complete renovation of the hotel to a full-service Holiday Inn. The acquisition
and the hotel is conditioned upon the seller's renovation of the hotel (to which
approximately $8 million of the purchase price will be applied). The hotel is
currently owned by a private partnership which consists primarily of AGHI
shareholders, including Messrs. Jorns and Wiles. The Madison Acquisition is
expected to close during the second quarter of 1998.
Shared Services and Office Space Agreement
The Company has entered into a shared services and office space agreement with
AGHI pursuant to which AGHI provides the Company with office space and limited
support personnel for the Company's headquarters at 5605 MacArthur Boulevard,
Irving, Texas 75038 for an annual fee of approximately $103,000.
55
Purchase of Personal Property
In order for the Company to qualify as a REIT, the Operating Partnership sold
certain personal property relating to certain of the Initial Hotels to the AGH
Leasing for $315,000, which amount was paid by issuance of a promissory note to
the Operating Partnership. The promissory notes are recourse to the AGH Leasing
and bear interest at the rate of 10.0% per annum and require the payment of
quarterly installments of principal and interest of approximately $20,000 that
will fully amortize the notes over a five-year period ending on July 31, 2001.
The Participating Leases
The Company and AGH Leasing have entered into the Participating Leases, each
with a term of twelve years from the inception of the lease, relating to each of
the Current Hotels. Pursuant to the terms of the Participating Leases, AGH
Leasing is required to pay to the company the greater of fixed weekly base rent
or monthly participating rent and is entitled to all profits from the operation
of the hotels it leases after the payment of rent and all other operating and
other expenses. See "Financial Statements AGH Leasing." In addition, the Company
has entered into a lease master agreement with AGH Leasing which sets forth the
terms of the AGH Leasing Pledge whereby the owners of AGH Leasing pledged
certain of their interests in the Operating Partnership to secure AGH Leasing's
obligations under the Participating Leases and certain other matters.
The Management Agreements
The AGH Leasing and AGHI entered into the Management Agreements, each with a
term of twelve years from the date of the acquisition of the applicable hotel,
relating to the management of 44 of the Current Hotels. In the future if AGHI
is engaged as the manager of additional hotel properties, the Company
anticipates that similar Management Agreements will be entered into with AGHI.
Pursuant to the Management Agreements, AGHI is entitled to receive a base fee of
1.5% of gross revenues, plus an incentive fee of up to 2.0% of gross revenues
based on the hotels achieving certain increases in revenue. The payment of
management fees to AGHI by AGH Leasing is subordinate to AGH Leasing's
obligations to the Company under the Participating Leases.
The Beverage Corporations
In order to facilitate compliance with state and local liquor laws and
regulations, AGH Leasing subleases those areas of certain of the Current Hotels
that comprise the restaurant and other areas where alcoholic beverages are
served to the Beverage Corporations, 39 of which are wholly owned by Mr. Jorns.
In accordance with the terms of the Beverage Subleases, each Beverage
Corporation is obligated to pay to AGH Leasing rent payments equal to 30% of
each such corporation's annual gross revenues generated from the sale of food
and beverages generated from such areas; however, pursuant to the Participating
Leases, such subleases will not reduce the Participating Rent payments to the
Operating Partnership, which it is entitled to receive from such food and
beverage sales.
56
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Included herein at pages F-1 through F-37.
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are included herein at pages F-18
and F-38.
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1997.
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1996.
All other schedules for which provision is made in Regulation S-X are either not
required to be included herein under the related instructions or are
inapplicable or the related information is included in the footnotes to the
applicable financial statement and, therefore, have been omitted
3. EXHIBITS
The following exhibits are filed as part of this Annual Report on Form 10-K:
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation of the Registrant (Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-11, No. 333-4568).
3.2 Articles of Amendment and Restatement of the Registrant
(Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-11, No. 333-4568).
3.3 Bylaws of the Registrant (Incorporated by reference to Exhibit
3.3 to the Company's Registration Statement on Form S-11, No.
333-4568).
3.4 Form of Second Articles of Amendment and Restatement
(Incorporated by reference to the Company's Registration
Statement on Form S-11, No. 333-4568)
4.1 Form of Common Stock Certificate for the Registrant (Incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-11, No. 333-4568).
10.1 American General Hospitality Operating Partnership, L.P. Limited
Partnership Formation Agreement (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-
11, No. 333-4568).
10.2 Form of Amended and Restated Agreement of Limited Partnership of
American General Hospitality Operating Partnership, L.P.
(Incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-11, No. 333-4568).
10.3 Form of Participating Lease between the Registrant and AGH
Leasing, L.P. (Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-11, No. 333-4568).
57
10.4 Form of Lease Master Agreement between the Registrant and AGH
Leasing, L.P. (Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-11, No. 333-4568).
10.5 Form of Management Agreement between AGH Leasing, L.P. and
American General Hospitality, Inc. (Incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on Form
S-11, No. 333-4568).
10.6 Form of Supplemental Representations, Warranties and Indemnity
Agreement (Incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-11, No. 333-4568).
10.7 Form of Exchange Rights Agreement (Incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form
S-11, No. 333-4568).
10.8 Form of Registration Rights Agreement (Incorporated by reference
to Exhibit 10.8 to the Company's Registration Statement on Form
S-11, No. 333-4568).
10.9 Form of Lock-up Agreement (Incorporated by reference to Exhibit
10.9 to the Company's Registration Statement on Form S-11, No.
333-4568).
10.10 American General Hospitality Corporation 1996 Inventive Plan
(Incorporated by reference to Exhibit A to the Company's Proxy
Statement on Schedule 14A, dated April 14, 1998).
10.11 Form of American General Hospitality Corporation Non-Employee
Directors' Incentive Plan (Incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-11, No.
333-4568).
10.12 Form of Employment Agreement between the Registration and Steven
D. Jorns (Incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-11, No. 333-4568).
10.13 Form of Employment Agreement between the Registrant and Bruce G.
Wiles (Incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-11, No. 333-4568).
10.14 Form of Employment Agreement between the Registrant and Kenneth
E. Barr (Incorporated by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-11, No. 333-4568).
10.15 Form of Employment Agreement between the Registrant and Russ C.
Valentine (Incorporated by reference to Exhibit 10.16 to the
Company's Registration Statement on Form S-11, No. 333-4568).
10.16 Amendment to the Employment Agreement, dated July 31, 1997,
between the Registrant and Steven D. Jorns.*+
10.17 Amendment to the Employment Agreement, dated July 31, 1997,
between the Registrant and Bruce G. Wiles.*+
10.18 Amendment to the Employment Agreement, dated July 31, 1997,
between the Registrant and Kenneth E. Barr.*+
58
10.19 Amendment to the Employment Agreement, dated July 31, 1997,
between the Registrant and Russ C. Valentine.*+
10.20 Employment Agreement, dated November 14, 1997, between the
Registrant and John P. Buza.*+
10.21 Amended and Restated Senior Unsecured Credit Agreement
(Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K, dated February 13, 1998, No.
1-11903).
10.22 Subordinate Unsecured Credit Agreement (Incorporated by reference
to Exhibit 10.2 to the Company's Current Report on Form 8-K,
dated February 13, 1998, No. 1-11903).
10.23 Form of Shared Services Office Space Agreement (Incorporated by
reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-11, No. 333-4568).
10.24 Form of Indemnification Agreement between the Registrant and its
executive officers and directors (Incorporated by reference to
Exhibit 10.19 to the Company's Registration Statement on Form
S-11, No. 333-4568).
10.25 Form of Option Agreement and Right of First Offer/Refusal between
Broadway Morrison Limited Partnership and American General
Hospitality Operating Partnership, L.P. (with respect to the
Boise, Idaho Option Hotel) (Incorporated by reference to Exhibit
10.20 to the Company's Registration Statement on Form S-11, No.
333-4568).
10.26 Form of Management Company Master Agreement among AGH Leasing,
L.P., American General Hospitality, Inc., Steven D. Jorns and
Bruce G. Wiles (Incorporated by reference to Exhibit 10.21 to the
Company's Registration Statement on Form S-11, No. 333-4568).
10.27 Master Alliance Agreement by and among American General
Hospitality Corporation, American General Hospitality Operating
Partnership, L.P. and WHC Franchise Corporation, WHC Development
Corporation (Incorporated by reference to Exhibit 10.22 to the
Company's Registration Statement on Form S-11, No. 333-4568).
10.28 Amended and Restated Purchase and Sale Agreement, dated January
7, 1998, between Prime and the Operating Partnership (Crowne
Plaza Suites Las Vegas) (Incorporated herein by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K, dated
January 8, 1998, No. 1-11903).
10.29 Amended and Restated Purchase and Sale Agreement, dated January
7, 1998, between Prime and the Operating Partnership (St. Tropez
Suites Las Vegas) (Incorporated herein by reference to Exhibit
2.2 to the Company's Current Report on Form 8-K, dated January 8,
1998, No. 1-11903).
10.30 Amended and Restated Purchase and Sale Agreement, dated January
7, 1998, between Prime and the Operating Partnership (Ramada Inn
Mahwah) (Incorporated herein by reference to Exhibit 2.3 to the
Company's Current Report on Form 8-K, dated January 8, 1998, No.
1-11903).
10.31 Amended and Restated Purchase and Sale Agreement, dated January
7, 1998, between Prime and the Operating Partnership (Ramada
Plaza Meriden) (Incorporated herein by reference to Exhibit 2.4
to the Company's Current Report on Form 8-K, dated January 8,
1998, No. 1-11903).
59
10.32 Amended and Restated Purchase and Sale Agreement, dated January
7, 1998, between Prime and Mahwah Holding Corp. and the Operating
Partnership (Sheraton Crossroads Hotel Mahwah) (Incorporated
herein by reference to Exhibit 2.5 to the Company's Current
Report on Form 8-K, dated January 8, 1998, No. 1-11903).
10.33 Amended and Restated Purchase and Sale Agreement, dated January
7, 1998, between Prime and Mt. Arlington New Jersey, LLC
(Sheraton Four Points Hotel Mount Arlington) (Incorporated herein
by reference to Exhibit 2.6 to the Company's Current Report on
Form 8-K, dated January 8, 1998, No. 1-11903).
10.34 Amended and Restated Purchase and Sale Agreement, dated January
7, 1998, between Prime and Fairfield Holding Corp. and
Portland/Shelton LLC (Crowne Plaza Portland) (Incorporated herein
by reference to Exhibit 2.7 to the Company's Current Report on
Form 8-K, dated January 8, 1998, No. 1-11903).
10.35 Amended and Restated Purchase and Sale Agreement, dated January
7, 1998, between Prime and the Fairfield Holding Corp. and
Portland/Shelton LLC (Ramada Plaza Shelton) (Incorporated herein
by reference to Exhibit 2.8 to the Company's Current Report on
Form 8-K, dated January 8, 1998, No. 1-11903).
10.36 Form of Participating Lease for the Prime Group I Acquisition
Hotels and the Lease Modification Letter, dated January 7, 1998,
from American General Hospitality Operating Partnership, L.P. to
Prime Hospitality Corp. (Incorporated herein by reference to
Exhibit 2.9 to the Company's Current Report on Form 8-K, dated
January 8, 1998, No. 1-11903).
10.37 Contract for Purchase and Sale of Hotels, dated November 26,
1997, between Clearwater Surfside Hotel Trust, FSA Zeta LBV
Hotel, Inc., Tampa Airport Hotel Trust, Marina del Rey Hotel
Trust, Ft. Lauderdale Beach Hotel Trust, Clearwater-Gulfview
Hotel Trust, Century City Hotel Management, Inc., Madeira Beach
Hotel Trust, Zeta Kay Largo Hotel, Inc., Richmond Hotel Trust,
Zeta St. Louis Hotel, Inc., Zeta Rochester Hotel, Inc., and the
Operating Partnership (Incorporated herein by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K, dated
February 13, 1998, No. 1-11903).
10.38 Contract for Purchase and Sale of Hotel, dated November 26, 1997,
between Zeta Mystic Hotel, Inc. and the Operating Partnership
(Incorporated herein by reference to Exhibit 2.2 to the Company's
Current Report on Form 8-K, dated February 13, 1998, No. 1-
11903).
10.39 Agreement and Plan of Merger, dated as of March 15, 1998, by and
among the Registrant and the Operating Partnership, on the one
hand, and CapStar Hotel Company, CapStar Management Company,
L.P., and CapStar Management Company II, L.P., on the other hand
(Incorporated by reference to Exhibit 99.4 to the Company's
Current Report on Form 8-K, dated March 17, 1998, No. 1-11903).
21.1 Subsidiaries of the Company.*
23.1 Consent of Coopers & Lybrand.*
24.1 Power of Attorney (Included on the Signature Pages hereto).*
27.1 Financial Data Schedule.*
*Filed herewith.
+Management contract or compensatory plan or arrangement.
60
(b) Reports on Form 8-K
1. A current report on Form 8-K, dated November 7, 1997, was filed by the
Company with the SEC in connection with the public offering of
4,250,000 shares of Common Stock, for a purchase price of $27.50 per
share or $116,875,000 in the aggregate.
