<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1996
REGISTRATION NO. 333-4568
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 4 TO FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
AMERICAN GENERAL HOSPITALITY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
3860 WEST NORTHWEST HIGHWAY
SUITE 300
DALLAS, TEXAS 75220
(214) 904-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
PRINCIPAL EXECUTIVE OFFICES)
STEVEN D. JORNS
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
3860 WEST NORTHWEST HIGHWAY
SUITE 300
DALLAS, TEXAS 75220
(214) 904-2000
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
PETER M. FASS, ESQ. DAVID C. WRIGHT, ESQ.
STEVEN L. LICHTENFELD, ESQ. HUNTON & WILLIAMS
LESLIE H. LOFFMAN, ESQ. 2000 RIVERVIEW TOWER
BATTLE FOWLER LLP 900 SOUTH GAY STREET
75 EAST 55TH STREET KNOXVILLE, TENNESSEE 37902
NEW YORK, NEW YORK 10022 (423) 549-7700
(212) 856-7000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
CROSS REFERENCE SHEET PURSUANT TO
RULE 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
----------------------- ---------------------
<S> <C>
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus....... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus...... Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............... Outside Front Cover Page; Prospectus
Summary; Risk Factors; Policies and
Objectives with Respect to Certain
Activities; Shares Available for Future
Sale
4. Determination of Offering
Price.......................... Outside Front Cover Page; Underwriting
5. Dilution....................... Dilution
6. Selling Security Holders....... Not Applicable
7. Plan of Distribution........... Outside Front Cover Page; Underwriting
8. Use of Proceeds................ Use of Proceeds
9. Selected Financial Data........ Selected Financial Information
10. Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
11. General Information as to
Registrant..................... Prospectus Summary; The Company; The
Initial Hotels; Formation Transactions;
Management; Certain Provisions of Maryland
Law and of the Company's Charter and
Bylaws; Glossary
12. Policy with Respect to Certain
Activities..................... Prospectus Summary; Description of Capital
Stock; Policies and Objectives with
Respect to Certain Activities; Additional
Information
13. Investment Policies of
Registrant..................... Prospectus Summary; The Company; The
Initial Hotels; Policies and Objectives
with Respect to Certain Activities
14. Description of Real Estate..... Prospectus Summary; The Initial Hotels
15. Operating Data................. The Initial Hotels
16. Tax Treatment of Registrant and
Its Security Holders........... Prospectus Summary; Federal Income Tax
Considerations
17. Market Price of and Dividends
on the Registrant's Common
Equity and Related Stockholder
Matters........................ Risk Factors; Distribution Policy;
Principal Stockholders; Description of
Capital Stock; Certain Provisions of
Maryland Law and of the Company's Charter
and Bylaws; Shares Available for Future
Sale; Federal Income Tax Considerations
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
----------------------- ---------------------
<S> <C>
18. Description of Registrant's
Securities............................. Description of Capital Stock; Certain
Provisions of Maryland Law and of the
Company's Charter and Bylaws
19. Legal Proceedings...................... The Initial Hotels -- Legal Proceedings
20. Security Ownership of Certain
Beneficial Owners and Management....... Principal Stockholders
21. Directors and Executive Officers....... Management
22. Executive Compensation................. Management
23. Certain Relationships and Related Prospectus Summary; The Initial Hotels;
Transactions........................... Management; Certain Relationships and
Transactions
24. Selection, Management and Custody of
Registrant's Investments............... Outside Front Cover Page; Prospectus
Summary; The Company; The Initial Hotels;
Management; AGHI and the Lessee; Policies
and Objectives with Respect to Certain
Activities
25. Policies with Respect to Certain
Transactions........................... Risk Factors; Management; Policies and
Objectives with Respect to Certain
Activities
26. Limitations of Liability............... Description of Capital Stock
27. Financial Statements and Information... Prospectus Summary; Selected Financial
Information; Financial Statements
28. Interests of Named Experts and
Counsel................................ Legal Matters; Experts
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 15, 1996
PROSPECTUS 7,000,000 Shares
[LOGO OF AMERICAN AMERICAN GENERAL HOSPITALITY CORPORATION
GENERAL HOSPITALITY] Common Stock
-------
American General Hospitality Corporation (the "Company") has been formed to
own hotel properties and to continue and expand the hotel acquisition,
development, and repositioning operations of American General Hospitality, Inc.
and certain of its affiliates (collectively "AGHI"). The Company's operations
will focus on the ownership of full-service hotels in major metropolitan
markets. Upon completion of this offering (the "Offering"), the Company, which
intends to operate as a self-administered real estate investment trust
("REIT"), will own, through an operating partnership (the "Operating
Partnership"), thirteen hotels containing an aggregate of 3,012 guest rooms in
nine states (the "Initial Hotels"). The Initial Hotels will be leased by the
Company to AGH Leasing, L.P. (the "Lessee"), which is owned in part by certain
executive officers of the Company. See "AGHI and the Lessee."
All the shares of Common Stock, $0.01 par value per share (the "Common
Stock"), offered hereby are being offered by the Company. The Company intends
to make regular quarterly distributions to its stockholders, commencing with a
pro rata distribution with respect to the quarter ending September 30, 1996.
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, under the symbol "AGT." Prior
to the Offering, there has been no public market for the Common Stock. It
currently is anticipated that the initial public offering price will be between
$19.00 and $21.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The
Company's Charter will limit the number of shares of Common Stock that may be
owned by any single person or affiliated group. See "Description of Capital
Stock--Restrictions on Transfer."
SEE "RISK FACTORS" BEGINNING ON PAGE 20 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING:
. Conflicts of interest between the Company and certain of its executive
officers who own interests in certain of the Initial Hotels that will be
acquired by the Company and who also own interests in the Lessee and AGHI;
. Dependence on rent payments from the Lessee under the Participating Leases
(as hereinafter defined) for substantially all the Company's income;
. Risks associated with the Company's lack of control over the operations of
the Initial Hotels due to tax restrictions that prevent REITs from
operating hotels;
. Risks associated with the lack of appraisals of the Initial Hotels,
including the possibility that the purchase prices paid by the Company for
the Initial Hotels may exceed the market value of such hotels;
. Risks affecting the hotel industry generally, and the Company's hotels
specifically, including competition, increases in operating costs,
dependence on business travelers and tourism, seasonality, the potential
loss of franchise licenses and the need for future capital expenditures in
excess of budgeted amounts, all of which could adversely affect the
Lessee's ability to make required rent payments;
. Receipt by the Primary Contributors (as hereinafter defined) and certain
of the Company's executive officers of material benefits from the
Formation Transactions (as hereinafter defined);
. Risks affecting the real estate market generally, including economic and
other conditions, relative illiquidity of real estate, increases in taxes
and potential liabilities, including liabilities for unknown or future
environmental problems;
. Risks associated with the fact that certain of the Initial Hotels have
experienced net operating losses in recent years; and
. Risks associated with distributing 95% of estimated Cash Available for
Distribution (as hereinafter defined), including the risk that actual Cash
Available for Distribution will be insufficient to permit the Company to
maintain its proposed initial distribution rate.
-------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- --------------------------------------------------
Total(3) $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses estimated at $4,122,000, which are payable by
the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 1,050,000 additional shares of Common Stock, on the same terms set
forth above, solely to cover over-allotments, if any. See "Underwriting."
If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ , and $ , respectively.
-------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as, and if accepted by them, and
subject to certain conditions. It is expected that certificates for the Common
Stock offered hereby will be available for delivery on or about , 1996 at
the offices of Smith Barney Inc., 333 West 34th Street, New York, New York
10001.
-------
Smith Barney Inc.
Prudential Securities Incorporated
Legg Mason Wood Walker
Incorporated
The Robinson-Humphrey Company, Inc.
, 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 1
The Company.............................................................. 1
Risk Factors............................................................. 3
AGHI and the Lessee...................................................... 4
The Initial Hotels....................................................... 5
Growth Strategies........................................................ 7
Formation Transactions................................................... 11
Benefits to the Officers and the Primary Contributors.................... 14
Tax Status............................................................... 15
The Offering............................................................. 15
Distribution Policy...................................................... 16
Summary Financial Information............................................ 17
RISK FACTORS.............................................................. 20
Conflicts of Interest.................................................... 20
Dependence on Lessee and Payments Under the Participating Leases......... 21
Lack of Control Over Operations of the Initial Hotels.................... 21
Lack of Appraisals for Initial Hotels; No Assurance as to Value.......... 22
Hotel Industry Risks..................................................... 22
Benefits to Primary Contributors and Officers............................ 23
Contingent Liabilities of Selling Partnerships........................... 23
Risks of Leverage; No Limits on Indebtedness............................. 24
Lack of Operating History or Revenues; History of Losses................. 24
Risk of High Distribution Payout Percentage.............................. 24
Contingent Obligation to Construct Additional Hotel Rooms................ 24
Immediate and Substantial Dilution....................................... 25
Possible Adverse Effects of Shares Available for Future Sale Upon Market
Price of Common Stock................................................... 25
Competition for Management Time.......................................... 25
Real Estate Investment Risks............................................. 25
Tax Risks................................................................ 28
ERISA.................................................................... 29
Risks of Operating Hotels Under Franchise Agreements; Approval for Brand
Conversions............................................................. 30
Potential Anti-Takeover Effect of Certain Provisions of Maryland Law and
of the Company's Charter and Bylaws..................................... 30
No Prior Market for Common Stock......................................... 32
Reliance on Board of Directors and Management............................ 32
Ability of Board to Change Policies...................................... 32
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adverse Effect of Increase in Market Interest Rates on Price of Common
Stock.................................................................. 32
THE COMPANY.............................................................. 33
General................................................................. 33
Growth Strategies....................................................... 35
Acquisitions............................................................ 35
Development............................................................. 36
Internal Growth......................................................... 37
Financing Strategy...................................................... 39
The Operating Partnership............................................... 40
USE OF PROCEEDS.......................................................... 41
DISTRIBUTION POLICY...................................................... 42
CAPITALIZATION........................................................... 45
DILUTION................................................................. 46
SELECTED FINANCIAL INFORMATION........................................... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 53
Overview................................................................ 53
Results of Operations of AGH Predecessor Hotels......................... 54
Results of Operations of AGH Acquisition Hotels......................... 56
Results of Operations of the Initial Hotels............................. 58
Liquidity and Capital Resources......................................... 58
Franchise Conversions and Other Capital Improvements.................... 61
Inflation............................................................... 62
Seasonality............................................................. 62
THE HOTEL INDUSTRY....................................................... 63
THE INITIAL HOTELS....................................................... 64
Descriptions of Initial Hotels.......................................... 66
AGH Predecessor Hotels.................................................. 66
AGH Acquisition Hotels.................................................. 68
Ten Percent Hotels...................................................... 72
The Participating Leases................................................ 72
The Management Agreements............................................... 79
Mortgage Indebtedness Remaining Following the Offering.................. 80
Line of Credit.......................................................... 81
Ground Leases........................................................... 81
Franchise Conversions and Other Capital Improvements.................... 82
Franchise Agreements.................................................... 82
Employees............................................................... 84
Environmental Matters................................................... 84
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Options to Purchase and Rights of First Refusal......................... 85
Competition............................................................. 86
Insurance............................................................... 86
Legal Proceedings....................................................... 86
FORMATION TRANSACTIONS................................................... 87
Benefits to the Officers and the Primary Contributors................... 88
Valuation of Interests.................................................. 89
Transfer of Initial Hotels.............................................. 89
MANAGEMENT............................................................... 90
Directors and Executive Officers........................................ 90
Board of Directors and Committees....................................... 91
Executive Compensation.................................................. 92
Employment Agreements................................................... 92
Compensation of Directors............................................... 92
Stock Incentive Plans................................................... 93
Limitation of Liability and Indemnification............................. 96
Indemnification Agreements.............................................. 97
CERTAIN RELATIONSHIPS AND TRANSACTIONS................................... 97
Relationships Among Officers and Directors.............................. 97
Acquisition of Interests in Certain of the Initial Hotels............... 97
Shared Services and Office Space Agreement.............................. 98
Options to Purchase and Rights of First Refusal......................... 98
Employment Agreements and Stock Incentive Plans......................... 98
Purchase of Personal Property........................................... 99
The Participating Leases................................................ 99
The Management Agreements............................................... 99
The Beverage Corporations............................................... 99
AGHI AND THE LESSEE...................................................... 99
PRINCIPAL STOCKHOLDERS................................................... 102
DESCRIPTION OF CAPITAL STOCK............................................. 103
General................................................................. 103
Common Stock............................................................ 103
Preferred Stock......................................................... 103
Power to Issue Additional Shares of Common Stock and Preferred Stock.... 104
Restrictions on Transfer................................................ 104
Transfer Agent and Registrar............................................ 106
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND
BYLAWS.................................................................. 107
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Number of Directors; Classification of the Board of Directors............ 107
Removal; Filling Vacancies............................................... 107
Limitation of Liability and Indemnification.............................. 107
Business Combinations.................................................... 108
Control Share Acquisitions............................................... 109
Amendment to the Charter................................................. 110
Dissolution of the Company............................................... 110
Advance Notice of Director Nominations and New Business.................. 110
Meetings of Stockholders................................................. 110
Operations............................................................... 110
Anti-Takeover Effect of Certain Provisions of Maryland Law and of the
Charter and Bylaws...................................................... 110
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES................ 111
Investment Policies...................................................... 111
Financing................................................................ 112
Conflict of Interest Policies............................................ 112
Policies with Respect to Other Activities................................ 113
Working Capital Reserves................................................. 114
SHARES AVAILABLE FOR FUTURE SALE.......................................... 114
PARTNERSHIP AGREEMENT..................................................... 115
Management............................................................... 115
Transferability of Interests............................................. 115
Capital Contribution..................................................... 116
Exchange Rights.......................................................... 116
Registration Rights...................................................... 116
Operations............................................................... 117
Distributions and Allocations............................................ 117
Term..................................................................... 117
Tax Matters.............................................................. 117
FEDERAL INCOME TAX CONSIDERATIONS......................................... 118
Requirements for Qualification as a REIT................................. 118
Failure to Qualify as a REIT............................................. 125
Taxation of the Company.................................................. 126
Taxation of Stockholders................................................. 127
Statement of Stock Ownership............................................. 130
Tax Aspects of the Operating Partnership................................. 130
Income Taxation of the Operating Partnership and Its Partners............ 132
Other Tax Considerations................................................. 133
UNDERWRITING.............................................................. 137
EXPERTS................................................................... 138
LEGAL MATTERS............................................................. 138
ADDITIONAL INFORMATION.................................................... 139
GLOSSARY.................................................................. 140
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus assumes (i) the
completion of the transactions described in "Formation Transactions," (ii) an
offering price of $20.00 per share, which is the mid-point of the price range
set forth on the cover page of this Prospectus (the "Offering Price"), and
(iii) the Underwriters' over-allotment option is not exercised. Unless the
context requires otherwise, the term "Company," as used herein, includes
American General Hospitality Corporation and its two wholly owned subsidiaries,
AGH GP, Inc. ("AGH GP") and AGH LP, Inc. ("AGH LP"), and American General
Hospitality Operating Partnership, L.P., a Delaware limited partnership (the
"Operating Partnership"). The term "Operating Partnership," unless the context
requires otherwise, includes subsidiaries of the Operating Partnership. See
"Glossary" for the definitions of certain terms used in this Prospectus.