2. A current report on Form 8-K, dated October 7, 1997, was filed by the
Company with the SEC in connection with the private sale of 2,671,705
shares of Common Stock to various institutional investors.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN GENERAL HOSPITALITY CORPORATION
a Maryland corporation (Registrant)
By:/s/ Steven D. Jorns
----------------------------------
STEVEN D. JORNS
Chairman of the Board, Chief Executive
Officer, and President
Each of the officers and directors of American General Hospitality Corporation
whose signature appears below, in so signing, also makes, constitutes and
appoints Steven D. Jorns and Kenneth E. Barr, and each of them acting along, his
true and lawful attorney-in-fact, with full power and substitution, for him in
any and all capacities, to execute and cause to be filed with the Securities and
Exchange Commission any and all amendment or amendments to the Report on Form
10-K, with exhibits thereto and other documents connected therewith and to
perform any acts necessary to be done in order to file such documents, and
hereby ratifies and confirms all that said attorney-in-fact or his substitute or
substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Steven D. Jorns Chairman of the Board,
- --------------------------- Chief Executive Officer,
STEVEN D. JORNS and President March 31, 1997
/s/ Kenneth E. Barr Executive Vice President,
- --------------------------- Chief Financial Officer,
KENNETH E. BARR Principal Accounting Officer,
Secretary and Treasurer March 31, 1997
/s/ H. Cabot Lodge III Director March 31, 1997
- --------------------------
H. CABOT LODGE III
/s/ James R. Worms Director March 31, 1997
- --------------------------
JAMES R. WORMS
/s/ James McCurry Director March 31, 1997
- --------------------------
JAMES MCCURRY
/s/ Kent R. Hance Director March 31, 1997
- ---------------------------------
KENT R. HANCE
62
AMERICAN GENERAL HOSPITALITY CORPORATION
INDEX TO FINANCIAL STATEMENTS
AMERICAN GENERAL HOSPITALITY CORPORATION
- ----------------------------------------
Report of Independent Accountants............................................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996 .................... F-3
Consolidated Statements of Operations for the Year Ended December 31, 1997 and for the
Period from July 31, 1996 (inception of operations) through December 31, 1996 ........... F-4
Consolidated Statements of Shareholders' Equity for the Year Ended December 31, 1997 and for
the Period from July 31, 1996 (inception of operations) through December 31, 1996 ....... F-5
Consolidated Statements of Cash Flows for the Year Ended December 31, 1997 and for the
Period from July 31, 1996 (inception of operations) through December 31, 1996 ........... F-7
Notes to Consolidated Financial Statements.................................................... F-8
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1997............... F-24
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1996............... F-25
AGH LEASING, L.P.
- -----------------
Report of Independent Accountants............................................................. F-26
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996..................... F-27
Consolidated Statements of Operations for the Year Ended December 31, 1997 and for the
Period from July 31, 1996 (inception of operations) through December 31, 1996 ........... F-28
Consolidated Statements of Partners' Deficit for the Year Ended December 31, 1997 and for the
Period from July 31, 1996 (inception of operations) through December 31, 1996............ F-29
Consolidated Statements of Cash Flows for the Year Ended December 31, 1997 and for the
Period from July 31, 1996 (inception of operations) through December 31, 1996............ F-30
Notes to Consolidated Financial Statements.................................................... F-31
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
American General Hospitality Corporation
We have audited the accompanying consolidated balance sheets and financial
statement schedule of American General Hospitality Corporation as of December
31, 1997 and 1996 and the related consolidated statements of operations,
shareholders' equity and cash flows for the year ended December 31, 1997 and for
the period from July 31, 1996 (inception of operations) through December 31,
1996. Our audits also included the financial statement schedule listed in the
Index at Item F-24 and F-25. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American General
Hospitality Corporation as of December 31, 1997 and 1996 and the consolidated
results of their operations and their cash flows for the year ended December 31,
1997 and for the period from July 31, 1996 (inception of operations) through
December 31, 1996 in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
January 26, 1998, except for
Note 11, as to which the date is
March 16, 1998
F-2
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
1997 1996
----------------------- -----------------------
ASSETS
Investment in hotel properties
Land and land improvements.................................... $ 46,352,820 $ 17,287,136
Buildings and building improvements........................... 449,575,286 195,294,012
Furniture, fixtures and equipment............................. 38,218,668 11,505,892
Construction in progress...................................... 53,605,534 10,861,976
----------------------- -----------------------
587,752,308 234,949,016
Less: accumulated depreciation.................................. (18,162,480) (4,188,198)
----------------------- -----------------------
Net investment in hotel properties............................... 569,589,828 230,760,818
Cash and cash equivalents........................................ 800,255 3,888,281
Restricted cash.................................................. 765,048 544,541
Participating Lease receivable - AGH Leasing, L.P................ 7,999,122 3,982,424
Deferred expenses, net........................................... 4,037,825 2,986,946
Other assets..................................................... 1,661,650 664,661
Note receivable - AGH Leasing, L.P............................... 234,321 287,684
----------------------- -----------------------
Total assets................................................ $ 585,088,049 $ 243,115,355
======================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt............................................................. $ 36,140,059 $ 19,122,398
Debt, Line of Credit............................................. 41,312,177 57,500,000
Distributions payable............................................ 9,352,973 4,150,729
Accounts payable, trade, accrued expenses and other
Liabilities................................................... 11,676,685 5,756,097
Minority interest in Operating Partnership....................... 43,356,608 29,125,020
----------------------- -----------------------
Total liabilities........................................... 141,838,502 115,654,244
----------------------- -----------------------
Commitments and Contingencies (Note 5)
Shareholders' equity
Common stock $0.01 par value per share, 100,000,000 shares
authorized, 21,182,308 and 8,288,841 shares issued and
outstanding at December 31, 1997 and 1996, respectively........ 211,823 82,888
Additional paid-in capital....................................... 447,573,312 128,746,013
Unearned officers' compensation.................................. (724,792) (850,521)
Distributions in excess of accumulated earnings.................. (3,810,796) (517,269)
----------------------- -----------------------
Total shareholders' equity.................................. 443,249,547 127,461,111
----------------------- -----------------------
Total liabilities and shareholders' equity.................. $ 585,088,049 $ 243,115,355
======================= =======================
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1996
1997 1996
------------------------- -----------------------
Revenues
Participating Lease revenue............................. $ 59,934,337 $ 13,387,719
Office building rental income........................... 1,205,465
Interest income......................................... 771,955 108,075
------------------------- -----------------------
Total revenue.................................... 61,911,757 13,495,794
------------------------- -----------------------
Expenses
Depreciation............................................ 13,970,289 2,635,380
Amortization of deferred loan costs..................... 977,109 234,375
Amortization of franchise fees.......................... 98,311 31,621
Amortization of other deferred expenses................. 30,478 7,429
Real estate and personal property taxes and
property insurance................................... 7,073,323 1,444,592
Office building operating expense....................... 596,939
General and administrative.............................. 1,999,923 822,113
Ground lease expense.................................... 1,271,639 545,279
Amortization of unearned officers' compensation......... 125,729 36,979
Interest expense........................................ 9,048,898 1,412,117
------------------------- -----------------------
Total expenses................................... 35,192,638 7,169,885
------------------------- -----------------------
Income before minority interest............................ 26,719,119 6,325,909
Minority interest.......................................... 3,234,189 1,196,728
------------------------- -----------------------
Net income applicable to common stockholders............... $ 23,484,930 $ 5,129,181
========================= =======================
Net income per basic common share.......................... $ 1.60 $ 0.63
========================= =======================
Weighted average number of basic shares
of common stock outstanding............................. 14,678,160 8,122,139
========================= =======================
Net income per diluted common share........................ $ 1.58 $ 0.63
========================= =======================
Weighted average number of diluted shares
of common stock outstanding............................. 14,841,343 8,164,774
========================= =======================
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997
Common Stock Additional Unearned Distributions in
-------------------------- Paid-In Officers' Excess of
Shares Dollars Capital Compensation Earnings Total
----------- ----------- ------------ ------------ ---------------- -------------
Issuance of common shares, net
of offering expenses and
allocation to minority
interest ($1,974,944) 8,212,008 $ 82,120 $127,276,784 $ 127,358,904
Issuance of restricted common
shares to officers 50,000 500 887,000 $ (887,500)
Distributions declared
September 28, 1996
($0.2746 (per share) $ (2,268,748) (2,268,748)
Distributions declared December
18, 1996 ($0.4075 per share) (3,377,702) (3,377,702)
Issuance of common shares to
directors 1,436 14 25,475 25,489
Issuance of common shares for
the acquisition of the Days
Inn Lake Buena Vista
adjusted for allocation to
minority interest ($57,008) 25,397 254 556,754 557,008
Amortization of unearned
officers' compensation 36,979 36,979
Net income 5,129,181 5,129,181
----------- ----------- ------------ ------------ ---------------- -------------
Balance at December 31, 1996 8,288,841 82,888 128,746,013 (850,521) (517,269) 127,461,111
Issuance of common shares, net
of offering expenses and
allocation to minority
interest ($7,332,705) 6,368,300 63,683 154,332,763 154,396,446
Distributions declared March
13, 1997 ($0.4075 per share) (5,972,785) (5,972,785)
Distributions declared June 15,
1997 ($0.4075 per share) (6,018,820) (6,018,820)
Distributions declared
September 13, 1997 ($0.4275
per share) (6,316,320) (6,316,320)
Distributions declared December
11, 1997 ($0.4275 per
share) (8,470,533) (8,470,533)
Allocation of minority interest
from the issuance of Cocoa
Beach OP units 1,346,155 1,346,155
Issuance of common shares to
Wyndham Hotel Corporation
and allocation to minority
Interest ($60,593) 112,969 1,130 2,438,277 2,439,407
Issuance of common shares to
directors 1,308 13 33,995 34,008
F-5
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- (CONTINUED) FROM THE PERIOD FROM JULY 31, 1996 (INCEPTION OF
OPERATIONS) THROUGH DECEMBER 31, 1996 AND
FOR THE YEAR ENDED DECEMBER 31, 1997
Common Stock Additional Unearned Distributions in
-------------------------- Paid-In Officers' Excess of
Shares Dollars Capital Compensation Earnings Total
----------- ----------- ------------ ------------ ---------------- -------------
Issuance of common shares for
ABKB/LaSalle offering, net
of expenses and allocation
to minority interest
($1,082,122) 2,057,033 20,570 50,973,758 50,994,328
Issuance of common shares, net
of offering expenses and
allocation to minority
interest ($2,288,966) 4,250,000 42,500 107,823,534 107,866,034
Allocation of minority interest
from the issuance of
Courtyard Durham OP Units 36,394 36,394
Issuance of common shares in
exchange for OP units 103,857 1,039 1,842,423 1,843,462
Amortization of unearned
officers' compensation 125,729 125,729
Net Income 23,484,931 23,484,931
----------- ----------- ------------ --------- ----------- -------------
Balance at December 31, 1997 21,182,308 $ 211,823 $447,573,312 $(724,792) $(3,810,796) $443,249,547
=========== =========== ============ ========= =========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
FOR THE PERIOD FROM JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1996
1997 1996
----------------------- -----------------------
Cash flow from operating activities:
Net income. ................................................... $ 23,484,930 $ 5,129,181
Adjustments to reconcile net income to net cash provided by
Operating activities, net of effects of acquisitions:
Depreciation................................................ 13,970,289 2,635,380
Amortization................................................ 1,231,627 310,404
Minority interest........................................... 3,234,189 1,196,728
Common stock issued to Board of Directors .................. 34,008
Changes in assets and liabilities:
Restricted cash............................................. (220,508) (544,541)
Participating Lease receivable.............................. (4,016,699) (3,982,424)
Organization costs and franchise agreements................. (211,116) (1,010,371)
Other assets................................................ (996,990) (664,661)
Accounts payable, trade, accrued expenses and other
liabilities 5,920,588 5,756,097
----------------------- -----------------------
Net cash flow provided by operating activities................. 42,430,318 8,825,793
----------------------- -----------------------
Cash flow from investing activities:
Purchase of hotel properties.............................. (270,113,514) (175,612,831)
Improvements and additions to hotel properties............ (58,133,280) (10,861,976)
Payments received from loan to Lessee..................... 53,363 27,316
----------------------- -----------------------
Net cash flow used in investing activities........... (328,193,431) (186,447,491)
----------------------- -----------------------
Cash flow from financing activities:
Proceeds from borrowings.................................... 223,000,000 67,500,000
Net proceeds from public offerings.......................... 161,729,151 129,333,898
Net proceeds from Wyndham strategic alliance stock sale..... 2,500,000
Net proceeds from private placement - ABKB.................. 52,076,450
Net proceeds ROCS offering ................................. 110,155,000
Principal payments on borrowings............................ (239,915,267) (10,283,862)
Distributions paid - common stockholders.................... (21,685,628) (2,268,748)
Distributions paid - OP Unit holders........................ (3,247,119) (521,309)
Payments for deferred loan costs............................ (1,937,500) (2,250,000)
----------------------- -----------------------
Net cash flow provided by financing activities....... 282,675,087 181,509,979
----------------------- -----------------------
Net change in cash and cash equivalents........................ (3,088,026) 3,888,281
Cash and cash equivalents at beginning of periods.............. $ 3,888,281
----------------------- -----------------------
Cash and cash equivalents at end of periods.................... $ 800,255 $ 3,888,281
======================= =======================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ................ $ 7,542,607 $ 1,251,610
======================= =======================
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND INITIAL PUBLIC OFFERING
American General Hospitality Corporation (the "Company") was
incorporated and formed on April 12, 1996, as a Maryland corporation qualifying
as a real estate investment trust ("REIT"). The Company commenced operations and
completed an Initial Public Offering ("IPO") of 7,500,000 shares of its common
stock on July 31, 1996. An additional 575,000 shares of common stock were issued
by the Company on August 28, 1996, upon exercise of the underwriters'
over-allotment option. The offering price of all shares sold in the IPO was
$17.75 per share, resulting in net proceeds of approximately $129.3 million
after deducting IPO expenses.
The Company contributed all of the net proceeds of the IPO to AGH GP,
Inc. (the "General Partner"), and AGH LP, Inc. (the "Limited Partner"), which in
turn contributed such proceeds to American General Hospitality Operating
Partnership, L.P. (the "Operating Partnership"), in exchange for an approximate
81.3% aggregate equity interest in the Operating Partnership. At December 31,
1997, the General Partner, a wholly owned subsidiary of the Company, owns a 1.0%
interest in the Operating Partnership and the Limited Partner, also a wholly
owned subsidiary of the Company, owns an approximate 90.1% limited partnership
interest in the Operating Partnership.
On July 31, 1996, the Operating Partnership acquired directly or
indirectly the equity interests in each of the Initial Hotels for an aggregate
of 1,896,996 units of limited partnership interest in the Operating Partnership
("OP Units") (560,178 OP Units to the Primary Contributors and 1,336,818 OP
Units to parties unaffiliated with the Primary Contributors) and approximately
$91.0 million in cash to parties unaffiliated with the Primary Contributors.
Four of the Initial Hotels (the "AGH Predecessor Hotels") were acquired
primarily from limited partnerships controlled by the shareholders of American
General Hospitality, Inc. ("AGHI"), and principals of the Lessee and certain of
their respective affiliates (the "Primary Contributors"). The remaining nine
Initial Hotels (the "AGH Acquisition Hotels") were acquired primarily from
parties unaffiliated with the Primary Contributors. In addition, the Company
acquired interests in five of the Initial Hotels from the AGHI Employee
Retirement Savings Plan (the "Retirement Plan") in exchange for 137,008 shares
of restricted common stock.
At December 31, 1997, the Company owned 27 hotels in 16 states
consisting of the Initial Hotels and the hotels acquired in the periods
indicated below (collectively the "December 31 Hotels").
Number of Hotels Aggregate
Quarter Acquired Acquired Acquisition Price
- ------------------------------ ------------------- ---------------------
(dollars in millions)
1996
4/th/ Quarter 2 $ 49.0
------------------- ---------------------
1997
1/st/ Quarter 5 $ 84.1
2/nd/ Quarter 6 $ 193.8
4/th/ Quarter 1 $ 11.8
------------------- ---------------------
Total 1997 Acquisitions 12 $ 289.7
------------------- ---------------------
Acquisitions since IPO
through December 31, 1997 14 $ 338.7
=================== =====================
F-8
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company currently leases 26 of the Hotels to AGH Leasing, L.P., and
one hotel, the Radisson Twin Towers Orlando, to Twin Towers Leasing, L.P. ("Twin
Towers Leasing" and, together with AGH Leasing, L.P., "AGH Leasing") pursuant to
12-year operating leases providing for the payment of participating rent based
on the revenues of the Hotels (the "Participating Leases"). AGH Leasing, L.P. is
owned in part by certain executive officers of the Company and AGH Leasing, L.P.
is the 51% sole general partner of Twin Towers Leasing.
In addition, AGH Leasing has engaged American General Hospitality, Inc.
("AGHI"), to manage 26 of the Hotels pursuant to separate management agreements
(the "Management Agreements"). The remaining hotel, the Wyndham Garden Hotel
Marietta, is managed by Wyndham Hotel Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation--The consolidated financial statements
include the accounts of the Company, the Operating Partnership and all of its
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Investment in Hotel Properties--Hotel properties are stated at cost and
are depreciated using the straight-line method over estimated useful lives of 39
years for buildings and improvements and 5 to 7 years for furniture, fixtures
and equipment.
The Company periodically reviews the carrying value of each of its
investments in hotel properties to determine if circumstances exist indicating
an impairment in the carrying value of the investment in hotel property or that
depreciation periods should be modified. If facts or circumstances support the
possibility of impairment, the Company will prepare a projection of the
undiscounted future cash flows, without interest charges, of the specific hotel
property and determine if the investment in hotel property is recoverable based
on the undiscounted future cash flows. Management of the Company does not
believe that there are any factors or circumstances indicating impairment of any
of its investment in hotel properties.
Maintenance and repairs are charged to operations as incurred; major
renewals and improvements are capitalized. Upon the sale or disposition of a
fixed asset, the asset and related accumulated depreciation are removed from the
accounts and the related gain or loss is included in operations.
Cash and Cash Equivalents--All highly liquid investments with a
maturity of three months or less when purchased are considered to be cash
equivalents.
Deferred Expenses--Organizational costs of $115,881 and $94,771,
deferred loan costs of $4,187,500 and $2,250,000 and franchise fees of
$1,105,606 and $915,600 at December 31, 1997 and 1996, respectively, are stated
at cost. Amortization of organization costs is computed using the straight-line
method over five years. Amortization of deferred loan costs is computed using
the effective yield method over the original term of the related debt of four
years. Amortization of franchise fees is computed using the straight-line method
over the average life of the franchise agreements of approximately 10 years.
Accumulated amortization at December 31, 1997 and 1996 was $1,371,162 and
$273,425, respectively.
Revenue Recognition--Participating Lease revenue is recognized when
earned from the Lessee under the Participating Lease agreements (see Note 4).
The Participating Lease revenue is based on a percentage of room revenues, food
and beverage revenues and telephone and other revenues. The departmental revenue
thresholds in the Participating Leases are seasonally adjusted for interim
periods and the Participating Lease formulas are adjusted each year by a
percentage equal to the percentage increase in the Consumer Price Index as
compared to the prior year plus 0.75% in the case of the Participating Rent
departmental revenue thresholds. Additionally, some of the Hotels will have
further adjustments to the Participating Lease formulas due to the significant
renovations expected to be completed on those hotels in 1997 and 1998. The
Lessee is in compliance with its obligations stipulated in the Percentage
Leases.
F-9
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1997 and 1996, the Lessee owed the Company $7,999,122
and $3,982,424, respectively, under the Participating Leases which were paid in
January 1998 and 1997.
Net Income Per Common Share--Net income per common share is computed by
dividing net income applicable to common shareholders by the weighted average
number of shares of common stock and equivalents outstanding.
Earnings per Common Share - In the fourth quarter of 1997, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 128
"Earnings Per Shares" (FAS 128), as required and restated the previously
reported earnings per share in conformity with FAS 128. The new standard
specifies the computation, presentation, and disclosure requirements for
earnings per share.
Distributions--The Company pays regular quarterly distributions, which
are dependent on receipt of distributions from the Operating Partnership.
Distributions made in 1997 and 1996 represents a 6.1% and an 18.0% return of
capital for federal income tax purposes, respectively.
Income Taxes--The Company intends to qualify as a Real Estate
Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue
Code. Accordingly, no provision for federal income taxes has been reflected in
the consolidated financial statements.
Earnings and profits, which will determine the taxability of
distributions to stockholders, will differ from income reported for financial
reporting purposes due to the differences for federal tax purposes primarily in
the estimated useful lives used to compute depreciation.
Concentration of Credit Risk--The Company places cash deposits at a
major bank. At December 31, 1997 and 1996, bank account balances exceeded
Federal Deposit Insurance Corporation limits by approximately $750,000 and $3.0
million, respectively. Management believes credit risk related to these deposits
is minimal.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Concentration of Risk - The Company's December 31 Hotels are
diversified by ten different national brands and include twenty-five
full-service hotels and two limited hotels located in sixteen states. At
December 31, 1997, the Company has a concentration of 20.7% in Florida and 16.1%
in California, based upon the number of guest rooms.
Recent Accounting Pronouncements - In June of 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") 130, "Reporting Comprehensive Income", which requires a
statement of comprehensive income to be included in the financial statements for
fiscal years beginning after December 15, 1997. The Company is presently
designing such statement and, accordingly, will include such statement beginning
with the first quarter of 1998.
In addition, in June of 1997, the FASB issued SFAS 131, "Disclosures
About Segments of Enterprise and Related Information". SFAS 131 requires
disclosure of certain information about operating segments and about products
and services, geographic areas in which a company operates, and their major
customers. The Company is presently in the process of evaluating the effect this
new standard will have on disclosures in the Company's financial statements and
the required information will be reflected in the Company's financial statements
for the year ended December 31, 1998.
F-10
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. DEBT OBLIGATIONS
Debt at December 31, 1997 consists of the following:
First mortgage note payable in monthly installments including interest at the fixed rate of
8.75%; maturing on February 1, 2011 at which time a balloon payment of approximately
$6,120,000 will be due and payable; collateralized by the Holiday Inn Dallas DFW
Airport South ......................................................................... $ 13,701,262
First mortgage note payable in monthly installments including interest at the
fixed rate of 7.5%; maturing on December 1, 2001 at which time a balloon
payment of approximately $3,985,000 will be due and payable; collateralized
by the Courtyard by Marriott Meadowlands .............................................. 4,416,853
Construction loan payable in monthly installments including interest at the fixed rate of
7.89%; maturing on January 1, 2001; collateralized by the Courtyard by Marriott
Meadowlands............................................................................ 439,658
One year first mortgage note payable in monthly installments of interest only at a fixed
rate of 7.5%; collateralized by the Radisson Hotel Arlington Heights; matured on
February 28, 1998, at which time the balance of $8,218,755 was paid.................... 8,218,755
First mortgage note payable in monthly installments at a fixed rate of 9.75%; maturing on
July 1, 2002, at which time a balloon payment of approximately $8,200,000 will be due
and payable; collateralized by the DoubleTree Guest Suites Atlanta..................... 9,363,531
-----------
36,140,059
Credit Facility............................................................................. 41,312,177
-----------
Total debt obligations...................................................................... $77,452,236
===========
The Company increased its Credit Facility ("Credit Facility") from $150
million to $300 million on June 24, 1997. The Credit Facility matures on July
31, 1999. At December 31, 1997 and 1996, there was $41.3 million and $57.5
million, respectively, outstanding on its Credit Facility. Borrowings under the
Credit Facility bear interest at 30-day, 60-day or 90-day LIBOR (London
Interbank Offered Rate) plus 1.75% and 1.85% per annum (7.47% and 7.35% at
December 31, 1997 and 1996) an December 31, 1997 and 1996, respectively, payable
monthly in arrears or one-half percent in excess of prime rate at the option of
the Company.
At December 31, 1997 and 1996, the Credit Facility was collateralized
by substantially all of the Company's assets including, among other things,
first mortgage liens on all of the Hotels, other than the Holiday Inn Select
Dallas DFW Airport South, the Courtyard by Marriott Meadowlands, the Radisson
Hotel Arlington Heights and the DoubleTree Guest Suites Atlanta, which Hotels
collateralize other indebtedness.
The Credit Facility is with a consortium of banks led by Societe
Generale, Southwest Agency, and Bank One, Texas, N.A., Bank of Nova Scotia and
Wells Fargo Bank, National Association.
Aggregate annual principal payments for the Company's debt at December
31, 1997 are as follows.
Year Amount
- ----------------------------------------------------- ------------
1998................................................. $ 9,002,644
1999................................................. 42,166,999
2000................................................. 932,230
2001................................................. 4,750,411
2002................................................. 8,834,869
2003 and thereafter.................................. 11,765,083
------------
Aggregate annual principal payments.................. $ 77,452,236
============
The Company's Credit Facility limits consolidated indebtedness
(measured at the time the debt is incurred) to no more than 50% of the Company's
investments in hotels as defined in the credit agreement.
F-11
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company entered into an agreement for a license and an association
membership from one of the sellers of the Days Inn Lake Buena Vista, which the
Company immediately assigned to the Lessee. Commencing January 1998, in
connection with the license and the association membership, the Lessee is
required to pay recurring association fees including a base monthly fee equal to
1.0% of the prior month's gross room revenues generated at the hotel, and an
additional fee of 0.5% to 1.0% of gross monthly revenues if the trailing twelve
month's gross room revenues at the hotel exceed a threshold of approximately $13
million, (subject to increase based on the percentage increase in the CPI). In
addition, the Lessee is obligated to pay a recurring royalty for the African
Safari theme equal to an amount which ranges from 10% to 25% of net operating
income in excess of $6 million (subject to adjustment if the Company invests
more than $40 million in the hotel). The Lessee is also obligated to pay a
marketing assistance fee equal to .25% of gross room revenues. The marketing and
association fees are not expected to exceed 2.25% of gross room revenues for any
twelve-month period. The association membership agreement terminates in October
2008; the Lessee is obligated to pay liquidated damages if the agreement is
terminated earlier.