Investors should carefully consider the information set forth under the heading
"Risk Factors."
THE COMPANY
The Company, which intends to operate as a self-administered real estate
investment trust ("REIT"), has been formed to own hotel properties and to
continue and expand the hotel acquisition, development, and repositioning
operations of American General Hospitality, Inc. and certain of its affiliates
(collectively, "AGHI"). Upon completion of the Offering and the Formation
Transactions, the Company will own thirteen hotels containing an aggregate of
3,012 guest rooms, located in nine states (the "Initial Hotels"). AGHI, which
will manage the Initial Hotels, was founded in 1981 by Steven D. Jorns, the
Company's Chairman of the Board, Chief Executive Officer and President. As of
March 31, 1996, AGHI operated and managed 74 hotels in 24 states containing an
aggregate of more than 13,865 guest rooms. According to Hotel & Motel
Management, a leading hotel trade publication, AGHI was the nation's fourth
largest independent hotel management company in 1995, based upon number of
hotels under management. The Company's operations will focus on the ownership
of full-service hotels in major metropolitan markets, including hotels that are
in close proximity to the airports that serve such markets, and, to a lesser
extent, prominent hotels in major tourist areas. The Company expects to
capitalize on AGHI's expertise to achieve revenue growth at the Company's
hotels. Pursuant to the terms of the Management Agreements (as defined below),
and for so long as AGHI is managing hotels owned by the Company, AGHI has
agreed not to own or develop any additional hotel properties. The Company will
not have any economic interest in AGHI's hotel management operations.
The Initial Hotels include eleven full-service hotels and two limited-service
hotels and are diversified by franchise affiliation. For the twelve months
ended March 31, 1996, the Initial Hotels had a weighted average occupancy of
73.0% and a weighted average daily room rate ("ADR") of $70.97. Ten of the
Initial Hotels operate under franchise licenses with nationally recognized
hotel companies, which include one Hilton(R), one Courtyard by Marriott(R), six
Holiday Inns(R), one Hampton Inn(R) and one Days Inn(R).
The Company will seek to achieve revenue growth principally through the
acquisition and subsequent product and brand repositioning of hotels.
Consistent with this strategy, the Company has scheduled approximately $24.6
million (an average of approximately $13,400 per guest room) to be spent on
renovations and refurbishments within one year after the completion of the
Offering at seven Initial Hotels to convert the hotels to leading franchise
brands and reposition such hotels for future revenue growth. Upon completion of
the franchise conversions, the Initial Hotels will consist of one Wyndham
Hotel(R), two DoubleTree Hotels(R), two Crowne Plazas(R), one Hilton(R), one
Courtyard by Marriott, one Holiday Inn Select SM (the premium Holiday Inn
brand), two Holiday Inns, two Hampton Inns and one independent luxury hotel.
There can be no assurance that such brand conversions and hotel repositionings
will occur as planned.
1
<PAGE>
In order to qualify as a REIT, the Company may not operate hotels. As a
result, the current principals of AGHI (including Mr. Jorns and Bruce G. Wiles,
the Company's Executive Vice President) and Kenneth E. Barr, the Company's
Executive Vice President and Chief Financial Officer, have formed AGH Leasing,
L.P. (the "Lessee"), which will lease the Initial Hotels from the Company
pursuant to separate participating leases (the "Participating Leases"). Messrs.
Jorns, Wiles and Barr own collectively an approximate 23.0% interest in the
Lessee. The Participating Leases are designed to allow the Company to achieve
substantial participation in any future growth of revenues generated at the
Initial Hotels. The Lessee, in turn, will enter into separate management
agreements (the "Management Agreements") with AGHI to operate the Initial
Hotels. See "AGHI and the Lessee."
The Initial Hotels have achieved significant growth in occupancy, ADR and
total revenue per available room ("REVPAR") as set forth in the following
chart:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------- ----------------
1993(1) 1994(1) 1995(1) 1995(1) 1996(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Occupancy.............................. 71.6% 71.7% 72.9% 70.6% 70.7%
ADR.................................... $57.65 $62.28 $69.19 $65.97 $73.33
REVPAR................................. $41.26 $44.67 $50.46 $46.56 $51.81
</TABLE>
- --------
(1) For comparison purposes, the total weighted average occupancy, ADR and
REVPAR for all U.S. hotels for each of the years ended December 31, 1993,
1994 and 1995 and for each of the three months ended March 31, 1995 and
1996 were as follows: occupancy: 63.0%, 64.7%, 65.5%, 60.3% and 61.1%,
respectively; ADR: $61.93, $64.24, $67.34, $67.83 and $72.01, respectively;
and REVPAR: $39.01, $41.56, $44.11, $40.93 and $44.02, respectively. The
occupancy, ADR and REVPAR data for all U.S. hotels was provided by Smith
Travel Research, Inc. ("Smith Travel Research"). Smith Travel Research has
not provided any form of consultation, advice or counsel regarding any
aspect of, and is in no way associated with, the Offering.
The Company believes that the growth in occupancy, ADR and REVPAR at the
eight Initial Hotels currently managed and operated by AGHI reflects the
successful repositioning, renovation and marketing strategies of AGHI, as well
as AGHI's superior management and operational capabilities. See "The Initial
Hotels." The Company also attributes the success of the Initial Hotels to the
slowing in recent years of new hotel construction nationally and improving
economic conditions, both of which followed an extended period of unprofitable
industry performance in the late 1980's and early 1990's. The Company believes
these improved lodging market fundamentals have created a favorable environment
for internal growth at the Initial Hotels and for acquisitions. See "The Hotel
Industry."
Management believes that the full-service hotel segment, in particular, has
potential for improved performance as the economy continues to improve, and as
business and leisure travel activity increases. The Company has targeted the
full-service segment of the hotel industry due, in part, to its belief that the
approximate three- to five-year lead time from conception to completion of a
full-service hotel in the markets in which the Company intends to focus
represents a significant barrier to entry that will limit near-term competition
resulting from a new supply of guest rooms. Management also believes that the
full-service segment of the market will continue to offer numerous
opportunities to acquire hotels at attractive multiples of cash flow, and at
discounts to replacement value, including underperforming hotels that may
benefit from new management. The Company believes that a substantial number of
hotels meeting its investment criteria are available at attractive prices in
the markets where AGHI currently operates hotels and in markets that the
Company believes have attractive economic characteristics. The Company believes
its acquisition capabilities will be enhanced by the fact that its initial
capital structure provides significant financial flexibility. Upon completion
of the Offering, the Company will have approximately $19.4 million of
outstanding indebtedness. The Company intends to limit consolidated
indebtedness (measured at the time the debt is incurred) to no more than 45.0%
of the Company's investment in hotels. See "Policies and Objectives with
Respect to Certain Activities--Financing." The Company has obtained a
commitment for a $100 million revolving line of credit (the "Line of Credit"),
the borrowings from which
2
<PAGE>
will be utilized primarily for the acquisition and renovation of additional
hotels and for the renovation of certain Initial Hotels. Upon closing of the
Offering, the Company expects to have approximately $60 million of borrowing
capacity under the Line of Credit. The Company expects that the borrowing
capacity under the Line of Credit will increase to approximately $100 million,
assuming all additional borrowings are used to fund capital improvements to the
Initial Hotels or the acquisition of additional hotels. See "The Initial
Hotels--Line of Credit."
The Company's executive offices are located at 3860 West Northwest Highway,
Suite 300, Dallas, Texas 75220, and its telephone number is (214) 904-2000.
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK INVOLVES VARIOUS RISKS, AND
INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS,"
INCLUDING THE FOLLOWING:
. Conflicts of interest between the Company and certain of its executive
officers who own interests in certain of the Initial Hotels to be
acquired by the Company and who also own interests in the Lessee and
AGHI, all of which could lead to decisions that do not reflect solely the
interests of the Company's stockholders, including (i) the lack of arm's-
length negotiations relating to the purchase of, or the assignment of
contract rights relating to, interests in seven Initial Hotels, including
the risk that the purchase prices may exceed the market values of such
hotels, (ii) the lack of arm's-length negotiations relating to the
Participating Leases and the Management Agreements, (iii) the possible
failure by the Company to enforce the terms and conditions of the
Participating Leases against the Lessee, even when such enforcement would
be in the best interests of the Company, and (iv) the possible adverse
tax consequences to certain executive officers of the Company upon the
subsequent sale by the Company of certain of the Initial Hotels;
. Dependence upon rent payments from the Lessee for substantially all of
the Company's income, including risks related to the ability of the
Lessee to make rent payments that are sufficient to permit the Company to
make initial estimated distributions to its stockholders, the failure or
delay in making rent payments, the failure of the Lessee and AGHI to
effectively operate and manage the Initial Hotels and to meet the
obligations under the franchise agreements, and the limited operating
history of the Lessee as a newly organized entity;
. Risks associated with the Company's lack of control over the operations
of the Initial Hotels due to tax restrictions that prevent REITs from
operating hotels;
. Risks associated with the lack of appraisals of the Initial Hotels,
including the possibility that the purchase prices paid by the Company
for the Initial Hotels may exceed the market value of such hotels;
. Risks affecting the hotel industry generally, and the Company's hotels
specifically, including competition for guests, increases in operating
costs due to inflation and other factors, dependence on business and
commercial travelers and tourism, increases in energy costs and other
travel expenses, seasonality and the need for future capital expenditures
and for replacement of furniture, fixtures and equipment ("FF&E") in
excess of budgeted amounts, all of which could have a material adverse
effect on Cash Available for Distribution (as defined in "Summary
Financial Information");
. Receipt by the Primary Contributors (as defined in "Benefits to the
Officers and the Primary Contributors") and certain of the Company's
executive officers of material benefits from the transactions described
under "Formation Transactions," including, but not limited to, (i)
receipt by the Primary Contributors and the Company's executive officers
of an aggregate of approximately 1,157,673 units of limited partnership
interest ("OP Units") in the Operating Partnership (valued at
approximately $23.2 million, based on the Offering Price), (ii) the
repayment of $3.75 million of indebtedness guaranteed by AGHI, (iii) the
grant to the Company's officers and directors of options to acquire an
aggregate of 400,000 shares of Common
3
<PAGE>
Stock at the Offering Price, (iv) the grant to the Company's executive
officers of stock awards for an aggregate of 50,000 shares of restricted
Common Stock that vest over a four-year period commencing on the date of
grant, (v) the reimbursement to AGHI of approximately $900,000 in direct
out-of-pocket expenses incurred in connection with the acquisition of the
Initial Hotels, (vi) benefits to the Lessee and AGHI under the
Participating Leases and Management Agreements, and (vii) benefits to Mr.
Jorns from the ownership of the Beverage Corporations (as defined in
"Formation Transactions");
. Risks affecting the real estate industry generally, including economic
and other conditions that may adversely affect real estate investments,
including the Initial Hotels, and the Lessee's ability to make rent
payments from the operations of the Initial Hotels, relative illiquidity
of real estate, increases in taxes caused by increased assessed values or
property tax rates, and potential liabilities, including liabilities for
unknown or future environmental problems, all of which could have a
material adverse effect on Cash Available for Distribution;
. Risks associated with the fact that certain of the Initial Hotels
experienced net losses in recent years; accordingly, there can be no
assurance that the Company will not experience net losses in the future;
. Risks associated with distributing 95% of estimated Cash Available for
Distribution, including the risk that actual Cash Available for
Distribution will be insufficient to permit the Company to maintain its
proposed initial distribution rate, and the risk that the planned
renovations at certain of the Initial Hotels may adversely impact hotel
revenues and rent payments due under the Participating Leases, which, in
turn, would have a material adverse impact on Cash Available for
Distribution;
. Tax risks, including taxation of the Company as a corporation if it fails
to qualify as a REIT and taxation of the Operating Partnership as a
corporation if it were deemed not to be a partnership, and the Company's
liability for federal and state taxes on its income in either such event,
which could have a material adverse effect on Cash Available for
Distribution;
. Risks normally associated with debt financing, including the fact that
there is no limitation on the amount of indebtedness that may be incurred
by the Company, except as imposed under the Line of Credit and may be
imposed by future lenders to the Company;
. The risk that sufficient sources of financing will not be available to
fund capital expenditure requirements, including planned renovations and
the Company's obligation under the ground lease for the Fred Harvey
Albuquerque Airport Hotel to construct, at the Company's expense, 100
additional guest rooms if the occupancy at such hotel is 85.0% or greater
for 24 consecutive months;
. Potential loss of franchise licenses relating to the franchised Initial
Hotels, and varying capital requirements of franchisors that may affect
the Company's return on its investment in the Initial Hotels; and
. The restriction on ownership of shares of Common Stock intended to insure
compliance with certain requirements related to continued qualification
of the Company as a REIT, and certain other provisions in the Company's
Charter and Bylaws, all of which may have the effect of inhibiting a
change in control of the Company even when such a change of control could
be beneficial to the Company's stockholders.
AGHI AND THE LESSEE
American General Hospitality, Inc.
AGHI, based in Dallas, Texas, was founded in 1981 by Mr. Jorns, the Company's
Chairman of the Board, Chief Executive Officer and President. AGHI has
experienced significant growth over the last five years as its management
portfolio increased from 39 hotels with more than 5,200 guest rooms under
management at December 31, 1990, to 74 hotels with more than 13,865 guest rooms
under management at March 31, 1996. For the twelve months ended March 31, 1996,
the hotels managed by AGHI generated revenues in excess of $275 million.
According to Hotel & Motel Management, a leading hotel trade publication, AGHI
was the nation's
4
<PAGE>
fourth largest independent hotel management company in 1995 based upon the
number of hotels under management. As of March 31, 1996, AGHI had approximately
6,000 employees. AGHI has been involved in the repositioning of approximately
70 different hotels operated under various national franchise brands. Pursuant
to the terms of the Management Agreements, and for so long as AGHI is managing
hotels for the benefit of the Company, AGHI has agreed to limit its business
activities to managing and operating Company-owned hotels and hotels owned by
third parties. The Company will not have any economic interest in AGHI's hotel
management operations. The Lessee will contract with AGHI to manage the Initial
Hotels under an incentive compensation structure. See "The Initial Hotels--The
Management Agreements." Messrs. Jorns and Wiles, two executive officers of the
Company, own collectively approximately 21.0% of AGHI. The remaining interests
in AGHI are owned by James E. Sowell, Lewis W. Shaw II and Kenneth W. Shaw,
three of the Primary Contributors. See "AGHI and the Lessee."
AGH Leasing, L.P.
The Company will lease each Initial Hotel to the Lessee pursuant to a
separate Participating Lease and, while not legally obligated to do so, expects
to lease additional hotels that may be acquired or developed by the Company to
the Lessee. Messrs. Jorns, Wiles and Barr, all executive officers of the
Company, own collectively approximately 23.0% of the Lessee. See "AGHI and the
Lessee." The remaining interests in the Lessee are owned by Messrs. Sowell,
Shaw and Shaw. Each Participating Lease will have a term of twelve years,
subject to earlier termination upon the occurrence of certain events. Under the
Participating Leases, the Lessee will be obligated to make fixed weekly base
rent payments ("Base Rent") to the Company and monthly participating rent
payments based on a percentage of revenues ("Participating Rent") to the
Company. The Company has structured the terms of the Participating Leases, the
Management Agreements and the related agreements in an effort to seek to align
the interests of AGHI and the Lessee with the interests of the Company's
stockholders. See "AGHI and the Lessee," "The Initial Hotels--The Participating
Leases" and "--The Management Agreements."
THE INITIAL HOTELS
The thirteen Initial Hotels are diversified by five different national hotel
affiliations, including Hilton, Courtyard by Marriott, Holiday Inn, Hampton Inn
and Days Inn and include eleven full-service hotels, including one hotel with a
conference center, and two limited-service hotels. In addition, the Company
plans to reposition, within one year after the completion of the Offering,
seven of the Initial Hotels (four Holiday Inns, one Days Inn and two
independent hotels) through an upgrade and conversion into hotels that operate
under the Wyndham Hotel, DoubleTree Hotel, Crowne Plaza, Holiday Inn Select and
Hampton Inn 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 organization. There can be no assurance that such brand
conversions and repositionings will occur as planned or that, if such brand
conversions and repositionings occur, the affected hotels will experience
occupancy and rate increases. The Company believes that the diversity of its
initial portfolio moderates the potential effects on the Company of regional
economic conditions or local market competition affecting specific hotel
franchises, hotel markets, or price segments within the industry. The hotels
are located primarily in major metropolitan areas at or in close proximity to
commercial airports, interstate highways or local commercial demand generators,
such as regional shopping centers, convention centers or tourist attractions.
The table on the following page sets forth certain information with respect
to the Initial Hotels. The Lessee is obligated to pay to the Company annually
the greater of Base Rent or Participating Rent at each of the Initial Hotels.
5
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED MARCH 31, 1996
--------------------------------------------------------------
PRO
RENOVATIONS FORMA
AND CAPITAL TOTAL PRO PRO FORMA
NUMBER YEAR IMPROVEMENT REVENUE PRO FORMA LESSEE
OF BUILT/ EXPENDITURES, OF THE FORMA PARTICI- NET
GUEST RENO- 1/1/93- INITIAL BASE PATING INCOME
INITIAL HOTELS LOCATION ROOMS VATED(1) 3/31/96(2) HOTELS RENT(3) RENT(3) (LOSS)(4) OCCUPANCY ADR REVPAR(5)
- ---------------- --------------- ------ --------- ------------- ------- ------- -------- --------- --------- ------- ---------
(DOLLARS IN THOUSANDS, EXCEPT FOR ADR AND REVPAR)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AGH PREDECESSOR HOTELS(6)
Holiday Inn
Dallas DFW
Airport West(7)
............... Bedford, TX 243 1974/1995 $ 4,582 $ 4,881 $ 827 $ 1,440 $ 3 64.9% $ 66.05 $ 42.84
Courtyard by
Marriott-
Meadowlands(7).. Secaucus, NJ 165 1989/1994 1,500 4,525 946 1,593 (108) 77.7 83.42 64.82
Hampton Inn
Richmond
Airport(7)..... Richmond, VA 124 1987/1995 443 1,962 530 866 42 69.9 58.64 40.96
Hotel Maison de
Ville(7)....... New Orleans, LA 23 1788/1994 849 1,881 274 423 18 64.7 234.85 151.84
AGH ACQUISITION HOTELS(8)
Hilton Hotel-
Toledo(7) ..... Toledo, OH 213 1987/1994 1,069 6,094 832 1,336 159 71.7 61.31 43.96
Holiday Inn
Dallas DFW
Airport
South(7)....... Irving, TX 409 1974/1995 2,776 12,070 2,410 4,080 (102) 77.2 73.54 56.79
Holiday Inn New
Orleans
International
Airport(7)(9)(10).. Kenner, LA 304 1973/1994 3,236 8,333 2,099 3,424 (10) 79.5 74.17 58.99
Days Inn Ocean
City(7)(10)(11).. Ocean City, MD 162 1989/1994 529 2,365 719 1,221 (157) 48.2 78.75 37.96
Holiday Inn
Select-
Madison(10)(12).. Madison, WI 227 1987/1995 473 7,845 1,597 2,758 54 78.8 78.91 62.20
Holiday Inn Park
Center
Plaza(10)(12).. San Jose, CA 231 1975/1990 304 7,658 1,091 2,069 94 76.1 80.17 61.03
Fred Harvey
Albuquerque
Airport
Hotel(10)(13).. Albuquerque, NM 266 1972/1994 664 6,190 1,202 1,933 (147) 83.3 53.43 44.53
Le Baron Airport
Hotel(10)(14).. San Jose, CA 327 1973/1995 993 9,199 1,323 2,625 283 69.8 67.69 47.24
Holiday Inn
Mission
Valley(10)(14).. San Diego, CA 318 1970/1995 926 6,662 1,542 2,134 434 68.0 64.80 44.09
----- ------- ------- ------- ------- ----
Totals/Weighted Averages
Initial Hotels................ 3,012 $18,344 $79,665 $15,392 $25,902 $563 73.0% $ 70.97 $ 51.77
AGH Predecessor Hotels........ 555 7,374 13,250 2,577 4,322 (45) 69.8 76.73 53.59
AGH Acquisition Hotels........ 2,457 10,969 66,415 12,815 21,581 608 73.6 69.75 51.37
</TABLE>
- -------
(1) Year renovated reflects the calendar year in which management deems that a
significant renovation was completed at that hotel.
(2) Represents total capital expenditures at each hotel from January 1, 1993
through March 31, 1996.
(3) Represents Base Rent and Participating Rent calculated on a pro forma basis
by applying the rent provisions of the Participating Leases to the pro
forma revenues of the Initial Hotels as if January 1, 1995 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 departmental revenue thresholds in certain of the Participating
Lease formulas adjust in the future commencing January 1, 1997. See "The
Initial Hotels--The Participating Leases."
(4) After pro forma management fees of approximately $2.1 million payable to
AGHI. Such management fees are subordinate to Participating Lease payments
to the Company. See "Selected Financial Information," "AGHI and the Lessee"
and "The Initial Hotels--The Management Agreements."
(5) REVPAR is determined by dividing total room revenue by total available
rooms for the applicable period.
(6) The AGH Predecessor Hotels consist of the following four Initial Hotels:
the Holiday Inn Dallas DFW Airport West, the Courtyard by Marriott-
Meadowlands, the Hotel Maison de Ville, and the Hampton Inn Richmond
Airport.
(7) This hotel is currently operated and managed by AGHI.
(8) The AGH Acquisition Hotels consist of the following nine Initial Hotels
(four of which are currently managed by AGHI): the Holiday Inn Dallas DFW
Airport South, Hilton Hotel-Toledo, Holiday Inn New Orleans International
Airport, Holiday Inn Park Center Plaza, Holiday Inn Select-Madison, Holiday
Inn Mission Valley, Le Baron Airport Hotel, Days Inn Ocean City, and Fred
Harvey Albuquerque Airport Hotel.
(9) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Holiday Inn Select brand.
(10) There can be no assurance that the brand conversion and repositioning of
this hotel will occur as planned.
(11) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Hampton Inn brand.
(12) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Crowne Plaza brand.
(13) This hotel is currently affiliated with Best Western(R). The Company has
plans to reposition this hotel and convert it to a hotel that operates
under the Wyndham Hotel brand.
(14) The Company plans to reposition this hotel and convert it to a hotel that
operates under the DoubleTree Hotel brand.
6
<PAGE>
GROWTH STRATEGIES
The Company will seek to maximize current returns to stockholders through
increases in Cash Available for Distribution and to increase long-term total
returns to stockholders through appreciation in value of the Common Stock. The
Company plans to achieve these objectives through participation in any
increased revenues from the Initial Hotels, pursuant to the Participating Rent
payments under the Participating Leases and by the acquisition and selective
development of additional hotels.
ACQUISITIONS
The Company intends to acquire additional hotels that meet one or more of the
investment criteria outlined below. The Company intends to capitalize on AGHI's
extensive resources and industry contacts available through its hotel
management business, sizable existing management portfolio, and significant
industry and national presence to access acquisition opportunities not readily
available to the market in general. The Company currently has options to
acquire AGHI's interest in two Courtyards by Marriott currently under
development containing an aggregate of 318 guest rooms. See "The Company--
Development." The Company believes that its executive officers' experience in
the hotel industry will enable the Company to acquire, upgrade and convert
hotels in order to capture the growth potential from such acquisitions. The
Company initially will employ five professionals devoted exclusively to hotel
acquisitions.
The Company will seek 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 underperforming and are candidates for implementation of
market repositioning, franchise conversion and turnaround strategies that
employ the extensive management and marketing experience of AGHI;
. 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.
The Company's ability to make acquisitions will depend on its ability to
access debt and equity financing. Initially, the Company expects to fund its
acquisitions by utilizing funds available under its Line of Credit. Funds
available to the Company under the Line of Credit will be limited to the
maximum amount of $100 million and, among other limitations, to 40% of the
value or cost of the hotels which secure such line. See "The Initial Hotels--
Line of Credit." Although as a public company the Company expects to have
available alternative sources of financing, no commitments relating to such
financing exist. Acquisitions entail risks that acquired hotels will fail
7
<PAGE>
to perform in accordance with expectations and that estimates of the cost of
improvements necessary to reposition hotels will prove inaccurate, as well as
general investment risks associated with any new real estate investment. In
addition, future trends in the hotel industry may make future acquisitions
economically impractical. Moreover, there can be no assurance that the Company
will be able to acquire hotels that meet its investment criteria or that any
such hotel's operations can be successfully improved. See "Risk Factors--Real
Estate Investment Risks--General Risks" and "--Acquisition and Development
Risks."
DEVELOPMENT
The Company's executive officers average approximately 17 years of experience
in the development and renovation of hotel properties. Under the direction of
the Company's executive officers, AGHI has developed six hotel properties, with
an aggregate development cost of approximately $60 million, and has completed
redevelopment or repositioning projects at approximately 70 hotel properties,
including both full- and limited-service hotels. The Company anticipates that
most of the additional hotels developed in the future will be in the full-
service commercial sector, including such major brands as Hilton, Marriott's
family of brands, Wyndham Hotel, DoubleTree Hotel, Crowne Plaza, Holiday Inn,
Sheraton and Embassy Suites. Other than in connection with the limited
expansion of existing hotels, the Company may not engage in development
activities without the consent of the lenders under the Line of Credit.
The Company's development activities will be limited by the terms of the Line
of Credit, its ability to access financing as well as future trends in the
hotel industry. Like acquisitions, new project development is also subject to
numerous risks, including risks of construction delays or cost overruns that
may increase project costs. Accordingly, there can be no assurance that the
Company will be able to develop hotels that meet its investment criteria or
that any hotels can be successfully developed. See "Risk Factors--Real Estate
Investment Risks--Acquisition and Development Risks."
INTERNAL GROWTH
The Company believes that, based on the historical operating results of the
Initial Hotels, the strength of the Company's and AGHI's existing management
teams and the structure of the Participating Leases, the Initial Hotels should
provide the Company with the opportunity for significant revenue growth. The
Company believes that it has structured its business relationships with AGHI
and the Lessee to provide incentives to operate and maintain the Initial Hotels
in a manner that will increase revenue and the Company's Cash Available for
Distribution. See "The Initial Hotels--The Participating Leases" and "--The
Management Agreements."
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. The Company believes there is
significant potential to increase revenues at the Initial Hotels (especially
those not currently managed by AGHI) and increase Participating Lease payments
by employing 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
. use of Participating Leases designed to capture increased revenues
attributable to improved marketing and yield management techniques that
AGHI will employ at the Initial Hotels not previously operated and
managed by AGHI and any additional hotels acquired by the Company after
the completion of the Offering.
8
<PAGE>
Product Repositioning. The Company believes that a regular program of capital
improvements, including replacement and refurbishment of FF&E at the Initial
Hotels, as well as the renovation and redevelopment of certain of the Initial
Hotels, will maintain the competitiveness of the Initial Hotels and increase
revenues. From January 1, 1993 through March 31, 1996, approximately $15.0
million (an average of approximately $9,000 per guest room) was spent on
renovations and capital improvements at the eight Initial Hotels currently
operated and managed by AGHI. The Company expects to employ a repositioning and
conversion strategy in connection with its hotel acquisitions. Consistent with
this strategy, the Company has scheduled approximately $24.6 million (an
average of approximately $13,400 per guest room) to be spent on renovations and
refurbishments within one year after the completion of the Offering at seven of
the Initial Hotels anticipated to undergo brand conversions within one year
after the closing of the Offering (see "Brand Repositioning" below).