On July 14, 1997, as part of the terms of the strategic alliance
between Wyndham Hotel Corporation ("Wyndham") and the Company, an affiliate of
Wyndham purchased 112,969 shares of restricted common stock (the "Wyndham
Shares") at a negotiated price of $22.13 per share. The shares were purchased in
connection with the conversion of the LeBaron Airport Hotel to the Wyndham
Airport Hotel San Jose.
Participating Leases
The Lessee has future lease commitments to the Company under the
Participating Leases, which expire from July 2008 to November 2010. Minimum
future base rents under these noncancellable Participating Leases at December
31, 1997 is as follows:
Year Amount
- ------------------------------------------------------- -------------------
1998................................................. $ 48,960,000
1999................................................. 50,527,600
2000................................................. 52,143,028
2001................................................. 53,814,309
2002................................................. 55,428,738
2003 and thereafter.................................. 342,549,603
-------------------
Minimum future base rents $ 603,423,278
===================
Under the Participating Leases, the Company is obligated to pay the
costs of real estate and personal property taxes, property insurance and
maintaining underground utilities and structural elements of the Current Hotels.
Additionally, the Company is required to establish annual minimum reserves equal
to 4.0% of total revenue for each of the Hotels which will be utilized by the
Lessee for the replacement and refurbishment of furniture, fixtures & equipment
("FF&E") and other capital expenditures to enhance the competitive position of
the Hotels. At December 31, 1997 and 1996, actual capital expenditures were
greater than the amount required to be reserved.
In the event the Company enters into an agreement to sell or otherwise
transfer a Hotel, the Company will have the right to terminate the Participating
Lease with respect to such hotel upon 30 days' prior written notice upon either
(i) paying the Lessee the fair market value of the Lessee's leasehold interest
in the remaining term of the Participating Lease to be terminated (which amount
will be determined by discounting to present value, for each year of the
remainder of the lease term, cash flow attributable to such lease after
deducting the cost component of the applicable management fees, at an annual
discount rate of 12% (for the purposes of such calculation, the annual cash flow
for each remaining year of the lease term shall be equal to the cash flow
attributable to such lease for the twelve months ended on the lease termination
date)) or (ii) offering to lease to the Lessee a substitute hotel on terms that
would create a leasehold interest in such hotel with a fair market value equal
to or exceeding the fair market value of the Lessee's remaining leasehold
interest under the Participating Lease to be terminated.
F-12
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Ground Leases
Four of the Current Hotels are subject to ground leases with third
parties with respect to the land underlying each such Hotel and the Westin
Resort Key Largo has a ground lease related to the bay bottom area fronting the
property. The ground leases are triple net leases which require the tenant to
pay all expenses of owning and operating the Hotel, including real estate taxes
and structural maintenance and repair.
The Courtyard by Marriott Meadowlands is subject to a ground lease with
respect to approximately 0.37 acres. The ground lease terminates in March 2036
with two ten-year options to renew. The lease requires a fixed rent payment
equal to $150,000 per year, subject to a 25.0% increase every five years
thereafter beginning in 1997, and a percentage rent payment equal to 3.0% of
gross room revenues.
The Wyndham Albuquerque Airport Hotel is subject to a ground lease with
respect to approximately 10 acres. The ground lease terminates in December 2013
with two five-year options to renew. The lease requires a fixed rent payment
equal to $19,180 per year, subject to annual CPI adjustment, and a percentage
rent payment equal to 5.0% of gross room revenues, 3.0% of gross receipts from
the sale of alcoholic beverages, 2.0% of gross receipts from the sale of food
and non-alcoholic beverages and 1.0% of gross receipts from the sale of other
merchandise or services. The lease also provides the landlord with the right,
subject to certain conditions, to require the Company, at its expense, to
construct 100 additional hotel rooms if the occupancy rate at the Hotel is 85.0%
or more for 24 consecutive months and to approve any significant renovations
scheduled at the Hotel. The occupancy rate at the Wyndham Albuquerque Airport
Hotel for the years ended December 31, 1997 and 1996, was 75.3% and 80.4%,
respectively.
The Hilton Hotel Toledo is subject to a ground lease with respect to
approximately 8.8 acres. The ground lease terminates in June 2026 with four
successive renewal options, each for a ten-year term. The lease requires annual
rent payments equal to $25,000, increasing to $50,000 or $75,000 if annual gross
room revenues exceed $3.5 million or $4.5 million, respectively.
The Wyndham Airport Hotel San Jose is subject to a ground sublease with
respect to approximately 5.3 acres, which in turn is subject to a ground lease
covering a larger tract of land. The sublease terminates in 2022 with one
30-year option to renew. The sublease requires the greater of a fixed minimum
annual rent of $75,945 (increasing to an annual minimum rent of $100,000 if the
option is exercised) or, in the aggregate, 4.0% of gross room revenues, 2.0% of
gross food receipts and 3.0% of gross bar and miscellaneous operations receipts.
The sublease also provides the sublessor with the right to approve any
significant renovations scheduled at the Hotel.
The Westin Resort Key Largo is subject to a ground lease with respect
to 42,500 square feet of off-shore bay bottom land in the Florida Bay on which a
commercial marina is operated pursuant to a lease from the Board of Trustees of
the Internal Improvement Trust Fund of the State of Florida, as Lessor. The
lease terminates in May 2021 and requires an annual lease fee of approximately
$3,100.
Minimum future rental payments for the ground leases to be paid by Company at
December 31, 1997 are as follows:
Year Amount
- ------------------------------------------------------- -------------------
1998................................................. $ 273,225
1999................................................. 273,225
2000................................................. 273,225
2001................................................. 273,225
2002................................................. 310,725
2003 and thereafter.................................. 20,783,852
-------------------
Minimum future rental payments $ 22,187,477
===================
F-13
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. EARNINGS PER COMMON SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings Per Shares" (FAS 128), during the fourth quarter of
1997, as required. The new standard specifies the computation, presentation, and
disclosure requirements for earnings per share. The following table presents the
computation of basic and diluted earnings per common share as required by SFAS
128.
July 31, 1996
(inception of
Year Ended December operations) through
31, 1997 December 31, 1996
--------------------- ------------------------
BASIC EARNINGS PER SHARE COMPUTATION:
Net income applicable to common stockholders $ 23,484,930 $ 5,129,181
Weighted average number of basic shares of
Common Stock outstanding 14,678,160 8,122,139
--------------------- ------------------------
Basic Earnings per Common Share $ 1.60 $ 0.63
===================== ========================
DILUTED EARNINGS PER SHARE COMPUTATION:
Net income applicable to common stockholders $ 23,484,930 $ 5,129,181
Weighted average number of shares of common
stock outstanding 14,678,160 8,122,139
Common Stock equivalents - Stock Options 163,183 42,635
--------------------- ------------------------
Total weighted average number of diluted shares
of Common Stock outstanding 14,841,343 8,164,774
--------------------- ------------------------
Diluted Earnings per Common Share $ 1.58 $ 0.63
===================== ========================
The outstanding OP Units have been excluded form the diluted earnings
per share calculation as there would be no effect on the amounts since the
minority interests' share of income would also be added back to net income.
6. EMPLOYEE BENEFITS
The Company instituted the American General Hospitality Corporation
1996 Incentive Plan (the "1996 Plan") and the American General Hospitality
Corporation Non-Employee Directors' Incentive Plan (the "Directors' Plan") in
July 1996.
Under the 1996 Plan, an aggregate of 900,000 shares of Common Stock was
initially authorized for issuance for the purpose of providing incentives to
attract and retain executive officers and key employees. Each employee of the
Company or an affiliate of the Company (other than employees of the Lessee and
AGHI who are not also employees of the Company), or any person whose efforts
contribute to the Company's performance is eligible to participated in the 1996
Plan. The Compensation Committee of the Board of Directors may grant stock
options, stock awards, incentive awards or performance shares to participants.
On April 7, 1997, the Board of Directors adopted an amendment to the
1996 Plan (the "Amended 1996 Plan") to enhance the flexibility of the Board of
Directors and the committee administering the 1996 Plan (the "Committee") in
granting awards to the Company's officers, directors, consultants and key
employees. The amendment provides for a pool equal to ten (10%) percent of the
outstanding shares, calculated with respect to the number of shares outstanding
as of the last day of the prior calendar year. The amendment also permits the
Company to grant up to 50,000 shares of restricted stock to an individual in any
calendar year.
F-14
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Directors' Plan provides that a maximum of 100,000 shares of Common
Stock may be issued under the Directors' Plan. Pursuant to the Directors' Plan,
the Directors were awarded nonqualified options to purchase 10,000 shares of
Common Stock at the exercise price of $17.75 per share (the offering price in
connection with the IPO). On October 1, 1996, the Directors were issued 1,436
shares (359 per Director) at the IPO price of $17.75 per share. On October 14,
1997, the Directors were issued 1,308 shares (327 per Director) at the price of
$26.00 per share. Each issuance was in accordance with the agreement.
The following options have been granted pursuant to the 1996 Plan, the
Directors' Plan and the Amended 1996 Plan:
Date of Number of Exercise Vesting Year of
Option recipient Grant Options Price Period Expiration
- ---------------------------------- ------------ ------------ ------------ ------------ ------------
Company's Officers and Directors 7/31/96 400,000 $ 17.75 5 years 2006
Company's Officers and Key
Employees 1/02/97 214,600 $ 23.25 5 years 2007
Company's Officers and Key
Employees 11/14/97 979,882 $ 26.625 5 years 2007
As of December 31, 1997 and 1996, no options had been exercised.
The Company entered into an employment agreement with Mr. Steven D.
Jorns, the Company's Chairman of the Board, President and Chief Executive
Officer for a term of five years at an initial annual base compensation of
$100,000, subject to any increases in base compensation approved by the
Compensation Committee. In addition, the Company entered into employment
agreements with three other executive officers each for a term of five years at
an aggregate annual base compensation of $230,000.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 requires
all entities to disclose the fair value of certain financial instruments in
their financial statements. Accordingly, the Company reports the carrying amount
of cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other liabilities at cost which approximates fair value due to the
short maturity of these instruments. The carrying amount of the Company's debt
obligations approximates fair value due to the Company's ability to obtain such
borrowings at comparable interest rates.
8. STOCK BASED COMPENSATION PLANS
The Company sponsors the American General Hospitality Corporation 1996
Incentive Plan (the "1996 Plan") and the American General Hospitality
Corporation Non-Employee Directors' Incentive Plan (the "Directors' Plan")
(collectively, the "Plans"), which are stock-based incentive compensation plans
as described below. The Company applies APB Opinion 25 and related
interpretations in accounting for the Plans. In 1995, the FASB issued FASB
Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") which,
if fully adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plans. Adoption of the cost recognition provisions
of SFAS 123 is optional and the Company has elected to follow the disclosure
provisions of SFAS 123. Accordingly, pro forma disclosures as if the Company
adopted the cost recognition provisions of SFAS 123 are presented below.
Stock Options - The Company was initially authorized to issue 900,000
shares of Common Stock under the 1996 Plan pursuant to "Awards" granted in the
form of incentive stock options qualified under Section 422 of the Internal
Revenue Code of 1986, as amended, non-qualified stock options, restricted stock,
performance shares and other incentive awards. Awards may be granted to key
executives and other key employees of the Company and its
F-15
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
affiliates. On April 7, 1997, the Board of Directors adopted an amendment to the
1996 Plan (the "Amended 1996 Plan") to enhance the flexibility of the Board of
Directors and the committee administering the 1996 Plan (the "Committee") in
granting awards to the Company's officers, directors, consultants and key
employees. The amendment provides for a pool equal to ten (10%) percent of the
outstanding shares (the "Pool"), calculated with respect to the number of shares
outstanding as of the last day of the prior calendar year.
The options granted in 1996 were composed of both incentive and
nonqualified stock options with 10-year contractual terms. The options vest 25%
per year beginning on the grant date. The options granted in January 1997 were
composed of nonqualified stock options with 10-year contractual terms. The
January 1997 options vest 25% per year beginning with the first anniversary date
of grant. The options granted in November 1997 were composed of nonqualified
stock options with 10-year contractual terms. The November 1997 options vest in
nearly equal thirds beginning with the first anniversary date of grant. The
Compensation Committee administers the Plan and has broad discretion in
selecting Plan participants and determining the vesting period and other terms
applicable to Awards granted under the Plans.
Under the Directors' Plan, the Company automatically grants
nonqualified stock options to non-employee directors on designated "award
dates." The options granted in 1996, 40,000 options, have 10-year contractual
terms and vest 33.33% per year beginning on the grant date. The Compensation
Committee administers the Plan and has limited discretion in determining the
terms applicable to Awards granted under the Plan.