As an example of this strategy, AGHI, after its acquisition in May 1992 of an
interest in the Holiday Inn Dallas DFW Airport South and its retention as
manager, commenced an extensive $2.5 million renovation of the hotel, which
included upgrades of all guest rooms and corridors, common areas, meeting
space, and restaurants and the lounge and renovation of the exterior of the
building. At the time of purchase, the hotel had lost its Holiday Inn franchise
due to product deficiencies and was experiencing declining occupancy arising
from poor marketing and insufficient capital improvements. Since the completion
of the initial renovations in 1992, an additional $2.5 million has been spent
to upgrade the hotel. In 1992, occupancy, ADR and REVPAR at the Holiday Inn
Dallas DFW Airport South were 49.1%, $54.18 and $26.61, respectively. By the
twelve months ended March 31, 1996, occupancy at the hotel had increased 57.2%
to 77.2%, ADR at the hotel had increased 35.7% to $73.54 and REVPAR at the
hotel had increased 113.4% to $56.79. There can be no assurance that the
Company will be able to achieve similar results with respect to the Initial
Hotels or hotels acquired in the future.
The Participating Leases require the Company to establish reserves of 4.0% of
total revenue for each of the Initial Hotels (which, on a consolidated pro
forma basis for the twelve months ended March 31, 1996, represented
approximately 5.6% of room revenue), which will be utilized by the Lessee for
the replacement and refurbishment of FF&E and for other capital expenditures
designed to enhance the competitive position of the Initial 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 Courtyard by Marriott, DoubleTree Hotel, Crowne Plaza,
Holiday Inn, Holiday Inn Select, and Wyndham Hotel brands, in order to improve
the operating performance at these hotels. Seven of the Initial Hotels are
anticipated to undergo brand conversions within one year after the closing of
the Offering. It is expected that the Holiday Inn Park Center Plaza will be
converted from a traditional Holiday Inn to a Crowne Plaza, the Holiday Inn
Select-Madison will be converted to a Crowne Plaza, the Days Inn Ocean City
will be converted to a Hampton Inn, the Le Baron Airport Hotel will be
converted to a DoubleTree Hotel, the Holiday Inn New Orleans International
Airport will be converted from a traditional Holiday Inn to a Holiday Inn
Select, the Holiday Inn Mission Valley will be converted to a DoubleTree Hotel,
and the Fred Harvey Albuquerque Airport Hotel will be converted to a Wyndham
Hotel. 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 repositionings will occur as planned. See "Risk Factors--Risks
of Operating Hotels Under Franchise Agreements; Approval for Brand
Conversions."
As an example, AGHI implemented its brand repositioning strategy in
connection with its acquisition of the Courtyard by Marriott-Meadowlands in
December 1993. At the time of its acquisition by AGHI, this hotel's operating
performance was declining due to prior management inefficiencies, deferred
maintenance and a lack of capital to effectively compete in its market. In
response to these conditions, AGHI developed a multi-phase strategy, including
repositioning the former Days Hotel(R) to a Courtyard by Marriott and upgrading
the hotel by
9
<PAGE>
making approximately $530,000 in renovations of guest rooms and public space
and exterior improvements to the hotel. Since the initial renovation was
completed in May 1994, AGHI has invested an additional $845,400 to further
improve the restaurant, lounge, exterior entrances, guest rooms and meeting
facilities. In 1993, occupancy, ADR and REVPAR at the Courtyard by Marriott-
Meadowlands were 74.8%, $65.63 and $49.09, respectively. By the twelve months
ended March 31, 1996, occupancy at the hotel had increased 3.9% to 77.7%, ADR
at the hotel had increased 27.1% to $83.42 and REVPAR at the hotel had
increased 32.0% to $64.82. There can be no assurance that the Company will be
able to achieve similar results with respect to the Initial Hotels or hotels
acquired in the future.
The Company's ability to utilize its repositioning strategies will depend on
its ability to access financing. The Company plans to use funds available under
the Line of Credit to implement its planned conversion and repositioning
strategy at certain of the Initial Hotels. Substantial renovations of hotels
often disrupt the operations of those hotels due to hotel guest rooms and
common areas being out of service for extended periods. See "Risk Factors--
Hotel Industry Risks--Risks of Necessary Operating Costs and Capital
Expenditures; Required Hotel Renovations."
Operational Repositioning. The Company expects to achieve internal growth
through the application of AGHI'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 continuing use of (i) interactive
yield management techniques, (ii) highly developed operating systems and
controls, (iii) targeted sales and marketing plans, (iv) proactive 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 by employing AGHI as the
manager of the five Initial Hotels that AGHI does not currently manage, AGHI,
through improved marketing and yield management techniques, will increase the
revenues of these hotels, thereby increasing the rent payable to the Company by
the Lessee under the Participating Leases. The Company and the Lessee relied on
this estimated increase in revenue in establishing the rent payable to the
Company under the Participating Leases relating to these hotels. While the rent
provisions of the Participating Leases are revenue-based, such provisions have
been developed with consideration of the fixed and variable nature of hotel
operating expenses and changes in operating margins typically associated with
increases in revenues. See "The Initial Hotels--The Participating Leases."
In an effort to align the interests of AGHI and the Lessee with the interests
of the Company's stockholders, the Participating Leases, the Management
Agreements and certain related agreements provide for the following:
. the partners of the Lessee have agreed upon consummation of the Offering
to (i) initially capitalize the Lessee with $500,000 in cash and (ii)
pledge 275,000 OP Units having a value of approximately $5.5 million,
based on the Offering Price, to the Company to secure the Lessee's
obligations under the Participating Leases (the "Lessee Pledge");
. until the Lessee's net worth equals the greater of (i) $6.0 million and
(ii) 17.5% of actual rent payments from hotels leased to the Lessee
during the preceding calendar year (the "Lessee Distribution
Restriction"), the Lessee will 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 the operations of the Lessee and except
for distributions relating to interest or dividends received by the
Lessee from cash or securities held by it);
. management fees paid to AGHI by the Lessee will include an incentive fee
of up to 2.0% of gross revenues based upon reaching certain gross revenue
targets at the Initial Hotels;
. management fees payable by the Lessee to AGHI will be subordinated to the
Lessee's rent obligations to the Company under the Participating Leases;
10
<PAGE>
. defaults by the Lessee under each Participating Lease will result in a
cross-default of all other Participating Leases to which the Lessee is a
party allowing the Company to terminate each other lease;
. Messrs. Jorns and Wiles, who are stockholders of AGHI and are also
executive officers of the Company, will agree to use 50.0% of the
dividends (net of tax liability) 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
additional interests in the Company; and
. the Board of Directors of the Company will establish a Leasing Committee,
consisting entirely of Independent Directors (as defined in "Management--
Board of Directors and Committees"), that will review not less frequently
than annually the Lessee's compliance with the terms of the Participating
Leases and will review and approve the terms of each new Participating
Lease between the Company and the Lessee.
FORMATION TRANSACTIONS
Set forth below is a description of the principal transactions in connection
with the formation of the Company and the acquisition of the Initial Hotels
(the "Formation Transactions"):
. The Company will sell 7,000,000 shares of Common Stock in the Offering.
All of the net proceeds to the Company from the Offering will be
contributed to AGH GP and AGH LP, which, in turn, will contribute such
proceeds, together with certain assets acquired from AGHI's Employee
Retirement and Savings Plan (the "Plan") (as described below), to the
Operating Partnership in exchange for an approximate 74.2% interest in
the Operating Partnership. AGH GP, a wholly owned subsidiary of the
Company, is the sole general partner of the Operating Partnership and
will own a 1.0% interest in the Operating Partnership. AGH LP, also a
wholly owned subsidiary of the Company, will initially own an approximate
73.2% limited partnership interest in the Operating Partnership;
. The Company will acquire directly or indirectly a 100.0% interest in each
of the Initial Hotels for an aggregate of 2,511,106 OP Units, 155,518
shares of Common Stock, approximately $91.0 million in cash, and the
assumption of approximately $52.9 million in mortgage indebtedness (of
which amount approximately $33.5 million will be repaid from the net
proceeds of the Offering), as follows:
. The Operating Partnership will acquire from the Primary Contributors
interests in six of the Initial Hotels (Holiday Inn Dallas DFW Airport
West, Holiday Inn Dallas DFW Airport South, Hotel Maison de Ville,
Hampton Inn Richmond Airport, Courtyard by Marriott-Meadowlands and
Hilton Hotel-Toledo) and the Primary Contributors' contract right to
acquire the Holiday Inn Park Center Plaza in exchange for 1,157,673 OP
Units (valued at approximately $23.2 million, based on the Offering
Price);
. The Company will acquire from the Plan interests in five of the
Initial Hotels (Hampton Inn Richmond Airport, Holiday Inn Dallas DFW
Airport West, Hotel Maison de Ville, Courtyard by Marriott-Meadowlands
and Hilton Hotel-Toledo) in exchange for 155,518 shares of Common
Stock (valued at approximately $3.1 million, based on the Offering
Price), and the Company will, in turn, contribute such interests to
the Operating Partnership in exchange for 155,518 OP Units. The
Company's executive officers collectively own less than a 5.0%
beneficial interest in the Plan; and
. The Operating Partnership will acquire, directly or as assignee of the
Primary Contributors' contract rights, interests in eight of the
Initial Hotels from parties that are unaffiliated with the Primary
Contributors in exchange for an aggregate of 1,353,433 OP Units
(valued at approximately $27.1 million, based on the Offering Price)
and approximately $91.0 million in cash.
. The Operating Partnership will reimburse AGHI for approximately $900,000
for direct out-of-pocket expenses incurred in connection with the
acquisition of the Initial Hotels, including legal, environmental and
engineering expenses;
11
<PAGE>
. The Operating Partnership will lease each Initial Hotel to the Lessee for
a term of twelve years pursuant to a Participating Lease, which will
require Base Rent to be paid on a weekly basis and Participating Rent to
be paid on a monthly basis;
. The Operating Partnership will receive from the Primary Contributors
options to acquire their interests in the two Option Hotels (see "The
Initial Hotels--Options to Purchase and Rights of First Refusal");
. In order for the Company to qualify as a REIT, the Operating Partnership
will sell certain personal property relating to certain of the Initial
Hotels to the Lessee in exchange for one or more five-year amortizing
recourse promissory notes in the aggregate principal amount of $315,000
that will be secured by such personal property (collectively, the "FF&E
Note");
. The Lessee will contract with AGHI to operate the Initial Hotels under
separate Management Agreements providing for the subordination of the
payment of the management fees to the Lessee's obligation to pay rent to
the Operating Partnership under the Participating Leases; and
. In order to facilitate compliance with state and local liquor laws and
regulations, the Lessee will sublease (the "Beverage Subleases") those
areas of the Initial Hotels where alcoholic beverages are served to
special purpose corporations, eleven of which are wholly owned by Mr.
Jorns (collectively, the "Beverage Corporations"). The Beverage
Corporations will pay to the Lessee rent payments equal to 30% of gross
revenues 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.
12
<PAGE>
Following the consummation of the Formation Transactions, the structure and
relationship of the Company, the Operating Partnership, the Lessee and AGHI
will be as follows:
FLOWCHART APPEARS HERE
- --------
(1) Upon completion of the Formation Transactions, each of Messrs. Jorns, Wiles
and Barr will own less than 1% of the outstanding shares of Common Stock of
the Company and 2.2%, 0.7% and 0.2%, respectively, of the outstanding OP
Units of the Operating Partnership. See "Principal Stockholders."
(2) Messrs. Jorns, Wiles and Barr own, directly or indirectly, 15.43%, 4.89%
and 2.5%, respectively, of the Lessee.
(3) Messrs. Jorns and Wiles own 15.83% and 5.0%, respectively, of AGHI.
13
<PAGE>
BENEFITS TO THE OFFICERS AND THE PRIMARY CONTRIBUTORS
The Primary Contributors are Steven D. Jorns, Bruce G. Wiles, and Kenneth E.
Barr, each of whom is an executive officer of the Company, and James E. Sowell,
Lewis W. Shaw II and Kenneth W. Shaw, each of whom is an affiliate of the
Lessee and AGHI and, where applicable, the term "Primary Contributors" includes
their respective controlled affiliates and associates (including spouses).