A summary of the status of the Company's stock options as of December
31, 1996 and the changes during the year ended on that date is presented below:
1997 1996
------------------------------ ---------------------------
Number of Weighted Number of Weighted
Shares of Average Shares of Average
Underlying Exercise Price Underlying Exercise
Options Options Price
--------------- --------------- --------------- --------------
Options outstanding at beginning
of year 400,000 $17.75 0 n/a
Granted 1,195,976 $26.02 400,000 $17.75
Exercised 0 n/a 0 n/a
Forfeited 0 n/a 0 n/a
Expired 0 n/a 0 n/a
Options outstanding at end of year 1,595,976 $23.94 400,000 $17.75
Exercisable at end of year 206,667 $17.75 103,333 $17.75
Weighted average fair value of
options granted during the year $3.01 $0.96
The average remaining contractual term for options outstanding as of
December 31, 1997 is 9.43 years. The fair value of each stock option granted is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions:
Assumptions 1997 1996
------------------------------------ --------------------------- --------------------------
Expected Term 5.82 7.8
Expected Dividend Yield 6.59% 9.18%
Expected Volatility 19.11% 15.46%
Risk-Free Interest Rate 5.90% 6.80%
Restricted Stock - According to the Amended 1996 Plan, a total of
50,000 shares of the shares available in the Pool may be issued as restricted
Common Stock in any one year. In 1996, the Company issued 50,000 shares of
F-16
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
restricted Common Stock. These shares vest at the rate of 10% on the date of
grant, 20% on the first and second anniversaries of the date of grant, and 25%
on the third and fourth anniversaries of the date of grant.
In accordance with APB 25, upon the issuance of restricted shares of
Common Stock under the Plans, the Company recognized a deferred compensation
cost for the restricted Common Stock in the amount of $887,500. This cost is
charged to shareholders' equity and recognized as amortization expense over the
applicable vesting period, in the amount of $36,979 for 1996 and $125,729 for
1997. The weighted average share price at the date of grant for the 50,000
shares of restricted Common Stock issued in 1996 was $17.75.
A summary of the status of the Company's restricted shares of Common
Stock as of December 31, 1997 and the changes during the year ended on that date
is presented below:
1997
---------------------------------------
Weighted
Average Fair
Number of Shares Market Value at
Grant
----------------- -----------------
Outstanding at beginning of the year 50,000 $17.75
Granted 0 n/a
Outstanding at end of year 50,000 $17.75
Vested at December 31, 1996 5,000 $17.75
Vested at December 31, 1997 15,000 $17.75
Pro Forma Net Income and Net Income Per Common Share - Had the
compensation cost for the Company's stock-based compensation plans been
recognized as expense, the Company's net income and net income per common share
for 1997 and 1996 would approximate the pro forma amounts below:
As reported Pro forma As reported Pro forma
December 31, December 31, December 31, December 31,
1997 1997 1996 1996
--------------- --------------- ---------------- ----------------
SFAS 123 charge $ 0.00 $ 486,906 $ 0.00 $ 41,956
APB25 charge $ 125,729 $ 125,729 $ 36,979 $ 36,979
Net income $ 23,484,930 $ 22,998,024 $ 5,129,181 $ 5,087,225
Net income per common
share $ 1.60 $ 1.57 $ 0.63 $ 0.62
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. In addition, the Company anticipates making awards
in the future under its stock-based compensation plans.
9. NON-CASH INVESTING AND FINANCING ACTIVITIES
On July 31, 1996, the date of the IPO, the Operating Partnership issued
506,825 OP Units to AGHI Affiliates, 137,008 shares of restricted common stock
to the Retirement Plan and cash of $282,229 in exchange for the AGH Predecessor
Hotels' investment in hotel properties of $22,757,560 (recorded at carryover
historical cost) and assumed related debt of $5,267,990.
On the same date, the Operating Partnership also issued 1,336,818 OP
Units to parties unaffiliated with the Primary Contributors and 53,353 OP Units
to the Primary Contributors which had an aggregate value of $24,675,535 and
assumed $14,138,270 of indebtedness in exchange for partial interests in four of
the other IPO Hotels.
F-17
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In addition, the Operating Partnership advanced $315,000 in the form of
a note receivable to the Lessee for the purchase of FF&E at the IPO.
Also, in connection with the IPO, the Company issued 50,000 shares of
restricted common stock to four executive officers which, at the date of
issuance, were valued at $17.75 per share.
On October 1, 1996 the Company issued 1,436 shares of Common Stock to
the Board of Directors for compensation in accordance with their agreement to
serve as directors of the Company which were valued at $17.75 per share.
On October 22, 1996, concurrent with the acquisition of the Days Inn
Lake Buena Vista, the Company issued 25,397 shares of Common Stock to one of the
sellers which were valued at $19.69 per share at the date of issuance.
On December 18, 1996, $4,150,729 in distributions to Common Stock and
OP Unit holders had been declared but not yet paid as of December 31, 1996.
On February 28, 1997, the Company assumed $8,218,755 of mortgage
indebtedness with the acquisition of the Radisson Hotel Arlington Heights.
On March 18, 1997, the Company assumed $9,510,654 of mortgage
indebtedness with the acquisition of the DoubleTree Guest Suites Hotel.
On June 27, 1997, the Company issued 266,301 Class B units of limited
partnership interest in American General Hospitality Operating Partnership, L.P.
("Class B OP Units"), as part of the purchase of the Hilton Hotel Cocoa Beach.
At the time of issuance, the Class B OP Units were valued at $24.20 per unit. On
July 16, 1997, these Class B OP Units automatically converted into standard OP
Units.
On October 14, 1997, the Company issued 1,308 shares of Common Stock to
the Board of Directors for compensation in accordance with their agreement to
serve as directors of the Company. The shares were issued at $26.00 per share.
On November 30, 1997, the Company issued 13,650 Class B OP Units to
Primary Contributors as part of the purchase of the Courtyard by Marriott
Durham. At the time of issuance, the Class B OP Units were valued at $26.85 per
unit. On December 31, 1997, these Class B OP Units automatically converted into
standard OP Units.
On December 13, 1997, $9,352,973 in distributions to Common Stock and
OP Unit Holders had been declared by not yet paid as of December 31, 1997.
10. PRO FORMA INFORMATION (UNAUDITED)
Due to the impact of the IPO, the subsequent equity transactions and
the acquisition of all the Current Hotels as described in Note 1, the historical
results of operations may not be indicative of future results of operations and
net income per common share. The following unaudited pro forma information for
the year ended December 31, 1997 and 1996 are presented as if the transactions
previously described had occurred on January 1, 1996, and all of the Current
Hotels had been leased to the Lessee pursuant to the Participating Leases since
that date.
In management's opinion, all adjustments necessary to reflect the
effects of the transactions previously described have been made. The pro forma
information does not purport to present what actual results of operations would
have been if the acquisitions and the consummation of the IPO, the subsequent
equity transactions and the acquisition of all the Current Hotels had occurred
on such date or to project results for any future period.
F-18
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, December 31, 1996
Pro Forma Information 1997
---------------------------------------------- ---------------- ------------------
Participating Lease revenue $ 74,192,455 $ 65,776,641
Office building rental income 2,340,046 2,143,833
Interest income 771,955 99,473
---------------- ------------------
Total revenue 77,304,456 68,019,947
---------------- ------------------
Depreciation 18,431,592 16,457,232
Amortization 1,382,616 1,382,616
Real estate and personal property taxes and 8,903,636 7,167,867
property insurance
Office building operating expenses 1,255,550 1,344,552
General and administrative 1,999,923 1,933,488
Ground lease expense 1,271,639 1,049,524
Amortization of unearned officers'
compensation 125,729 88,750
Interest expense 3,660,636 2,668,491
---------------- ------------------
Total expenses 37,031,321 32,092,520
---------------- ------------------
Income before minority interest 40,273,135 35,927,427
Minority interest 3,590,127 3,202,731
---------------- ------------------
Net income applicable to common stockholders $ 36,683,008 $ 32,724,696
================ ==================
Net income per basic common share $ 1.74 $ 1.55
================ ==================
Weighted average number of basic shares of
Common Stock outstanding 21,141,527 21,134,418
================ ==================
Net income per diluted common share $ 1.72 $ 1.55
================ ==================
Weighted average number of diluted shares of
Common Stock outstanding 21,304,710 21,177,053
================ ==================
11. SUBSEQUENT EVENTS (UNAUDITED)
Recent Acquisitions
Prime Group I - On January 8, 1998, the Company acquired a portfolio of eight
hotels ("Prime Group I Acquisition") from Prime Hospitality Corporation
("Prime"), a New York Stock Exchange listed company. The hotels are leased to an
independent lessee (the "Prime Lessee") that is affiliated with Prime under
separate Participating Leases. The Participating Leases entered into with the
Prime Lessee are for a term of 10 years and prohibit the Operating Partnership
from selling the hotels for a period of three years but otherwise have terms and
conditions substantially similar to the Operating Partnership's other
Participating Leases. The purchase price was paid in cash, from borrowings under
the Company's credit facility, the issuance of OP Units and the assumption of
mortgage indebtedness.
Potomac Portfolio Acquisition - On January 22, 1998, the Company
acquired four hotels containing 815 guest rooms (the "Potomac Portfolio
Acquisition"). The purchase price was paid in cash from borrowings under the
Company's credit facility. The Potomac Portfolio Acquisition hotels are leased
to AGH Leasing and managed by AGHI.
Holiday Inn O'Hare International Hotel - On February 3, 1998, the
Company acquired the Holiday Inn O'Hare International Hotel, a full-service
hotel with 507 guest rooms located near O'Hare International Airport. The
purchase price was paid in cash, the issuance of Class C units of limited
partnership interest of the Operating Partnership (the "Class C OP Units") and
mortgage debt assumption. The Class C OP Units bear a preferred annual
distribution rate of $1.89 per Class C OP Unit until such time as the dividend
distribution rate for the Company's Common Stock exceeds $1.89 at which time the
distribution rate on the Class C OP Units shall equal the
F-19
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
distribution rate on the Company's Common Stock. In addition, the holders of the
Class C OP Units are entitled to receive additional OP Units if the Company's
Common Stock (as reported on the NYSE) is not trading at or above $30 per share
on the anniversary date of the closing of the acquisition. The hotel is leased
to AGH Leasing and managed by AGHI.
FSA Portfolio Acquisition - On February 13, 1998 the Company acquired
thirteen hotels in a fourteen-hotel portfolio (the "FSA Portfolio Acquisition")
containing an aggregate of 3,229 guest rooms. The Company expects to acquire the
fourteenth hotel by mid-April 1998. The closing is subject to various closing
conditions and no assurance can be given that the acquisition will be completed.
The purchase price was paid entirely in cash and was funded by borrowings under
the Company's recently increased Credit Facilities (described below). The
thirteen FSA Portfolio Acquisition hotels are leased to AGH Leasing and managed
by AGHI. The Company expects that the fourteenth hotel to be acquired by the
Company will continue to be leased to and managed by it current operator. The
Company intends to sell five of the FSA Portfolio Acquisition hotels either as a
group or individually although it has no binding purchase agreements with
respect to such sale.
Pending Acquisitions
Prime Group II - The Company has entered into agreements to acquire
from Prime 11 full-service hotels (the "Prime Group II Acquisition"). The
closing of the purchase can occur at the Company's option at any time between
September 30, 1998 and March 31, 1999. The aggregate purchase price is payable
entirely in cash. In 1998, Prime is obligated to complete an $18 million
improvement program on the Prime Group II Acquisition hotels and the closing of
the Prime Group II Acquisition will follow the completion of the renovation
program. Each of the Prime Group II Acquisition hotels is expected to be leased
and managed by the Prime Lessee or other affiliates of Prime. The Prime Group II
Acquisition hotels are operated under franchise affiliations with Crowne Plaza,
Holiday Inn, Radisson, Sheraton and Ramada.
Madison Hotel - The Company has entered into an agreement to acquire a
full-service 202 room Holiday Inn in Madison, Wisconsin. The acquisition of the
hotel is conditioned upon the seller's renovation of the hotel, which is
currently owned by a private partnership, which consists primarily of AGHI
shareholders and includes certain executive officers of the Company. The hotel
will be purchased with a combination of cash and OP Units. The Company expects
that the hotel will be leased to AGH Leasing and continue to be managed by AGHI.
The purchase of the Madison hotel is expected to close during the second quarter
of 1998.
Credit Facilities
Credit Facilities - On February 13, 1998 the Company replaced its $300
million secured line of credit with two new unsecured credit facilities in the
aggregate principal amount of $600 million (collectively, the "New Credit
Facilities"). The New Credit Facilities have a three-year term and bear interest
based upon the 30-day, 60-day or 90-day LIBOR (5.6875%, 5.6875% and 5.6875% as
of March 27, 1998) at the option of the Company, plus an applicable margin for
all or part of the Facilities (the "Margins"). The Margins, which are adjusted
on a quarterly basis, range from 1.40% per annum to 2.0% per annum, based upon
certain leverage ratios. As of March 27, 1998 the Margins were 1.875% per annum.