As a result of the Formation Transactions, officers of the Company and the
Primary Contributors will receive the following benefits:
. Mr. Jorns will receive 184,615 OP Units, Mr. Wiles will receive 56,519 OP
Units, Mr. Barr will receive 10,000 OP Units, Mr. Sowell will receive
538,724 OP Units, Mr. Lewis W. Shaw II will receive 184,615 OP Units, and
Mr. Kenneth W. Shaw will receive 183,199 OP Units, as consideration for
their interests in six of the Initial Hotels and the assignment of the
contract right to acquire one additional Initial Hotel. The OP Units to
be received by Messrs. Jorns, Wiles, Barr, Sowell, Shaw and Shaw (which
are exchangeable for cash, or at the Company's option for Common Stock,
at any time after one year following the completion of the Offering) will
have a value of approximately $3.7 million, $1.1 million, $200,000, $10.8
million, $3.7 million and $3.7 million, based on the Offering Price,
respectively, and will be more liquid than their interests in the Initial
Hotels once a public trading market for the Common Stock commences. As of
March 31, 1996, the aggregate book value of the interests and rights to
be contributed by such persons was approximately $3.2 million;
. Messrs. Jorns, Wiles, Barr and Russ C. Valentine, an executive officer of
the Company, will be granted options to acquire 225,000, 75,000, 40,000
and 20,000 shares of Common Stock, respectively, at the Offering Price,
which will become exercisable in four equal annual installments
commencing on the date of grant;
. Messrs. Jorns, Wiles, Barr and Valentine will receive stock awards of
30,000, 10,000, 6,000 and 4,000 shares of restricted Common Stock,
respectively, which will vest over a four-year period commencing on the
date of grant;
. The Operating Partnership will reimburse AGHI for approximately $900,000
for direct out-of-pocket expenses incurred in connection with the
acquisition of the Initial Hotels, including legal, environmental and
engineering expenses;
. The Operating Partnership will repay approximately $3.75 million of
indebtedness guaranteed by AGHI;
. Certain tax consequences to the Primary Contributors resulting from the
conveyance of their interests in the Initial Hotels to the Operating
Partnership will be deferred;
. Through its operation of the Initial Hotels pursuant to the Participating
Leases, the Lessee, which is owned by Messrs. Jorns, Wiles, Barr, Sowell,
Shaw and Shaw, will be entitled to all of the cash flow from the Initial
Hotels after the payment of operating expenses, management fees and rent
under the Participating Leases (which cash flow, after establishing a
reserve for tax distributions to its partners, the Lessee will use
annually, until its net worth equals the greater of (i) $6.0 million and
(ii) 17.5% of actual rent payments from hotels leased to the Lessee
during the preceding calendar year, to purchase interests in the
Company). Pursuant to the Management Agreements, AGHI, which is owned by
Messrs. Jorns, Wiles, Sowell, Shaw and Shaw, will receive management fees
from the Lessee, which are subordinate to the rent payments due to the
Company under the Participating Leases, in an amount initially equal to a
base fee of 1.5% of gross revenues plus an incentive fee of up to 2.0% of
gross revenues that will be earned incrementally upon reaching certain
gross revenue targets. See "The Initial Hotels--The Participating Leases"
and "--The Management Agreements;" and
. Through its operation of the areas of eleven of the Initial Hotels that
serve alcoholic beverages, the Beverage Corporations, which are wholly
owned by Mr. Jorns, will be entitled to all cash flow from food
14
<PAGE>
and beverage sales generated from such areas after the payment of rent to
the Lessee equal to 30% of gross revenues from such sales; such
arrangement will not, however, reduce Participating Rent payments to the
Company, which it is entitled to receive from such food and beverage
sales.
TAX STATUS
The Company intends to make an election to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its initial taxable year ending December 31, 1996. If the
Company qualifies for taxation 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. Failure to qualify as a REIT would render
the Company subject to tax (including any applicable minimum tax) on its
taxable income at regular corporate rates, and distributions to the
stockholders in any such year would not be deductible by the Company. Although
the Company does not intend to request a ruling from the Internal Revenue
Service (the "IRS") as to its REIT status, the Company will receive, at the
closing of the Offering, the opinion of its legal counsel that the Company
qualifies for taxation as a REIT, which opinion is based on certain assumptions
and representations and is not binding on the IRS or any court. Even if the
Company qualifies for taxation as a REIT, the Company may be subject to certain
federal, 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 intends to
adopt the calendar year as its taxable year. See "Risk Factors--Tax Risks" and
"--Potential Anti-Takeover Effect of Certain Provisions of Maryland Law and of
the Company's Charter and Bylaws--Ownership Limitation," "Description of
Capital Stock--Restrictions on Transfer," and "Federal Income Tax
Considerations--Taxation of the Company."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by
the Company............ 7,000,000 shares
Common Stock to be
outstanding after the 9,716,624 shares(1)
Offering...............
Use of Proceeds......... To acquire the Initial Hotels, to repay certain
mortgage and other existing indebtedness in connection
with the acquisition of the Initial Hotels, and for
working capital. See "Use of Proceeds."
NYSE symbol............. "AGT"
</TABLE>
- --------
(1) Includes 2,511,106 shares of Common Stock to be issuable one year after the
completion of the Offering upon the exchange of OP Units issued in the
Formation Transactions (other than to AGH GP and AGH LP), 155,518 shares of
Common Stock issued to the Plan in connection with the Formation
Transactions and 50,000 shares of restricted Common Stock that will vest
over a four-year period granted to the Company's executive officers as
stock awards. Excludes 850,000 reserved but unissued shares of Common Stock
under the American General Hospitality Corporation 1996 Incentive Plan (the
"1996 Plan") and 100,000 reserved but unissued shares of Common Stock under
the American General Hospitality Corporation Non-Employee Directors'
Incentive Plan (the "Directors' Plan"). See "Management--Stock Incentive
Plans," "Formation Transactions" and "Partnership Agreement--Exchange
Rights."
15
<PAGE>
DISTRIBUTION POLICY
Subsequent to the Offering, the Company intends to make regular quarterly
distributions to its stockholders. The Company's first distribution, for the
period from the closing of the Offering to September 30, 1996, is expected to
be $ per share of Common Stock, representing a pro rata distribution of the
anticipated regular quarterly distribution of $0.40 per share for a full
quarter, which, on an annualized basis, represents an initial annual
distribution rate of $1.60 per share or 8.0% of the Offering Price. The Company
estimates that approximately 21.0% of the initial annual distribution will
represent a return of capital for federal income tax purposes. Based on the
Company's estimated revenues less expenses for the twelve months ended March
31, 1996, the Company would have been required to distribute approximately $8.6
million, or $1.20 per share, in order to maintain its status as a REIT. This
estimated initial distribution represents 95.0% of estimated Cash Available for
Distribution. The holders of OP Units will be entitled to distributions per OP
Unit which are equal to the distributions payable on a per share basis with
respect to the Common Stock. The Company does not expect to adjust the
estimated distribution rate if the Underwriters' over-allotment option is
exercised. See "Partnership Agreement."
The Company has established the expected initial annual distribution rate
based upon the Company's estimate of Cash Available for Distribution, which has
been derived from the Statements of Estimated Revenues Less Expenses of the
Company for the twelve months ended March 31, 1996. The Company believes that
the estimated revenues less expenses for the twelve months ended March 31, 1996
constitute a reasonable basis for setting the expected initial annual
distribution rate. The Board of Directors, in its sole discretion, will
determine the actual distribution rate based on the Company's actual results of
operations, Cash Available for Distribution, economic conditions, tax
considerations (including those related to REITs) and other factors. See
"Distribution Policy."
16
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables set forth unaudited summary estimated and pro forma
consolidated financial data for the Company, summary historical combined
financial data for the Initial Hotels and pro forma financial data for the
Initial Hotels and Lessee and should be read in conjunction with the financial
statements and notes thereto that are contained elsewhere in this Prospectus.
The estimated revenues less expenses, pro forma and other data is presented as
if the Formation Transactions and the application of the net proceeds of the
Offering had occurred as of January 1, 1995 and therefore incorporate certain
assumptions that are included in the notes to the Statements of Estimated
Revenues Less Expenses and Pro Forma Statements of Operations included
elsewhere in the Prospectus. The pro forma balance sheet data is presented as
if the Formation Transactions and the application of the net proceeds of the
Offering had occurred on March 31, 1996.
AMERICAN GENERAL HOSPITALITY CORPORATION
SUMMARY ESTIMATED AND PRO FORMA CONSOLIDATED FINANCIAL DATA(1)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- -----------------
<S> <C> <C> <C>
ESTIMATED REVENUES LESS EX-
PENSES DATA:
Participating Lease
revenue(2)............... $ 24,775,142 $ 25,902,292 $ 6,527,908
Interest income........... 31,500 31,500 7,875
------------ ------------ ------------
Total revenue........... 24,806,642 25,933,792 6,535,783
------------ ------------ ------------
Depreciation.............. 7,404,235 6,551,936 1,485,233
Amortization.............. 646,660 646,660 161,665
Real estate and personal
property taxes and
property insurance....... 2,165,073 2,165,073 541,268
General and
administrative(3)........ 1,130,000 1,130,000 282,500
Ground lease expense...... 881,217 902,196 193,156
Amortization of unearned
officers'
compensation(4).......... 100,000 100,000 25,000
Interest expense.......... 1,244,637 1,633,962 408,491
------------ ------------ ------------
Total expenses.......... 13,571,822 13,129,827 3,097,313
------------ ------------ ------------
Estimated Revenues Less
Expenses before minority
interest................. 11,234,820 12,803,965 3,438,470
Minority interest(5)...... 2,898,584 3,303,423 887,125
------------ ------------ ------------
Estimated revenues less
expenses applicable to
common stockholders...... $ 8,336,236 $ 9,500,542 $ 2,551,345
============ ============ ============
Estimated revenues less
expenses per common
share.................... $1.16 $1.32 $0.35
============ ============ ============
Weighted average number of
shares of Common Stock
outstanding.............. 7,205,518 7,205,518 7,205,518
============ ============ ============
<CAPTION>
AT MARCH 31, 1996
-----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.............. $ 6,997
Investment in hotel
properties, net.......... 176,208,094
Total assets.............. 179,471,691
Debt...................... 19,352,239
Minority interest in
Operating Partnership.... 40,859,319
Stockholders' equity...... 117,510,133
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- -----------------
<S> <C> <C> <C>
OTHER DATA:
Funds From Operations(6).. $ 13,830,178 $ 14,362,079 $ 3,653,388
Cash Available for
Distribution(7).......... 11,663,636 12,142,695 3,195,403
Net cash provided by
operating activities(8).. 19,385,715 20,102,561 5,110,368
Net cash used in investing
activities(9)............ (3,115,404) (3,186,617) (803,895)
Net cash used in financing
activities(10)........... (16,056,851) (16,035,288) (4,008,823)
Weighted average number of
shares of Common Stock
and of OP Units
outstanding.............. 9,716,624 9,716,624 9,716,624
</TABLE>
See notes on following page.
17
<PAGE>
INITIAL HOTELS
SUMMARY HISTORICAL COMBINED FINANCIAL DATA (11)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue........... $27,963,802 $30,376,150 $36,829,877 $43,541,206 $53,756,926 $11,857,784 $14,186,415
Food and beverage
revenue............... 13,526,143 13,597,748 15,453,080 16,378,861 17,717,760 4,291,351 4,683,138
Other revenue.......... 2,434,535 2,528,364 4,680,010 3,392,275 4,147,900 971,975 1,163,152
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue.......... 43,924,480 46,502,262 56,962,967 63,312,342 75,622,586 17,121,110 20,032,705
Hotel operating
expenses.............. 32,251,012 35,083,148 40,130,782 44,349,278 51,198,375 11,622,390 13,216,152
Depreciation and
amortization.......... 2,575,564 6,329,770 5,847,629 5,986,460 8,131,244 2,839,488 1,567,020
Interest expense....... 3,802,670 4,819,749 4,667,281 4,771,483 6,307,202 1,411,434 1,705,764
Other expenses......... 1,946,193 617,334 2,543,235 2,996,568 3,132,865 763,398 789,611
----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues over (under)
expenses(12).......... $ 3,349,041 $ (347,739) $ 3,774,040 $ 5,208,553 $ 6,852,900 $ 484,400 $ 2,745,158
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
OTHER DATA:
Net cash provided by
operating activities.. $9,368,516 $13,928,371 $14,882,312 $1,885,863 $2,093,782
Net cash used in
investing activities.. (7,154,227) (13,895,746) (14,717,583) (1,252,875) (1,156,627)
Net cash provided by
(used in) financing
activities............ (1,354,888) 829,741 1,810,771 (507,506) 48,096
</TABLE>
LESSEE
SUMMARY PRO FORMA FINANCIAL DATA (1)(13)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED TWELVE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- ------------------- ------------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue........... $55,330,171 $56,830,028 $14,201,906
Food and beverage
revenue............... 18,191,504 18,335,582 4,732,323
Other revenue.......... 4,363,432 4,499,821 1,163,152
----------- ----------- -----------
Total revenue.......... 77,885,107 79,665,431 20,097,381
Hotel operating
expenses.............. 52,582,000 53,060,887 13,149,844
Depreciation and
amortization.......... 63,000 63,000 15,750
Interest expense....... 31,500 31,500 7,875
Other expenses......... 58,084 44,773 17,981
Participating Lease
expenses(2)........... 24,775,142 25,902,292 6,527,908
----------- ----------- -----------
Revenues over
expenses.............. $ 375,381 $ 562,979 $ 378,023
=========== =========== ===========
</TABLE>
- --------
(1) The estimated and pro forma information do not purport to represent what
the Company's financial position or the Company's and Initial Hotels' and
Lessee's results of operations would actually have been if the
consummation of the Formation Transactions and the Offering had, in fact,
occurred on such dates, or to project the Company's financial position or
the Company's and Initial Hotels' and Lessee's results of operations at
any future date or for any future period.
(2) Represents 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 pro forma
revenues of the Initial Hotels. The departmental revenue thresholds in
certain of the Participating Lease formulas adjust in the future effective
January 1, 1997. See "The Initial Hotels--The Participating Leases."
(3) Represents 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 probable 1996 expenses.
(4) Represents amortization of unearned officers' compensation represented by
an aggregate of 50,000 shares of restricted Common Stock issuable to the
Company's executive officers, which shares vest 10% at the date of grant
(5,000 shares at $20.00 per share).
(5) Calculated as 25.8% of estimated revenues less expenses before minority
interest for all periods.
(6) Represents Funds From Operations of the Company. The items added back to
estimated revenues less expenses applicable to common stockholders have
been adjusted by the Company's ownership percentage in the Operating
Partnership of 74.2% for all periods presented. The following table
computes Funds From Operations under the newly adopted National
Association of Real Estate Investment Trusts ("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
18
<PAGE>
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 computed in accordance
with the newly adopted NAREIT definition, Funds From Operations as
presented may not be comparable to other similarly titled measures used by
other REITs. Funds From Operations does not reflect cash expenditures for
capital improvements or principal amortization of indebtedness on the
Initial Hotels.
<TABLE>
<CAPTION>
PRO FORMA(1) PRO FORMA(1)
PRO FORMA(1) TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Estimated revenues less
expenses applicable to
common stockholders ... $ 8,336,236 $ 9,500,542 $2,551,345
Depreciation ........... 5,493,942 4,861,537 1,102,043
----------- ----------- ----------
Funds From Operations .. $13,830,178 $14,362,079 $3,653,388
=========== =========== ==========
Weighted average number
of shares of Common
Stock outstanding...... 7,205,518 7,205,518 7,205,518
=========== =========== ==========
</TABLE>
(7) Cash Available for Distribution represents Funds From Operations of the
Company plus the Company's ownership percentage in the Operating
Partnership of 74.2% 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 74.2% share of
the sum of 4.0% of total revenue for each of the Initial 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 Participating Leases and the estimated cash used
to pay interest expense related to the (i) $24.6 million cost of planned
renovations and refurbishments at the seven Initial Hotels the Company
plans to convert to leading franchise brands in order to reposition such
hotels for future growth and (ii) the $2.6 million of planned
improvements that the Company expects to make at five other Initial
Hotels. Estimated Cash Available for Distribution does not include the
effects of any revenue increases expected to result from capital
expenditures at the Initial Hotels.