The financial covenants contained in the New Credit Facilities require the
Company to maintain a debt service coverage ratio of at least 2.0 to 1.0, and an
interest coverage ratio of not less than 2.15 to 1.0 through December 31, 1998
and not less than 2.50 to 1.0 thereafter and to maintain a minimum net worth of
$450 million plus 75% of the net proceeds from stock offerings and offerings of
partnership interests in the Operating Partnership. In addition, the New Credit
Facilities contain limits on total indebtedness based on a multiple of EBITDA
(earnings before interest, taxes, depreciation and amortization) that adjust
downward as of December 31, 1998. As a result of the adjustment of certain
financial covenants that occur on December 31, 1998, the Company expects that it
would be required to repay or refinance a portion of the New Credit Facilities
by that time.
The following unaudited pro forma financial data for the years ended
December 31, 1997 and 1996 are presented as if the IPO, the subsequent equity
transactions since the IPO through March 27, 1997, the Pro Forma 1998 Offering,
the acquisition of the Current Hotels and all transactions described above in
Note 11 had occurred on January 1, 1996 and all Hotels had been leased to the
Lessee pursuant to the Participating Leases since that date.
F-20
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The pro forma information does not purport to represent what the
Company's financial position or the Company's results of operations would have
been if the Offerings, the acquisition of all Hotels and the consummation of the
Pro Forma 1998 Offering had, in fact, occurred on such dates, or to project the
Company's financial position or results of operations at any future date or for
any future period.
December 31, December 31,
Pro Forma Information 1997 1996
---------------------------------------------- ---------------- ------------------
Participating Lease revenue $ 169,004,147 $ 146,399,212
Total revenue $ 172,116,148 $ 148,642,518
Total expenses $ 120,066,542 $ 111,939,705
Net income applicable to common stockholders $ 46,285,427 $ 32,638,198
Net income per basic common share $ 1.48 $ 1.04
Weighted average number of basic shares of
Common Stock outstanding 31,275,051 31,267,768
Net income per diluted common share $ 1.47 $ 1.04
Weighted average number of diluted shares of 31,438,234 31,310,404
Common Stock outstanding
Proposed Merger
On March 15, 1998 the Company and CapStar Hotel Company ("CapStar")
entered into a definitive agreement (the "Merger Agreement") pursuant to which
the parties agreed, subject to stockholder approval and other conditions and
covenants, to merge as equals (the "Proposed Merger"). Accordingly, no assurance
can be given that the Proposed Merger will be consummated. Pursuant to the
Merger Agreement, CapStar will spin off (the "Spin-Off") in a taxable
transaction, its hotel operations and management business to its current
stockholders as a new C-Corporation to be called MeriStar Hotels & Resorts, Inc.
("MeriStar Resorts"). CapStar will subsequently merge with and into the Company,
which will qualify as a reorganization under Section 368 of the Internal Revenue
Code of 1986, as amended (the "Code"). The Company will be renamed MeriStar
Hospitality Corporation after the Proposed Merger. In a separate transaction,
which will close immediately after the closing of the Proposed Merger, MeriStar
Resorts will acquire AGH Leasing and AGHI which acquisition is a condition to
closing the Proposed Merger. If the Proposed Merger is consummated, MeriStar
Resorts will become the lessee and manager of all of the Current Hotels
currently leased by by AGH Leasing and will have a right of first refusal to
become the lessee of hotels acquired by the Company in the future except for the
Prime Group II Acquisition hotels.
The Merger Agreement defines the exchange ratios for both the Company's
and CapStar's stockholders. CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned. Both exchange
ratios are fixed, with no adjustment mechanism.
The Company expects the Proposed Merger to close in June 1998.
The Proposed Merger will be submitted for approval at separate meetings of the
stockholders of the Company and CapStar. Prior to such stockholder meetings, the
Company will file a registration statement with the SEC registering under the
Securities Act of 1933, as amended, the shares of MeriStar Hospitality
Corporation to be issued in the Proposed Merger.
12. QUARTERLY OPERATING RESULTS (UNAUDITED)
The Company's unaudited consolidated quarterly operating data for the
years ended December 31, 1997 and 1996 follows. In the opinion of management,
all adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of quarterly results have been reflected in the data. It is also
management's opinion, however, that quarterly operating data for hotel
enterprises are not indicative of results to be achieved in succeeding
F-21
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
quarters or years. In order to obtain a more accurate indication of performance,
there should be a review of operating results, changes in stockholders' equity
and cash flows for a period of several years.
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- ---------------------------------------- ------------- --------------- --------------- -----------------
STATEMENTS OF OPERATIONS DATA:
Participating Lease revenue $ 9,508,365 $ 13,323,868 $ 19,275,779 $ 17,826,325
Office building rental income - 592,629 612,836
Interest income 394,713 287,931 56,044 33,267
------------- --------------- --------------- -----------------
Total revenue 9,903,078 13,611,799 19,924,452 18,472,428
------------- --------------- --------------- -----------------
Depreciation 1,931,390 2,893,943 4,384,609 4,760,347
Amortization 197,214 225,015 341,747 341,922
Real estate and personal property 1,250,117 1,368,101 2,310,782 2,144,323
taxes and property insurance
Office building operating expenses 303,979 292,960
General and administrative 502,391 466,075 481,650 549,807
Ground lease expense 314,462 287,637 354,419 315,121
Amortization of unearned officers' 22,187 22,188 36,979 44,375
compensation
Interest expense 942,000 1,053,176 3,978,769 3,074,953
------------- --------------- --------------- -----------------
Total expenses 5,159,761 6,316,135 12,192,934 11,523,808
------------- --------------- --------------- -----------------
Income before minority interest 4,743,317 7,295,664 7,731,518 6,948,620
Minority interest 689,836 840,531 988,664 753,999
------------- --------------- --------------- -----------------
Net income applicable to
stockholders common $ 4,053,481 $ 6,455,133 $ 6,742,854 $ 6,194,621
============= =============== =============== =================
Net income per basic common share $ 0.34 $ 0.44 $ 0.46 $ 0.35
============= =============== =============== =================
Weighted average number of basic
shares of Common Stock outstanding 11,815,600 14,611,730 14,710,846 17,498,663
============= =============== =============== =================
Net income per diluted common share $ 0.34 $ 0.44 $ 0.45 $ 0.35
============= =============== =============== =================
Weighted average number of diluted
shares of Common Stock outstanding 11,916,503 14,725,977 14,899,328 17,670,786
============= =============== =============== =================
F-22
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. QUARTERLY OPERATING RESULTS (UNAUDITED) - CONTINUED
July 31, 1996
(inception of
operations)
through
September 30, Fourth
1996 1996 Quarter
- ---------------------------------------- ----------------- ------------------
STATEMENTS OF OPERATIONS DATA:
Participating Lease revenue $ 5,218,526 $ 8,169,193
Office building rental income
Interest income 32,227 75,848
----------------- ------------------
Total revenue 5,250,753 8,245,041
----------------- ------------------
Depreciation 1,008,874 1,626,506
Amortization 116,572 156,853
Real estate and personal property 511,115 933,477
taxes and property insurance
Office building operating expenses
General and administrative 194,226 627,887
Ground lease expense 218,000 327,279
Amortization of unearned officers' 14,792 22,187
compensation
Interest expense 347,622 1,064,495
----------------- ------------------
Total expenses 2,411,201 4,758,684
----------------- ------------------
Income before minority interest 2,839,552 3,486,357
Minority interest 545,102 649,258
----------------- ------------------
Net income applicable to common
stockholders $ 2,294,450 $ 2,837,099
================= ==================
Net income per basic common share $ 0.29 $ 0.34
================= ==================
Weighted average number of basic
shares of Common Stock outstanding 7,953,180 8,235,154
================= ==================
Net income per diluted common share $ 0.29 $ 0.34
================= ==================
Weighted average number of diluted
shares of Common Stock outstanding 7,957,650 8,277,789
================= ==================
F-23
AMERICAN GENERAL HOSPITALITY CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
Cost Capitalized Gross Amounts At
Subsequent to Which Carried at
Description of Property Initial Cost Acquisition Close of Period
- --------------------------------- ------------------------ ------------------------ -----------------------
Building Building Building
Land and Land and Land and
Improvements Improvements Improvements Total
- --------------------------------- --------- ------------- ----------- ------------ ---------- ------------ ----------
Holiday Inn Dallas DFW Airport West 816,515 6,532,118 23,950 1,183,526 840,465 7,715,644 8,556,109
Courtyard by Marriott Meadowlands 4,780,496 990,563 5,771,059 5,771,059
Hampton Inn Richmond Airport 505,000 3,590,369 28,755 473,682 533,754 4,064,051 4,597,805
Hotel Maison de Ville 175,000 1,641,777 39,519 1,072,631 214,519 2,714,408 2,928,927
Hilton Hotel Toledo 9,982,263 11,306 9,993,569 9,993,569
Holiday Inn Select Dallas DFW
Airport South 2,468,943 20,986,013 365 1,725,140 2,469,308 22,711,153 25,180,461
Holiday Inn Select New Orleans
International Airport 2,391,580 20,328,433 745 1,282,964 2,392,325 21,611,397 24,003,722
Hampton Inn Ocean City 736,514 6,407,673 555 1,547,027 737,069 7,954,700 8,691,769
Crowne Plaza Madison 2,135,059 18,148,002 801 630,949 2,135,860 18,778,951 20,914,811
Holiday Inn Park Center Plaza 1,249,414 10,869,901 5,385 59,417 1,254,800 10,929,318 12,184,118
Wyndham Albuquerque Airport Hotel 9,037,689 3,232,829 12,270,518 12,270,518
Wyndham San Jose Airport Hotel 19,102,129 9,969 19,112,098 19,112,098
Holiday Inn Select Mission Valley 1,954,204 17,001,577 715 12,005 1,954,919 17,013,582 18,968,501
Wyndham Safari Lake Buena Vista 3,191,074 29,519,668 1,080 125,044 3,192,154 29,644,712 32,836,866
Holiday Inn Resort Monterey 1,563,043 13,601,865 8,925 105,199 1,571,968 13,707,064 15,279,032
Hilton Hotel Durham 1,223,227 10,642,074 14,426 125,509 1,237,653 10,767,583 12,005,236
Wyndham Garden Hotel Marietta 1,595,529 13,881,105 19,689 171,928 1,615,219 14,053,033 15,668,252
Westin Resort Key Largo 2,553,298 22,213,691 23,753 223,870 2,577,051 22,437,561 25,014,612
DoubleTree Guest Suites Atlanta 1,819,587 15,830,408 19,412 170,705 1,838,999 16,001,113 17,840,112
Radisson Hotel Arlington Heights 1,169,248 10,172,458 18,385 160,964 1,187,633 10,333,422 11,521,055
Holiday Inn Select Bucks County 2,134,789 18,572,663 15,267 132,819 2,150,055 18,705,482 20,855,537
Hilton Hotel Cocoa Beach 2,208,955 19,217,910 18,079 157,283 2,227,034 19,375,193 21,602,227
Radisson Twin Towers Orlando 7,899,118 62,608,209 28,197 223,460 7,927,314 62,831,669 70,758,983
Crowne Plaza Phoenix 1,540,746 14,009,678 6,260 54,464 1,547,006 14,064,142 15,611,148
Hilton Airport Hotel Grand Rapids 1,690,584 14,376,596 1,958 21,847 1,692,543 14,398,443 16,090,986
Marriott West Loop Houston 2,261,461 19,228,220 6,928 60,271 2,268,388 19,288,491 21,556,879
Houston Office Building 1,598,272 13,070,611 38,405 1,055,480 1,636,677 14,126,091 15,762,768
Courtyard by Marriott Durham 1,150,107 9,200,839 1,150,106 9,200,839 10,350,946
------------ ------------ ----------- ------------ ------------ ------------ ------------
Total $ 46,031,267 $434,554,435 $ 321,553 $ 15,020,851 $ 46,352,820 $449,575,286 $495,928,106
============ ============ =========== ============ ============ ============ ============
Accumulated Net Book Life Upon
Depreciation Value Which
Building Building Depreciation
and and Date of Date of in Statement
Description of Property Improvements Improvements Construction Acquisition is Computed
- ------------------------------ -------------- ------------- ------------ ------------ -------------
Holiday Inn Dallas DFW Airport West $ 451,301 $ 8,104,808 1974 1995 39 years
Courtyard by Marriott Meadowlands 527,879 5,243,180 1989 1993 39 years
Hampton Inn Richmond Airport 292,324 4,305,481 1972 1994 39 years
Hotel Maison de Ville 194,475 2,734,452 1778 1994 39 years
Hilton Hotel Toledo 362,904 9,630,665 1987 1996 39 years
Holiday Inn Select Dallas DFW
DFW Airport South 785,212 24,395,249 1974 1996 39 years
Holiday Inn Select New Orleans
International Airport 769,187 23,234,535 1973 1996 39 years
Hampton Inn Ocean City 263,138 8,428,631 1989 1996 39 years
Crowne Plaza Madison 674,085 20,240,726 1987 1996 39 years
Holiday Inn Park Center Plaza 396,732 11,787,386 1975 1996 39 years
Wyndham Albuquerque Airport Hotel 348,250 11,922,268 1972 1996 39 years
Wyndham San Jose Airport Hotel 694,037 18,418,061 1974 1996 39 years
Holiday Inn Select Mission Valley 617,930 18,350,571 1970 1996 39 years
Wyndham Safari Lake Buena Vista 882,287 31,954,579 1985 1996 39 years
Holiday Inn Resort Monterey 379,907 14,899,125 1971 1996 39 years
Hilton Hotel Durham 275,138 11,730,098 1987 1997 39 years
Wyndham Garden Hotel Marietta 263,488 15,404,764 1985 1997 39 years
Westin Resort Key Largo 431,179 24,583,433 1985 1997 39 years