(8) Represents estimated revenues less expenses 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 cash used in investing activities 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 Initial 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 interest of the Company. See "The Initial
Hotels--The Participating Leases."
(10) Represents estimated initial distributions to be paid based on the
initial annual distribution rate of $1.60 per share and an aggregate of
9,716,624 Common Stock and OP Units outstanding plus the debt service on
the DFW South Loan and the Secaucus Loans (as defined in "The Initial
Hotels--Mortgage Indebtedness Remaining Following the Offering").
(11) The Initial Hotels' financial data is derived by adding selected
financial data of the AGH Predecessor Hotels and the AGH Acquisition
Hotels (as set forth in "Selected Financial Information"). Such financial
data excludes information of the AGH Predecessor Hotels for periods prior
to their acquisition by AGHI. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The AGH Predecessor
Hotels consist of the following four Initial Hotels: the Holiday Inn
Dallas DFW Airport West, Courtyard by Marriott-Meadowlands, Hotel Maison
de Ville, and the Hampton Inn Richmond Airport. The AGH Acquisition
Hotels consist of the following nine Initial Hotels: the Holiday Inn
Dallas DFW Airport South, Hilton Hotel-Toledo, Holiday Inn New Orleans
International Airport, Holiday Inn Park Center Plaza, Holiday Inn Select-
Madison, Holiday Inn Mission Valley, Le Baron Airport Hotel, Days Inn
Ocean City, and Fred Harvey Albuquerque Airport Hotel
(12) Income taxes for the AGH Acquisition Hotels have not been deducted in
calculating revenues over (under) expenses.
(13) Pro forma amounts as if the Operating Partnership recorded depreciation
and amortization and paid real and personal property taxes and property
insurance contemplated by the Participating Leases, and the Formation
Transactions and the Offering occurred on January 1, 1995.
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RISK FACTORS
Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Prospectus before
purchasing Common Stock in the Offering. This Prospectus contains certain
forward-looking statements. The Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause the
Company's actual results for 1996 and beyond to differ materially from those
expressed in any forward-looking statements made herein.
CONFLICTS OF INTEREST
General
Because of Messrs. Jorns', Wiles' and Barr's ownership in and positions with
the Company, AGHI and the Lessee, there are inherent conflicts of interest in
the Formation Transactions and in the ongoing lease, acquisition, disposition,
operation and management of the Initial Hotels. Accordingly, the interests of
the Company's stockholders may not have been, and in the future may not be,
reflected fully in all decisions made or actions taken or to be taken by
certain officers and directors of the Company. See "The Company," "Formation
Transactions," "Management," "Certain Relationships and Transactions," and
"Policies and Objectives with Respect to Certain Activities--Conflict of
Interest Policies."
No Arm's-Length Bargaining
In particular, the terms of the Participating Leases, the Management
Agreements, the Option Agreements (as defined in "The Initial Hotels--Options
to Purchase and Rights of First Refusal") relating to the Option Hotels (as
defined in "The Company--Development"), the agreements pursuant to which the
Company will acquire interests or contract rights relating to interests in
seven of the Initial Hotels from the Primary Contributors, the agreements
relating to the Lessee's purchase of certain personal property relating to the
Initial Hotels (including the terms of the FF&E Note) and the agreements
relating to the Beverage Subleases were not negotiated on an arm's-length
basis. In the event revenues from the Initial Hotels increase significantly
over prior periods, and operating expenses with respect thereto are less than
historical or projected operating expenses, the Lessee could
disproportionately benefit. In the event incremental increases in expenses at
the Initial Hotels exceed incremental increases in revenues, conflicts of
interest may arise between the Lessee and the Company. See "Certain
Relationships and Transactions--The Participating Leases" and "Policies and
Objectives with Respect to Certain Activities--Conflict of Interest Policies."
The Company will not own any interest in the Lessee. Because Messrs. Jorns,
Wiles and Barr are partners in the Lessee, and each of them is an executive
officer of the Company (Mr. Jorns is also a director of the Company), there is
a conflict of interest with respect to the enforcement and termination of the
Participating Leases. Because of these conflicts, Messrs. Jorns', Wiles' and
Barr's decisions relating to the Company's enforcement of its rights under the
Participating Leases may not solely reflect the interests of the Company's
stockholders. See "AGHI and the Lessee."
Conflicts Relating to Sale of Hotels Subject to Participating Leases
The Company generally will be obligated under the Participating Leases to
pay a lease termination fee to the Lessee if the Company elects to sell an
Initial Hotel and does not replace it with another hotel on terms that would
create a leasehold interest in such hotel with a fair market value equal to
the Lessee's remaining leasehold interest under the Participating Lease to be
terminated. Where applicable, the termination fee is equal to the fair market
value of the Lessee's leasehold interest in the remaining term of the
Participating Lease to be terminated. The payment of a termination fee to the
Lessee, which is owned in part by Messrs. Jorns, Wiles and Barr, may result in
decisions regarding the sale of an Initial Hotel that do not reflect solely
the interests of the Company's stockholders. See "The Initial Hotels--The
Participating Leases."
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Conflicts Relating to Sale of Initial Hotels Previously Owned by Executive
Officers
Certain executive officers of the Company or their affiliates may have
unrealized gain in their interests in certain of the Initial Hotels
transferred to the Company. The sale of such hotels by the Company may cause
adverse tax consequences to such officers or affiliates. Therefore, the
interests of the Company, such officers and affiliates could be different in
connection with the disposition of such hotels. However, decisions with
respect to the disposition of those Initial Hotels will be made by a majority
of the Board of Directors, which majority must include a majority of the
Independent Directors.
Conflicts Relating to Continued Management of Hotels
After completion of the Offering, AGHI, in which Messrs. Jorns and Wiles own
collectively a 21.0% interest, will continue to engage in the management of
hotels for third parties. In addition, there will be no restriction in either
the Participating Leases or the Management Agreements which would limit the
Lessee's or AGHI's ability to lease or manage hotels which may compete with
the Company's hotels. Accordingly, the Lessee's and AGHI's decisions relating
to the operation of any of the Initial Hotels that are in competition with
other hotels leased or managed by either of them may not fully reflect the
interests of the Company's stockholders.
Conflicts Relating to Continued Ownership of Other Hotel Properties
After completion of the Offering, AGHI will continue to own and operate
three hotel properties (including two hotels currently under development). One
of these hotels, a Ramada Limited(R) which is located in Madison, Wisconsin,
was not included as an Initial Hotel because it is being offered for sale for
its land value due to its location in a prime retail area. The other two
hotels, the Option Hotels, are Courtyards by Marriott currently under
development (which were not included as part of the Initial Hotels because
construction has not been completed). In connection with the Formation
Transactions, the Company will acquire two-year options and a right of first
refusal to acquire, subject to the receipt of any necessary third-party
consents, the interests of AGHI in either or both of the Option Hotels upon
their opening. See "The Initial Hotels--Options to Purchase and Rights of
First Refusal."
DEPENDENCE ON LESSEE AND PAYMENTS UNDER THE PARTICIPATING LEASES
The Company's ability to make distributions to its stockholders will depend
solely upon the ability of the Lessee to make rent payments under the
Participating Leases (which will be dependent primarily on AGHI's ability to
generate sufficient revenues from the Initial Hotels in excess of operating
expenses). Any failure or delay by the Lessee in making rent payments would
adversely affect the Company's ability to make anticipated distributions to
its stockholders. Such failure or delay by the Lessee may be caused by
reductions in revenue from the Initial Hotels or in the net operating income
of the Lessee or otherwise. In addition, the Lessee is a newly organized
limited purpose entity, and, except for approximately $500,000 in initial
working capital, has limited assets. Although failure on the part of the
Lessee to materially comply with the terms of a Participating Lease (including
failure to pay rent when due) would give the Company the right to terminate
such lease, repossess the applicable property and enforce the payment
obligations under the lease and the Lessee Pledge, the Company would then be
required to find another lessee to lease such property. There can be no
assurance that the Company would be able to find another lessee or that, if
another lessee were found, the Company would be able to enter into a new lease
on favorable terms.
LACK OF CONTROL OVER OPERATIONS OF THE INITIAL HOTELS
The Company also will be dependent on the ability of the Lessee and AGHI to
operate and manage the Initial Hotels. To maintain its status as a REIT, the
Company will not be able to operate the Initial Hotels or any subsequently
acquired hotels. As a result, the Company will be unable to directly implement
strategic business decisions with respect to the operation and marketing of
its hotels, such as decisions with respect to the setting of room rates,
repositioning of a franchise, food and beverage operations and certain similar
matters.
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LACK OF APPRAISALS FOR THE INITIAL HOTELS; NO ASSURANCE AS TO VALUE
In establishing the purchase prices of the Initial Hotels, no independent
appraisals were obtained. In addition, there were no arm's-length negotiations
with respect to the Company's acquisition of interests or contract rights
relating to seven of the Initial Hotels from the Primary Contributors and
certain of their affiliates. Accordingly, there can be no assurance that the
price paid by the Company for the Initial Hotels, including interests and
contract rights acquired from the Primary Contributors and certain of their
affiliates, does not exceed the value of the hotels and other assets acquired
by the Company.
The valuation of the Company has been determined based upon a capitalization
of the Company's estimated Cash Available for Distribution (as described in
"Summary Financial Data") and the other factors discussed under "Underwriting"
rather than an asset-by-asset valuation based on historical cost or current
market value. This methodology has been used because the Company's management
believes it appropriate to value the Company as an ongoing business rather
than with the view to values that could be obtained from a liquidation of the
Company or of individual assets owned by the Company. There can be no
assurance that revenues generated by the Company's hotels will not decline and
that future Cash Available for Distribution will be sufficient to make
expected distributions to the Company's stockholders. If expected
distributions are not made, the market price of the shares of Common Stock
likely would be adversely affected.
HOTEL INDUSTRY RISKS
Operating Risks
The Initial Hotels will be subject to all operating risks common to the
hotel industry. These risks include, among other things, (i) competition for
guests from other hotels, some of which may have greater marketing and
financial resources than the Company, the Lessee and AGHI; (ii) increases in
operating costs due to inflation and other factors, which increases may not
have been offset in recent years, and may not be offset in the future by
increased room rates; (iii) dependence on business and commercial travelers
and tourism, which business may fluctuate and be seasonal; (iv) increases in
energy costs and other expenses of travel, which may deter travelers; and (v)
adverse effects of general and local economic conditions. These factors could
adversely affect the Lessee's ability to generate revenues and to make rent
payments and therefore the Company's ability to make expected distributions to
its stockholders.
Risks of Necessary Operating Costs and Capital Expenditures; Required Hotel
Renovations
Hotels in general, including the Initial Hotels, require ongoing renovations
and other capital improvements, including periodic replacement or
refurbishment of FF&E. Under the terms of the Participating Leases, the
Company is obligated to establish a reserve to pay the cost of certain capital
expenditures at the Initial Hotels and pay for periodic replacement or
refurbishment of FF&E. The Company will control the use of funds in this
reserve. However, if capital expenditures exceed the Company's expectations,
there can be no assurance that sufficient sources of financing will be
available to fund such expenditures. The additional cost of such expenditures
could have an adverse effect on Cash Available for Distribution. In addition,
the Company may acquire hotels in the future that require significant
renovation. Renovation of hotels involves certain risks, including the
possibility of environmental problems, construction cost overruns and delays,
uncertainties as to market demand or deterioration in market demand after
commencement of renovation and the emergence of unanticipated competition from
other hotels.
The Company plans to undertake substantial renovations at certain of the
Initial Hotels during the one-year period following the closing of the
Offering. Such substantial renovations will likely disrupt the operations of
those hotels due to hotel guest rooms and common areas being taken out of
service for extended periods. Moreover, those renovations may result in lower
occupancy, ADR and hotel revenues at those hotels during the renovation
periods than the historical levels shown in this Prospectus.
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Competition for Investment Opportunities
The Company may be competing for investment opportunities with entities that
have substantially greater financial resources than the Company. These
entities generally may 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
generally may reduce the number of suitable investment opportunities offered
to the Company and increase the bargaining power of property owners seeking to
sell.
Seasonality of Hotel Industry
The hotel industry is seasonal in nature. Generally, hotel revenue for
business hotels is greater in the second and third quarters of a calendar
year, although this may not be true for hotels in major tourist destinations.
Revenue for hotels in tourist areas generally is substantially greater during
the tourist season than other times of the year. Seasonal variations in
revenue at the Initial Hotels may cause quarterly fluctuations in the
Company's lease revenue. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality."
Investment in Single Industry
The Company's current strategy is to acquire interests only in hotels. As a
result, the Company will be subject to risks inherent in investments in a
single industry. The effects on Cash Available for Distribution resulting from
a downturn in the hotel industry may be more pronounced than if the Company
had diversified its investments.