DoubleTree Guest Suites Atlanta 307,596 17,532,516 1985 1997 39 years
Radisson Hotel Arlington Heights 220,425 11,300,630 1981 1997 39 years
Holiday Inn Select Bucks County 239,598 20,615,939 1987 1997 39 years
Hilton Hotel Cocoa Beach 247,775 21,354,452 1986 1997 39 years
Radisson Twin Towers Orlando 803,495 69,955,488 1972 1997 39 years
Crowne Plaza Phoenix 269,669 15,341,479 1981 1997 39 years
Hilton Airport Hotel Grand Rapids 245,930 15,845,056 1979 1997 39 years
Marriott West Loop Houston 246,514 21,310,365 1976 1997 39 years
Houston Office Building 205,577 15,557,191 1976 1997 39 years
Courtyard by Marriott Durham 19,660 10,331,286 1996 1997 39 years
----------- -------------
Total $11,415,692 $ 484,512,414
=========== =============
(a) Balance at July 31, 1996 (1) $ 20,078,175 (b) Balance at July 31, 1996 (1) $ 737,503
Additions during the period 192,502,973 Additions during the period 1,779,528
----------------- -----------------
Balance December 31, 1996 212,581,148 Balance December 31, 1996 2,517,031
Additions during the period 283,346,958 Additions during the period 8,898,661
----------------- -----------------
Balance December 31, 1997 $ 495,928,106 Balance December 31, 1997 $ 11,415,692
================= =================
(1) Represents amounts from AGH Predecessor Hotels as of July 30, 1996
F-24
AMERICAN GENERAL HOSPITALITY CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
Cost Capitalized Gross Amounts At
Subsequent to Which Carried at
Description of Property Initial Cost Acquisition Close of Period
- --------------------------------- ------------------------ ------------------------ -----------------------
Building Building Building
Land and Land and Land and
Improvements Improvements Improvements Total
- --------------------------------- --------- ------------- ----------- ------------ ---------- ------------ ----------
Holiday Inn Dallas DFW Airport West 816,515 6,532,118 23,950 1,178,455 840,465 7,710,573 8,551,038
Courtyard by Marriott Meadowlands 4,780,496 977,821 5,758,317 5,758,317
Hampton Inn Richmond Airport 505,000 3,590,369 28,755 469,272 533,754 4,059,641 4,593,395
Hotel Maison de Ville 175,000 1,641,777 39,519 1,046,202 214,519 2,687,979 2,902,498
Hilton Hotel Toledo 9,982,263 6,293 9,988,556 9,988,556
Holiday Inn Select Dallas DFW
DFW Airport South 2,468,943 20,986,013 365 3,103 2,469,308 20,989,115 23,458,423
Holiday Inn Select New Orleans
International Airport 2,391,580 20,328,433 745 6,333 2,392,325 20,334,766 22,727,091
Hampton Inn Ocean City 736,514 6,407,673 555 5,278 737,069 6,412,951 7,150,020
Crowne Plaza Madison 2,135,059 18,148,002 801 10,506 2,135,860 18,158,508 20,294,368
Holiday Inn Park Center Plaza 1,249,414 10,869,901 5,385 47,765 1,254,800 10,917,666 12,172,466
Wyndham Albuquerque Airport Hotel 9,037,689 3,076 9,040,765 9,040,765
Wyndham San Jose Airport Hotel 19,102,129 1,469 19,103,598 19,103,598
Holiday Inn Select Mission Valley 1,954,204 17,001,577 715 8,466 1,954,919 17,010,044 18,964,963
Wyndham Safari Lake Buena Vista 3,191,074 29,519,668 3,191,074 29,519,668 32,710,742
Holiday Inn Resort Monterey 1,563,043 13,601,865 1,563,043 13,601,865 15,164,908
----------- ------------ --------- ------------ ----------- ------------ ------------
Total $17,186,346 $191,529,973 $ 100,790 $ 3,764,039 $17,287,136 $195,294,012 $212,581,148
=========== ============ ========= ============ =========== ============ ============
Accumulated Net Book Life Upon
Depreciation Value Which
Building Building Depreciation
and and Date of Date of in Statement
Description of Property Improvements Improvements Construction Acquisition is Computed
- ------------------------------ -------------- ------------- ------------ ------------ -------------
Holiday Inn Dallas DFW Airport West 253,516 8,297,522 1989 1993 39 years
Courtyard by Marriott Meadowlands 379,555 5,378,762 1972 1994 39 years
Hampton Inn Richmond Airport 192,025 4,401,370 1778 1994 39 years
Hotel Maison de Ville 125,538 2,776,960 1987 1996 39 years
Hilton Hotel Toledo 106,715 9,881,841
Holiday Inn Select Dallas DFW 1974 1996 39 years
DFW Airport South 224,243 23,234,180
Holiday Inn Select New Orleans 1973 1996 39 years
International Airport 217,252 22,509,839 1989 1996 39 years
Hampton Inn Ocean City 68,522 7,081,498 1987 1996 39 years
Crowne Plaza Madison 193,962 20,100,406 1975 1996 39 years
Holiday Inn Park Center Plaza 116,642 12,055,824 1972 1996 39 years
Wyndham Albuquerque Airport Hotel 96,589 8,944,176 1974 1996 39 years
Wyndham San Jose Airport Hotel 204,098 18,899,500 1970 1996 39 years
Holiday Inn Select Mission Valley 181,762 18,783,201 1985 1996 39 years
Wyndham Safari Lake Buena Vista 127,541 32,583,201 1971 1996 39 years
Holiday Inn Resort Monterey 29,071 15,135,837
---------- ------------
Total $2,517,031 $210,064,117
========== ============
(a) Balance at July 31, 1996 (1) $ 20,078,175 (b) Balance at July 31, 1996 (1) $ 737,503
Additions during the period 192,502,973 Additions during the period 1,779,528
----------------- -----------------
Balance December 31, 1996 212,581,148 Balance December 31, 1996 2,517,031
================= =================
(1) Represents amounts from AGH Predecessor Hotels as of July 30, 1996
F-25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
AGH Leasing, L.P.
We have audited the accompanying balance sheets of AGH Leasing, L.P. (The
"Partnership") as of December 31, 1997 and 1996, and the related statements of
operations, changes in partners' deficit, and cash flows for the year ended
December 31, 1997 and for the period from July 31, 1996 (inception of
operations) through December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit of the financial statements provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AGH Leasing, L.P. as of
December 31, 1997 and 1996 and its results of operations and its cash flows for
the year ended December 31, 1997 and for the period from July 31, 1996
(inception of operations) through December 31, 1996 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
January 30, 1998, except for
Note 6, as to which the date is
March 16, 1998
F-26
AGH LEASING, L.P.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND DECEMBER 31, 1996
1997 1996
---------------------- --------------------
ASSETS
Investments in hotel properties, at cost
Furniture, fixtures and equipment..................... $ 315,000 $ 315,000
Less accumulated depreciation.........................
(89,250) (26,250)
---------------------- --------------------
Net investment in hotel properties......................... 225,750 288,750
Cash and cash equivalents.................................. 8,781,329 5,673,232
Accounts receivable, net of allowance for doubtful
accounts of $73,915 and $5,291 as of December 31, 1997
and 1996, respectively................................. 6,247,083 2,822,936
Inventories................................................ 1,007,296 448,234
Prepaid expenses........................................... 1,067,384 553,400
Deferred expenses.......................................... 159,207 194,287
Other assets............................................... 283,997 47,985
---------------------- --------------------
Total assets..................................... $ 17,772,046 $ 10,028,824
====================== ====================
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable, trade.................................... $ 2,642,639 $ 1,054,902
Participating Lease payable, American General Hospitality
Operating Partnership, L.P............................. 7,999,122 3,979,242
Note payable to American General Hospitality Operating
Partnership, L.P....................................... 234,321 287,684
Accrued expenses and other liabilities..................... 5,327,522 4,198,035
Deferred income............................................ 2,100,000 730,000
Minority interest in Twin Towers Leasing, L.P.............. 1,197,442
---------------------- --------------------
Total liabilities................................ 19,501,046 10,249,863
---------------------- --------------------
Commitments and contingencies (Notes 1 and 2)
Partners' capital.......................................... 442,894 500,000
Accumulated deficit........................................ (2,171,894) (721,039)
---------------------- --------------------
Total partners' deficit.......................... (1,729,000) (221,039)
---------------------- --------------------
Total liabilities and partners' deficit.......... $ 17,772,046 $ 10,028,824
====================== ====================
The accompanying notes are an integral part of these
consolidated financial statements.
F-27
AGH LEASING, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE PERIOD JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1996
1997 1996
---------------------- --------------------
Revenues
Room revenue.................................................. $ 123,965,649 $ 26,725,200
Food and beverage revenue..................................... 35,595,835 8,374,459
Other revenue................................................. 8,031,070 1,691,472
Minority interest income...................................... 1,802,558 0
---------------------- --------------------
Total revenue............................................ 169,395,112 36,791,131
---------------------- --------------------
Expenses
Property operating costs and expenses......................... 33,894,184 7,235,297
Food and beverage costs and expenses.......................... 27,646,671 6,262,071
General and administrative.................................... 15,871,676 3,270,481
Advertising and promotion..................................... 12,792,700 2,305,776
Repairs and maintenance....................................... 6,712,883 1,450,987
Utilities..................................................... 7,258,674 1,628,490
Management fees............................................... 1,691,639 947,632
Franchise costs............................................... 4,754,285 950,307
Depreciation.................................................. 63,000 26,250
Amortization.................................................. 40,997 6,753
Interest expense.............................................. 26,808 13,314
Other expense................................................. 158,113 27,093
Participating Lease expenses.................................. 59,934,337 13,387,719
---------------------- --------------------
Total expenses........................................... 170,845,967 37,512,170
---------------------- --------------------
Net loss................................................. $ (1,450,855) $ (721,039)
====================== ====================
The accompanying notes are an integral part of these
consolidated financial statements.
F-28
AGH LEASING, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' DEFICIT
FOR THE PERIOD FROM JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997
Initial capitalization at inception $ 500,000
Net loss for the period from July 31, 1996 through December 31, 1996 (721,039)
---------------------
Balance at December 31, 1996 (221,039)
Partner distributions (57,106)
Net loss for the year ended December 31, 1997.......................... (1,450,855)
---------------------
Balance at December 31, 1997........................................... $ (1,729,000)
=====================
The accompanying notes are an integral part of these
consolidated financial statements.
F-29
AGH LEASING, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE PERIOD JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1996
1997 1996
---------------------- --------------------
Cash flow from operating activities:
Net loss................................................... $ (1,450,855) $ (721,039)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................. 63,000 26,250
Amortization.................................. 40,997 6,753
Minority interest............................. (1,802,558)
Changes in assets and liabilities:
Accounts receivable........................... (3,424,147) (2,822,936)
Inventories................................... (559,062) (448,234)
Prepaid expenses.............................. (513,984) (553,400)
Deferred expenses............................. (5,917) (201,040)
Other assets.................................. (236,012) (47,985)
Accounts payable, trade....................... 1,587,737 1,054,902
Participating Lease payable, American General
Hospitality Operating Partnership, L.P...... 4,019,880 3,979,242
Accrued expenses and other liabilities......... 1,129,487 4,198,035
Deferred income................................ 1,370,000 730,000
---------------------- --------------------
Net cash flow provided by operating
activities................................. 218,566 5,200,548
---------------------- --------------------
Cash flow from financing activities:
Capital contributions, AGH Leasing, L.P.................... 500,000
Capital contributions, Twin Leasing, L.P................... 3,000,000
Partner distributions ..................................... (57,106)
Principal payments on borrowings........................... (53,363) (27,316)
---------------------- --------------------
Net cash provided by financing
activities.................................. 2,889,531 472,684
---------------------- --------------------
Net change in cash and cash equivalents...... 3,108,097 5,673,232
Cash and cash equivalents at beginning of periods.......... 5,673,232
---------------------- --------------------
Cash and cash equivalents at end of periods................ $ 8,781,329 $ 5,673,232
====================== ====================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest................... $ 26,808 $ 13,314
====================== ====================
The accompanying notes are an integral part
of these consolidated financial statements.