BENEFITS TO PRIMARY CONTRIBUTORS AND OFFICERS
The Primary Contributors and the Company's officers will receive material
benefits from the Formation Transactions, including, but not limited to, (i)
receipt by the Primary Contributors of an aggregate of approximately 1,157,673
OP Units (valued at approximately $23.2 million based on the Offering Price),
(ii) receipt by Messrs. Jorns, Wiles, Barr and Valentine of stock awards of
30,000, 10,000, 6,000 and 4,000 shares of restricted Common Stock,
respectively, which will vest over a four-year period commencing on the date
of grant and which have a value of $600,000, $200,000, $120,000 and $80,000,
respectively, based on the Offering Price, (iii) repayment of an aggregate of
approximately $3.75 million of indebtedness guaranteed by AGHI, (iv) receipt
by Messrs. Jorns, Wiles, Barr and Valentine of options to acquire 225,000,
75,000, 40,000 and 20,000 shares of Common Stock, respectively, at the
Offering Price, which become exercisable in four equal annual installments,
commencing on the date of grant, (v) deferral of certain tax consequences to
officers of the Company from the conveyance of their interests in the Initial
Hotels to the Operating Partnership, and (vi) reimbursement by the Company of
AGHI for approximately $900,000 in direct out-of-pocket expenses incurred in
connection with the acquisition of the Initial Hotels. In addition, the
Lessee, which is owned by Messrs. Jorns, Wiles, Barr, Sowell, Shaw and Shaw,
will be entitled to all cash flow from the Initial Hotels after payment of
rent under the Participating Leases and other operating expenses. AGHI, the
principals of which include Messrs. Jorns, Wiles, Sowell, Shaw and Shaw, will
be entitled to receive from the Lessee management fees equal to a base fee of
1.5% of the gross revenues at the Initial Hotels plus incentive management
fees of up to 2.0% of gross revenues that will be earned incrementally upon
reaching certain gross revenue targets. The Beverage Corporations, eleven of
which are wholly owned by Mr. Jorns, will be entitled to all cash flow from
food and beverage sales generated from those areas of the Initial Hotels where
alcoholic beverages are served after the payment of rent to the Lessee equal
to 30% of gross revenues from such sales; such arrangement will not, however,
reduce Participating Rent payments to the Company, which it is entitled to
receive from such food and beverage sales. See "Formation Transactions."
CONTINGENT LIABILITIES OF SELLING PARTNERSHIPS
Because the Company is acquiring all the partnership interests in the
entities that own eight of the Initial Hotels, the Company may become liable
for certain liabilities, including contingent liabilities of such selling
entities. There is, therefore, a risk that unforeseen liabilities could exist
for which the Company could be liable and which could adversely affect Cash
Available for Distribution.
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RISKS OF LEVERAGE; NO LIMITS ON INDEBTEDNESS
Upon completion of the Offering and the concurrent completion of the
Formation Transactions, the Company will have outstanding indebtedness of
approximately $19.4 million encumbering two of the Initial Hotels. Neither the
Company's Bylaws nor its Charter will limit the amount of indebtedness the
Company may incur. The Company intends to limit consolidated indebtedness
(measured at the time the debt is incurred) to no more than 45.0% of the
Company's investment in hotels. See "Policies and Objectives with Respect to
Certain Activities--Financing." The Company has received a commitment for the
Line of Credit to fund the acquisition of additional hotels, renovations and
capital improvements to hotels and working capital. The Line of Credit will be
limited to the maximum principal amount of $100 million and, among other
limitations, to 40.0% of the value or cost of the hotels which secure such
line. The Line of Credit initially will be secured by a first mortgage lien on
eleven of the Initial Hotels. Other hotels acquired in the future may be added
as security for the Line of Credit. The Line of Credit will require lender
approval of certain Company actions, including new hotel development,
franchise conversions relating to the hotels which secure the Line of Credit,
and approval of lessees for such hotels. Subject to the limitations described
above and other limitations contained in the Line of Credit, the Company may
borrow additional amounts from the same or other lenders in the future, or may
issue corporate debt securities in public or private offerings. Certain of
such additional borrowings may be secured by hotels owned by the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," and "Policies and Objectives
with Respect to Certain Activities--Financing" and "The Initial Hotels--Line
of Credit."
There can be no assurances that the Company will be able to meet its debt
service obligations and, to the extent that it cannot, the Company risks the
loss of some or all of its assets, including the Initial Hotels, to
foreclosure. Economic conditions could result in higher interest rates, which
could increase debt service requirements on variable rate debt, such as the
Line of Credit, and could reduce the amount of Cash Available for
Distribution. Adverse economic conditions could cause the terms on which
borrowings become available to be unfavorable. In such circumstances, if the
Company is in need of capital to repay indebtedness in accordance with its
terms or otherwise, it could be required to liquidate one or more investments
in hotel properties that at times may result in a financial loss to the
Company.
LACK OF OPERATING HISTORY OR REVENUES; HISTORY OF LOSSES
The Company has been recently organized and has no operating history. There
can be no assurance that the Company will be able to generate sufficient Cash
Available for Distribution to make anticipated distributions to its
stockholders. The Company also will be subject to the risks generally
associated with the formation of any new business. Certain of the Initial
Hotels experienced net losses in recent years. Accordingly, there can be no
assurance that the Company will not experience net losses in the future.
RISK OF HIGH DISTRIBUTION PAYOUT PERCENTAGE
The Company's estimated annual distribution rate to stockholders is 95.0% of
the Company's estimated Cash Available for Distribution for the twelve months
ended March 31, 1996. See "Distribution Policy." Should actual Cash Available
for Distribution be less than estimated Cash Available for Distribution, the
Company may not be able to achieve and maintain its proposed initial
distribution rate.
CONTINGENT OBLIGATION TO CONSTRUCT ADDITIONAL HOTEL ROOMS
Pursuant to the terms of the ground lease relating to the Fred Harvey
Albuquerque Airport Hotel, the Company will be required, at its expense, to
build 100 additional guest rooms if the occupancy rate at the hotel is 85.0%
or greater for 24 consecutive months. The Company could be required to build
the additional rooms even if the Company does not deem such capital
expenditure to be in its economic interest and even if financing is not
available or is available only on unattractive terms, in order to complete
such construction. In addition, construction of the additional guest rooms
would require the consent of the lenders under the Line of Credit. Failure to
construct the additional rooms could result in a default under such ground
lease. For the twelve months ended March 31, 1996, the occupancy rate at the
hotel was 83.3%.
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IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock in the Offering will experience
immediate dilution of $4.10 per share in the net tangible book value per share
of Common Stock from the Offering Price. See "Dilution."
POSSIBLE ADVERSE EFFECTS OF SHARES AVAILABLE FOR FUTURE SALE UPON MARKET PRICE
OF COMMON STOCK
Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could adversely affect the prevailing market price for the
Common Stock. The Operating Partnership, in connection with the Formation
Transactions, will issue to persons other than the Company an aggregate of
2,511,106 OP Units, and the Company will issue 155,518 shares of restricted
Common Stock. These OP Units may be exchanged for cash based on their fair
market value or, at the Company's option, for shares of Common Stock on a one-
for-one basis. In certain circumstances, the Company may not be able to
exercise its option to satisfy such partners' exchange rights with Common Stock
because of tax or securities law limitations. An exercise of exchange rights in
such circumstances could adversely affect the Operating Partnership's liquidity
because it would then be required to satisfy such rights with cash. The
Exchange Agreement (as defined in "Partnership Agreement--Exchange Rights")
prohibits the exchange of OP Units for a period of one year following the
closing of the Offering. In addition, the officers and directors of the
Company, the Primary Contributors and the Plan have agreed, subject to certain
limited exceptions, not to offer, sell, contract to sell or otherwise dispose
of any shares of Common Stock (or any securities convertible into or
exercisable for shares of Common Stock) for a one-year period after the date of
this Prospectus (the "Lock-up Period") without the prior written consent of the
Company and Smith Barney Inc. See "Underwriting." The Registration Rights
Agreement (as defined in "Partnership Agreement--Registration Rights") requires
the Company to register all restricted shares of Common Stock under the Act,
including shares issuable upon the exchange of OP Units. As a result, at the
conclusion of the one-year restriction period and the Lock-up Period, all
shares of Common Stock issued in connection with the Formation Transactions or
acquired upon exchange of OP Units may be sold in the public market. In
addition, 850,000 shares of Common Stock (exclusive of stock awards to be
issued under the 1996 Plan as described below) will be reserved for issuance
pursuant to the 1996 Plan and 100,000 shares also will be reserved for issuance
to non-employee directors pursuant to the Directors' Plan. Stock awards equal
to an aggregate of 50,000 shares of restricted Common Stock that will vest over
a four-year period and options to purchase 400,000 shares of Common Stock at
the Offering Price will be granted to the Company's executive officers under
the 1996 Plan and the Company's directors under the Directors' Plan in
connection with the Formation Transactions. See "Management--Stock Incentive
Plans."
COMPETITION FOR MANAGEMENT TIME
Messrs. Jorns, Wiles, Barr and Valentine will be employed as executive
officers of the Company and will continue to be employed and compensated by
AGHI and will necessarily be subject to competing demands on their time. See
"--Conflicts of Interest" and "Management--Employment Agreements."
REAL ESTATE INVESTMENT RISKS
General Risks
The Company's investments will be subject to varying degrees of risk
generally incident to the ownership of real property. The underlying value of
the Company's hotel investments and the Company's income and ability to make
distributions to its stockholders is dependent upon the ability of the Lessee
and AGHI to operate the Initial Hotels in a manner sufficient to maintain or
increase revenues and to generate sufficient revenue in excess of operating
expenses to make rent payments under the Participating Leases. Income from the
Initial Hotels may be adversely affected by changes in national economic
conditions, changes in local market conditions due to changes in general or
local economic conditions and neighborhood characteristics, changes in interest
rates and in the availability, cost and terms of mortgage funds, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements, particularly in
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older structures, changes in real estate tax rates and other operating
expenses, adverse changes in governmental rules and fiscal policies, civil
unrest, acts of God, including earthquakes and other natural disasters (which
may result in uninsured losses), acts of war, adverse changes in zoning laws,
and other factors which are beyond the control of the Company.
Dependence on Particular Regions
The Initial Hotels are located throughout the United States, but 21.6% and
18.5% of the total number of the hotel guest rooms of the Initial Hotels
(representing 21.3% and 18.1% of the Company's estimated Participating Rent
revenues for the twelve months ended March 31, 1996) are located at the
Dallas/Fort Worth Airport and in the San Jose area, respectively. The
Company's cash flow, ability to make proposed distributions to its
stockholders and the value of the Common Stock will be affected by, to a large
degree, economic conditions and the demand for hotel rooms in the Dallas/Fort
Worth and San Jose markets in which these four Initial Hotels are located.
Value and Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of the Company
to vary its portfolio in response to changes in economic and other conditions
will be limited. Because management believes it is appropriate to value the
Company as an ongoing business rather than through liquidation values of the
Company or the Initial Hotels, the valuation of the Company has been
determined primarily based upon a capitalization of the Company's estimated
Cash Available for Distribution and other factors discussed under
"Underwriting," rather than on the basis of each property's cost or appraised
value. See "Underwriting." If the Company must sell an investment, there can
be no assurance that the Company will be able to dispose of it in the time
period it desires or that the sale price of any investment will recoup or
exceed the amount of the Company's investment.
Property Taxes and Casualty Insurance
Each Initial Hotel is subject to real and personal property taxes. Under the
Participating Leases, the Company is required to pay real and personal
property taxes. The real and personal property taxes on hotel properties in
which the Company invests may increase or decrease as property tax rates
change and as the properties are assessed or reassessed by taxing authorities.
Each Initial Hotel will be covered by casualty insurance, which, pursuant to
the Participating Leases, must be paid by the Company, the rates for which may
increase or decrease depending on claims experience. The increase in property
taxes or casualty insurance premiums could adversely affect the Company's
ability to make expected distributions to its stockholders.
Consents of Lessors Required for Sale and Renovation of Certain Initial
Hotels
The Fred Harvey Albuquerque Airport Hotel, the Courtyard by Marriott-
Meadowlands, the Le Baron Airport Hotel and the Hilton Hotel-Toledo are each
subject to ground leases, and the Hotel Maison de Ville is subject to a space
lease for its restaurant facilities and certain of its guest rooms, each with
third-party lessors. Any proposed sale of such hotels by the Company or any
proposed assignment of the Company's leasehold interest in the ground leases
and the space lease, as well as the subletting to the Lessee and the proposed
renovation of the Fred Harvey Albuquerque Airport Hotel and the Le Baron
Airport Hotel, may require the consent of the respective third-party lessors.
There can be no assurance that the Company will be able to obtain such
requisite consents. As a result, the Company may not be able to sell, assign,
transfer or convey its interest in these Initial Hotels in the future or
commence the proposed renovations at the Le Baron Airport Hotel and the Fred
Harvey Albuquerque Airport Hotel absent the consent of such third-party
lessors, even if such transactions or renovations may be in the best interests
of the stockholders of the Company.
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Environmental Matters
The Company's operating costs may be affected by the obligation to pay for
the cost of complying with existing environmental laws, ordinances and
regulations, as well as the cost of future legislation. 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 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 Initial Hotels, the Company or the 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 results of
operations and financial condition. Phase I environmental site assessments
("ESAs") have been conducted at all of the Initial Hotels by a qualified
independent environmental engineer. The purpose of Phase I ESAs is to identify
potential sources of contamination for which the Initial Hotels may be
responsible and to assess the status of environmental regulatory compliance.
The ESAs 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.
Compliance with Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990, as amended (the "ADA"),
all public accommodations are required to meet certain federal requirements
related to access and use by disabled persons. A determination that the
Company is not in compliance with the ADA could result in imposition of fines
or an award of damages to private litigants. If the Company were required to
make modifications to its hotels to comply with the ADA, the Company's ability
to make expected distributions to its stockholders could be adversely
affected.
Uninsured and Underinsured Losses
Each Participating Lease requires comprehensive insurance to be maintained
on each of the Initial Hotels, including liability, fire and extended
coverage. Management believes such specified coverage is of the type and
amount customarily obtained for or by an owner of hotels. Leases for
subsequently acquired hotels will contain similar provisions. However, there
are certain types of losses, generally of a catastrophic nature, such as those
caused by earthquakes and floods, that may be uninsurable or not economically
insurable. The Company's Board of Directors and management will use their
discretion in determining amounts, coverage limits and deductibility
provisions of insurance, with a view to maintaining appropriate insurance
coverage on the Company's investments at a reasonable cost and on suitable
terms. This may result in insurance coverage that, in the event of a
substantial loss, would not be sufficient to pay the full current market value
or current replacement cost of the Company's lost investment. Inflation,
changes in building codes and ordinances, environmental considerations and
other factors also might make it infeasible to use insurance proceeds to
replace the property after such property has been damaged or destroyed. Under
such circumstances, the insurance proceeds received by the Company might not
be adequate to restore its economic position with respect to such property.