F-30
AGH LEASING, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. ORGANIZATION
AGH Leasing, L.P. is a Delaware limited partnership which was formed on
May 29, 1996, and commenced operations on July 31, 1996. AGH Leasing is owned in
part by certain executive officers of American General Hospitality Corporation
(the "Company") and American General Hospitality, Inc. ("AGHI"). AGH Leasing,
L.P. leases 26 of the 27 Hotels (the "December 31 Hotels") owned by American
General Hospitality Operating Partnership, L.P. (the "Operating Partnership") at
December 31, 1997, pursuant to operating leases ("Participating Leases") which
provide for rent based on the revenues of the December 31 Hotels.
Twin Towers Leasing, L.P. ("Twin Towers Leasing" and, together with AGH
Leasing, L.P., "AGH Leasing") leases the remaining December 31 Hotel, the
Radisson Twin Towers Orlando, pursuant to a Participating Lease which is
substantially similar in form to the other Participating Leases. Twin Towers
Leasing is a Florida limited partnership which was formed on June 1, 1997, and
commenced operations on June 25, 1997. AGH Leasing is the 51% sole general
partner of Twin Towers Leasing. The remaining 49% is owned by Regent Carolina
Corporation ("Regent"), an affiliate of the selling entity. Based on the
partnership agreement, Regent is allocated 100% of any losses generated by Twin
Towers Leasing up to their capital contribution of $3 million. The operations of
Twin Towers Leasing are consolidated with the operations of AGH Leasing for
financial statement purposes.
The consolidated financial statements of AGH Leasing include the
results of operations of the December 31 Hotels leased from the Operating
Partnership due to AGH Leasing's control over the operations of the December 31
Hotels during the 12-year term of the Participating Leases. AGH Leasing has
complete discretion in establishing room rates and all rates for hotel goods and
services. Likewise, all operating expenses of the December 31 Hotels are under
the control of AGH Leasing. AGH Leasing has the right to manage or to enter into
management contracts with other parties to manage the December 31 Hotels. If AGH
Leasing elects to enter into management contracts with parties other than AGHI,
AGH Leasing must obtain the prior written consent of the Operating Partnership,
which consent may not be unreasonably withheld. AGH Leasing has entered into
management agreements pursuant to which 26 of the December 31 Hotels are managed
by AGHI and the remaining December 31 Hotel is managed by Wyndham Hotel
Corporation.
AGH Leasing's results of operations are seasonal. The aggregate room
revenues in the second and third quarters of each fiscal year may be higher than
room revenues in the first quarter and fourth quarter of each fiscal year.
Consequently, AGH Leasing may have net income in some quarters and may have net
losses in other quarters of the same year.
Upon consummation of the Company's Initial Public Offering ("IPO"), the
partners of AGH Leasing capitalized AGH Leasing with $500,000 cash and pledged
275,000 units of limited partnership interest in the Operating Partnership ("OP
Units") to the Company to collateralize the Lessee's obligations under the
Participating Leases. Twin Towers Leasing was capitalized with $3 million by the
49% limited partner upon commencement of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Hotel Properties - Hotel properties consist principally
of furniture, fixtures and equipment and are stated at the lower of cost or net
realizable value and are depreciated using the straight-line method over
estimated useful lives ranging from 3 to 7 years.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and the related accumulated depreciation are removed from
the accounts and the gain or loss is included in operations.
F-31
AGH LEASING, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Cash and Cash Equivalents - All highly liquid investments with a
maturity of three months or less when purchased are considered to be cash
equivalents.
Inventories - Inventories, consisting primarily of food and beverage
items, are stated at the lower of cost (generally, first-in first-out) or
market.
Deferred Expenses - Deferred expenses at December 31, 1997 and 1996
include organizational costs of $5,916 and $1,041, respectively and a $200,000
payment made in connection with the Wyndham Safari Resort Lake Buena Vista cash
flow guarantee. Amortization is computed using the straight-line method over
five years.
Deferred Income - Deferred income of $2,100,000 and $730,000 at
December 31, 1997 and 1996, respectively, represents the cash received from on
of the sellers of the Wyndham Safari Resort Lake Buena Vista for recurring
association fee agreements with the sellers as described in Note 4. The gain
will be amortized over the term of the agreements of ten years. The agreements
commence January 1, 1998.
Income Taxes - AGH Leasing is a Maryland limited partnership, which is
not a taxable entity. The results of operations are included in the tax returns
of the partners. The partnerships' tax returns and the amount of allocable
income or loss are subject to examination by federal and state taxing
authorities. If such examinations result in changes to income or loss, the tax
liability of the partners could be changed accordingly.
Revenue Recognition - Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.
Advertising Cost - The December 31 Hotels participate in various
advertising and marketing programs. All advertising costs are expensed in the
period incurred. The Lessee recognized advertising expense of $7.4 million and
$1.3 million for the years ended December 31, 1997 and 1996, respectively.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk - AGH Leasing places cash deposits at a
major bank. At December 31, 1997 and 1996, bank account balances exceeded
Federal Deposit Insurance Corporation limits by approximately $5.7 million and
$2.5 million, respectively. Management believes the credit risk related to these
deposits is minimal.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the Lessee reports the carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable, participating lease
payable, note payable, accrued expenses and other liabilities at cost, which
approximates fair value due to the short maturity of these instruments.
4. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Franchise costs represent the annual expense for franchise royalties
and reservation services under the terms of hotel franchise agreements, which
expire from 1998 to 2013. Franchise costs are based upon varying percentages of
gross room revenue ranging from 2.0% to 5.0%. These fees are paid by the Lessee.
No franchise costs were incurred for the Hotel Maison de Ville.
F-32
AGH LEASING, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Twenty-six of the December 31 Hotels are managed by AGHI on behalf of
AGH Leasing. AGH Leasing pays AGHI a base management fee of 1.5% of total
revenue and an incentive fee of up to 2.0% of total revenue. The incentive fee,
if applicable, is equal to 0.025% of annual total revenue for each 0.1% increase
in annual total revenue over the total revenues for the preceding twelve-month
period up to the maximum incentive fee.
The remaining December 31 Hotel, the Wyndham Garden Hotel Marietta, is
managed by Wyndham Hotel Corporation ("Wyndham") on behalf of AGH Leasing. AGH
Leasing pays Wyndham a base management fee equal to 1.5% of gross revenues at
the hotel plus an incentive management fee of up to 1.5% of gross revenues. The
incentive fee, if applicable, will be earned if gross revenues exceed certain
year over year thresholds.
Each December 31 Hotel, except the Hotel Maison de Ville, is required
to remit varying percentages of gross room revenue ranging from 1.0% to 5.0% to
the various franchisors for sales and advertising expenses incurred to promote
the hotel at the national level. Additional sales and advertising costs are
incurred at the local property level. These fees are paid by AGH Leasing.
The Company entered into an agreement for a license and an association
membership from one of the sellers of the Wyndham Safari Lake Buena Vista, which
the Company immediately assigned to AGH Leasing. Commencing January 1998, in
connection with the license and the association membership, the Lessee is
required to pay recurring association fees including a base monthly fee equal to
1.0% of the prior month's gross room revenues generated at the Hotel, and an
additional fee of 0.5% to 1.0% of gross monthly revenues if the trailing twelve
month's gross room revenues at the Hotel exceed a threshold of approximately $13
million (subject to increase based on the percentage increase in the CPI). In
addition, the Lessee is obligated to pay a recurring royalty for the African
Safari theme equal to an amount which ranges from 10% to 25% of net operating
income in excess of $6 million (subject to adjustment if the Operating
Partnership invests more than $40 million in the Hotel). AGH Leasing is also
obligated to pay a marketing assistance fee equal to .25% of gross room
revenues. The marketing and association fees are not expected to exceed 2.25% of
gross room revenues for any twelve-month period. The association membership
agreement terminates in October 2008; AGH Leasing is obligated to pay liquidated
damages if the agreement is terminated earlier.
AGH Leasing has future lease commitments to the Company under the
Participating Leases, which have various expiration dates between July 2008 to
June 2009. The Participating Lease expenses are based on percentages of room
revenues, food and beverage revenues, telephone and other revenues. The
departmental revenue thresholds in the Participating Leases are seasonally
adjusted for interim periods and the Participating Lease formulas are adjusted
annually effective January 1, by a percentage equal to the percentage increase
in the CPI, plus .75% as compared to the prior year. Additionally, several of
the December 31 Hotels will have further adjustments to the Participating Lease
formulas due to the significant renovations expected to be completed in those
hotels in 1997. Minimum future rental expense (i.e., base rents) under these
noncancellable Participating Leases is as follows:
Year Amount
- ------------------------------------------------------- -------------------
1998................................................. $ 48,960,000
1999................................................. 50,527,600
2000................................................. 52,143,028
2001................................................. 53,814,309
2002................................................. 55,428,738
2003 and thereafter.................................. 342,549,603
-------------------
Minimum future base rents $ 603,423,278
===================
5. PRO FORMA INFORMATION (UNAUDITED)
Due to the impact of the IPO and other hotel acquisitions made by the
Company and leased to AGH Leasing, the historical results of operations may not
be indicative of future results of operations. The following
F-33
AGH LEASING, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
unaudited pro forma information of AGH Leasing is presented as if the
transactions previously described had occurred on January 1, 1996 and all of the
Current Hotels had been leased pursuant to the Participating Leases since that
date.
In management's opinion, all adjustments necessary to reflect the
effects of the transactions previously described have been made. The pro forma
information does not purport to present what the actual results of operations of
AGH Leasing would have been if the previously mentioned transactions had
occurred on such date or to project the future financial position or results of
operations of AGH Leasing for any future period.
December 31, 1997 December 31, 1996
------------------ ------------------
Room revenue $ 151,771,990 $ 136,811,842
Food and beverage revenue 44,882,294 44,176,435
Other revenue 9,804,140 9,537,309
Minority interest income 2,874,156 1,284,177
------------------ ------------------
Total revenue 209,332,580 191,809,763
------------------ ------------------
Hotel operating expenses 134,759,239 126,515,121
Depreciation and amortization 103,997 69,753
Interest expense 264,064 31,689
Other expenses 331,229 359,009
Participating Lease expense 74,192,463 65,776,641
------------------ ------------------
Net loss $ (318,412) $ (942,450)
================== ==================
6. SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to year end, AGH Leasing and the Operating Partnership
entered into 19 operating lease agreements for 19 hotels which were acquired by
the Operating Partnership. The Operating Partnership has also entered in an
agreement to acquire another hotel in the second quarter of 1998 which it
intends to lease to AGH Leasing. The leases are substantially similar to the
other Participating Lease agreements between AGH Leasing and the Operating
Partnership.
The pro forma information does not purport to represent what AGH
Leasing's financial position or AGH Leasing's results of operations would have
been if the acquisition of all Hotels had, in fact, occurred on such dates, or
to project AGH Leasing's financial position or results of operations at any
future date or for any future period.
December 31, 1997 December 31, 1996
------------------ ------------------
Room revenue $ 252,513,441 $ 221,451,484
Total revenue $ 348,417,878 $ 310,406,682
Percentage Lease expense $ 120,128,336 $ 103,506,853
Net loss $ (1,320,000) $ (2,596,594)
Proposed Merger
On March 15, 1998 the Company and CapStar Hotel Company ("CapStar")
entered into a definitive agreement (the "Merger Agreement") pursuant to which
the parties agreed, subject to stockholder approval and other conditions and
covenants, to merge as equals (the "Proposed Merger"). Accordingly, no assurance
can be given that the Proposed Merger will be consummated. Pursuant to the
Merger Agreement, CapStar will spin off (the "Spin-Off") in a taxable
transaction, its hotel operations and management business to its current
stockholders as a new C-Corporation to be called MeriStar Hotels & Resorts, Inc.
("MeriStar Resorts"). CapStar will subsequently merge with and into the Company,
which will qualify as a reorganization
F-34
AGH LEASING, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code").
The Company will be renamed MeriStar Hospitality Corporation after the Proposed
Merger. In a separate transaction, which will close immediately after the
closing of the Proposed Merger, MeriStar Resorts will acquire AGH Leasing and
AGHI which acquisition is a condition to closing the Proposed Merger. If the
Proposed Merger is consummated, MeriStar Resorts will become the lessee and
manager of all of the Current Hotels currently leased by by AGH Leasing and will
have a right of first refusal to become the lessee of hotels acquired by the
Company in the future except for the Prime Group II Acquisition hotels.
The Merger Agreement defines the exchange ratios for both the Company's
and CapStar's stockholders. CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned. Both exchange
ratios are fixed, with no adjustment mechanism.
The Company expects the Proposed Merger to close in June 1998. The
Proposed Merger will be submitted for approval at separate meetings of the
stockholders of the Company and CapStar. Prior to such stockholder meetings, the
Company will file a registration statement with the SEC registering under the
Securities Act of 1933, as amended, the shares of MeriStar Hospitality
Corporation to be issued in the Proposed Merger.
F-35