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<PAGE>
Acquisition and Development Risks
The Company intends to pursue acquisitions of additional hotels and, under
appropriate circumstances, may pursue development opportunities. Acquisitions
entail risks that investments will fail to perform in accordance with
expectations and that estimates of the cost of improvements necessary to
market and acquire hotels will prove inaccurate, as well as general investment
risks associated with any new real estate investment. New project development
is subject to numerous risks, including risks of construction delays or cost
overruns that may increase project costs, new project commencement risks such
as receipt of zoning, occupancy and other required governmental approvals and
permits and the incurrence of development costs in connection with projects
that are not pursued to completion. In addition, the Line of Credit will
provide that the lenders thereunder must consent to any development activities
by the Company other than development in connection with the limited expansion
of existing hotels. The fact that the Company must distribute 95.0% of REIT
taxable income in order to maintain its qualification as a REIT may limit the
Company's ability to rely upon lease income from the Initial Hotels or
subsequently acquired hotels to finance acquisitions or new developments. As a
result, if debt or equity financing were not available on acceptable terms,
further acquisitions or development activities might be curtailed or Cash
Available for Distribution might be adversely affected.
TAX RISKS
Failure to Qualify as a REIT
The Company intends to operate so as to qualify as a REIT for federal income
tax purposes commencing with its taxable year ending December 31, 1996.
A REIT generally is not taxed at the corporate level on income it currently
distributes to its stockholders, as long as it distributes at least 95.0% of
its REIT taxable income. Although the Company believes that it will be
organized and will operate in such a manner so as to qualify as a REIT, no
assurance can be given that the Company will be organized or will be able to
operate in a manner so as to qualify as a REIT or remain so qualified.
Qualification as a REIT involves the application of highly technical and
complex Code provisions for which there are only limited judicial or
administrative interpretations. The determination of various factual matters
and circumstances not entirely within the Company's control may affect its
ability to qualify and to continue to qualify as a REIT. The complexity of
these provisions and of the applicable income tax regulations that have been
promulgated under the Code is greater in the case of a REIT that holds its
assets through a partnership, such as the Company. Moreover, no assurance can
be given that legislation, new regulations, administrative interpretations or
court decisions will not change the tax laws with respect to qualification as
a REIT or the federal income tax consequences of such qualification. The
Company will rely on the opinion of Battle Fowler LLP, counsel to the Company
("Counsel"), to the effect that, based on various assumptions relating to the
organization and operation of the Company and representations made by the
Company as to certain factual matters, the Company's proposed method of
operation will enable it to meet the requirements for qualification and
taxation as a REIT. Such legal opinion will not be binding on the IRS. See
"Federal Income Tax Considerations."
If the Company fails to qualify as a REIT in any taxable year, the Company
will not be allowed a deduction for distributions to its stockholders in
computing its taxable income and will be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
the applicable corporate rate. In addition, unless it were entitled to relief
under certain statutory provisions, the Company would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This disqualification would reduce the funds of the
Company available for investment or distribution to stockholders because of
the additional tax liability of the Company for the year or years involved.
If the Company were to fail to qualify as a REIT, it no longer would be
subject to the distribution requirements of the Code and, to the extent that
distributions to stockholders would have been made in anticipation of the
Company's qualifying as a REIT, the Company might be required to borrow funds
or to liquidate certain of its assets to pay the applicable corporate income
tax. Although the Company currently intends
28
<PAGE>
to operate in a manner designed to qualify as a REIT, it is possible that
future economic, market, legal, tax or other considerations may cause the
Company's Board of Directors to decide to revoke the REIT election. See
"Federal Income Tax Considerations."
Adverse Effects of REIT Minimum Distribution Requirements
To obtain the favorable tax treatment accorded to REITs under the Code, the
Company generally will be required each year to distribute to its stockholders
at least 95% of its REIT taxable income. The Company will be subject to income
tax on any undistributed REIT taxable income and net capital gain, and to a
4.0% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the
sum of (i) 85.0% of its ordinary income for the calendar year, (ii) 95.0% of
its capital gain net income for such year, and (iii) 100.0% of its
undistributed income from prior years.
The Company intends to make distributions to its stockholders to comply with
the distribution provisions of the Code and to avoid federal income taxes and
the nondeductible 4.0% excise tax. The Company's income will consist primarily
of the Company's share of the income of the Operating Partnership, and the
Company's cash flow will consist primarily of its share of distributions from
the Operating Partnership. Differences in timing between the receipt of income
and the payment of expenses in arriving at taxable income (of the Company or
the Operating Partnership) and the effect of nondeductible capital
expenditures, the creation of reserves or required debt amortization payments
could require the Company to borrow funds through the Operating Partnership on
a short-term or long-term basis to meet the distribution requirements that are
necessary to continue to qualify as a REIT. In such circumstances, the Company
might need to borrow funds to avoid adverse tax consequences even if
management believes that the then prevailing market conditions generally are
not favorable for such borrowings or that such borrowings are not advisable in
the absence of such tax considerations.
Distributions by the Operating Partnership will be determined by its sole
general partner, a wholly owned subsidiary of the Company, through the
Company's Board of Directors and will be dependent on a number of factors,
including the amount of Cash Available for Distribution, the Operating
Partnership's financial condition, any decision by the Board of Directors to
reinvest funds rather than to distribute such funds, the Operating
Partnership's capital expenditure requirements, the annual distribution
requirements under the REIT provisions of the Code and such other factors as
the Board of Directors deems relevant. There is no assurance that the Company
will be able to continue to satisfy the annual distribution requirement so as
to qualify as a REIT. See "Federal Income Tax Considerations--Requirements for
Qualification as a REIT--Annual Distribution Requirements."
Consequences of Failure to Qualify as Partnerships
The Operating Partnership will receive an opinion of Counsel stating that,
assuming that the Operating Partnership and each Subsidiary Partnership (as
defined in "The Company--The Operating Partnership") is being operated in
accordance with its respective organizational documents, the Operating
Partnership and each of the Subsidiary Partnerships will be treated as a
partnership, and not as a corporation, for federal income tax purposes. Such
opinion is not binding on the IRS. If the IRS were to challenge successfully
the status of the Operating Partnership or any Subsidiary Partnership as a
partnership for federal income tax purposes, the Operating Partnership or the
affected Subsidiary Partnership would be taxable as a corporation. In such
event, the Company would cease to qualify as a REIT for federal income tax
purposes. The imposition of a corporate tax on the Operating Partnership or
any of the Subsidiary Partnerships, with a concomitant loss of REIT status of
the Company, would reduce substantially the amount of Cash Available for
Distribution. See "Federal Income Tax Considerations--Tax Aspects of the
Operating Partnership."
ERISA
Depending upon the particular circumstances of the plan, an investment in
Common Stock may be an appropriate investment for an ERISA Plan, a Qualified
Plan or an IRA. In deciding whether to purchase Common
29
<PAGE>
Stock, a fiduciary of an ERISA Plan, in consultation with its advisors, should
carefully consider its fiduciary responsibilities under ERISA, the prohibited
transaction rules of ERISA and the Code, and the effect of the "plan asset"
regulations issued by the U.S. Department of Labor.
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS; APPROVAL FOR BRAND
CONVERSIONS
Ten of the Initial Hotels are subject to franchise agreements. In addition,
hotels in which the Company invests subsequently may be operated pursuant to
franchise agreements. The continuation of such franchise agreements is subject
to specified operating standards and other terms and conditions. Franchisors
typically inspect licensed properties periodically to confirm adherence to
operating standards. Action or inaction on the part of any of the Company, the
Lessee or AGHI could result in a breach of such standards or other terms and
conditions of the Franchise Licenses and could result in the loss or
cancellation of a franchise license. It is possible that a franchisor could
condition the continuation of a franchise license on the completion of capital
improvements which the Board of Directors determines are too expensive or
otherwise unwarranted in light of general economic conditions or the operating
results or prospects of the affected hotel. In that event, the Board of
Directors may elect to allow the franchise license to lapse. In any case, if a
franchise is terminated, the Company and the Lessee may seek to obtain a
suitable replacement franchise or to operate the Initial Hotel independent of
a franchise license. The loss of a franchise license could have a material
adverse effect upon the operations or the underlying value of the hotel
covered by the franchise because of the loss of associated name recognition,
marketing support and centralized reservation systems provided by the
franchisor.
The Company intends to convert seven of the Initial Hotels that operate
under franchise brands into hotels that operate under different franchise
brands. While the Company has obtained preliminary franchisor approval for
such conversions, completion of such conversions is dependent upon, among
other things, entering into definitive franchise agreements with the new
franchisors. Failure to effect such conversions could have a material adverse
effect on the Company's results of operations.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BYLAWS
Certain provisions of Maryland law and of the Company's Charter and Bylaws
may have the effect of discouraging a third party from making an acquisition
proposal for the Company and could delay, defer or prevent a transaction or a
change in control of the Company under circumstances that could give the
holders of Common Stock the opportunity to realize a premium over the then
prevailing market prices of the Common Stock. Such provisions include the
following:
Ownership Limitation
In order for the Company to maintain its qualification as a REIT under the
Code, not more than 50.0% in value of the outstanding shares of stock of the
Company may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) at any time during the last
half of the Company's taxable year (other than the first year for which the
election to be treated as a REIT has been made). Furthermore, if any
stockholder or group of stockholders of the Lessee owns, actually or
constructively, 10.0% or more in value of the stock of the Company, the Lessee
could become a Related Party Tenant (as defined in "Federal Income Tax
Consequences--Requirements for Qualification as a REIT--Income Tests") of the
Company, which would result in loss of REIT status for the Company. For the
purpose of preserving the Company's REIT qualification, the Company's Charter
prohibits direct or indirect ownership (taking into account applicable
ownership provisions of the Code) of more than 9.8% of any class of the
Company's outstanding stock by any person (the "Ownership Limitation"),
subject to an exception that permits mutual funds and certain other entities
to own as much as 15.0% of any class of the Company's stock in appropriate
circumstances (the "Look-Through Ownership Limitation"). Generally, the stock
owned by affiliated owners will be aggregated for purposes of the Ownership
Limitation. The Ownership Limitation could have the effect of delaying,
deferring or preventing a transaction or a change in control of the Company in
which holders of some, or a majority, of the Common
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<PAGE>
Stock might receive a premium for their Common Stock over the then prevailing
market price or which such holders might believe to be otherwise in their best
interests. See "Description of Capital Stock--Restrictions on Transfer" and
"Federal Income Tax Considerations--Requirements for Qualification as a REIT."
Preferred Stock
The Charter authorizes the Board of Directors to issue up to 20,000,000
shares of preferred stock, $0.01 par value per share (the "Preferred Stock"),
and to establish the preferences, rights, voting powers and other terms of any
shares issued. See "Description of Capital Stock--Preferred Stock." Although
the Board of Directors has no current intention to issue shares of Preferred
Stock in the foreseeable future, it could establish a class or a series of
Preferred Stock that could, depending on the terms of such class or series,
delay, defer or prevent a transaction or a change in control of the Company
that might involve a premium price for the Common Stock or otherwise be in the
best interest of the stockholders. No Preferred Stock will be issued or
outstanding as of the closing of the Offering.
Staggered Board
The Board of Directors will be divided into three classes of directors. The
initial terms of the first, second and third classes will expire in 1997, 1998
and 1999, respectively. Directors of each class will be chosen for three-year
terms upon the expiration of the current class terms, and, beginning in 1997
and each year thereafter, one class of directors will be elected by the
stockholders. Subject to the rights of any holder of any shares of Preferred
Stock then outstanding, a director may be removed, with or without cause, by
the affirmative vote of 75.0% of the votes entitled to be cast for the
election of directors, which super-majority vote may have the effect of
delaying, deferring or preventing a change of control of the Company. The
staggered terms of directors may reduce the possibility of a tender offer or
an attempt to change control of the Company even though a tender offer or
change in control might be in the best interests of the stockholders. See
"Certain Provisions of Maryland Law and of the Company's Charter and Bylaws--
Number of Directors; Classification of the Board of Directors."
Partial Exemption from Maryland Business Combination Law
Under the Maryland General Corporation Law, as may be amended from time to
time (the "MGCL"), certain "business combinations" (including certain
issuances of equity securities) between a Maryland corporation such as the
Company and any person who owns 10.0% or more of the voting power of the
corporation's shares (an "Interested Shareholder") or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Shareholder became an Interested Shareholder. Thereafter, any such business
combination must be approved by two super-majority votes unless, among other
conditions, the holders of shares of Common Stock receive a minimum price (as
defined in the MGCL) for their stock and the consideration is received in cash
or in the same form as previously paid by the Interested Shareholder for its
shares. As permitted by the MGCL, the Charter contains an exemption for any
"business combination" involving Messrs. Jorns, Wiles, Barr, Sowell, Shaw and
Shaw and persons affiliated with them. Accordingly, the five-year prohibition
and the super-majority vote requirements described above will not apply to
"business combinations" between any such persons and the Company. As a result,
Messrs. Jorns, Wiles, Barr, Sowell, Shaw and Shaw may be able to enter into
"business combinations" with the Company, which may or may not be in the best
interests of the other stockholders, without compliance by the Company with
the super-majority vote requirements and other provisions of the statute. See
"Certain Provisions of Maryland Law and of the Company's Charter and Bylaws--
Business Combinations."
Maryland Control Share Acquisition Statute
In addition to certain provisions of the Charter, the Maryland control share
acquisition statutes may have the effect of discouraging a third party from
making an acquisition proposal for the Company. The MGCL provides that
"control shares" of a Maryland corporation acquired in a "control share
acquisition" have no
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<PAGE>
voting rights except to the extent approved by a vote of two-thirds of the
votes eligible under the statute to be cast on the matter. "Control shares"
are voting shares of stock, which, if aggregated with all other such shares of
stock previously acquired by the acquiror or in respect of which the acquiror
is able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority, or (iii) a majority of all voting power. Control
shares do not include shares that the acquiring person is then entitled to
vote as a result of having previously obtained shareholder approval. A
"control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
If voting rights are not approved at a meeting of stockholders then, subject
to certain conditions and limitations, the issuer may redeem any or all of the
control shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for control shares are approved at
a stockholders' meeting and the acquiror becomes entitled to vote a majority
of the shares of stock entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition.
The Company's Bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any persons of shares of stock
of the Company. There can be no assurance that such provision will not be
amended or eliminated at any point in the future. If the foregoing exemption
in the Company's Bylaws is rescinded, the control share acquisition statute
could have the effect of delaying, deferring, preventing or otherwise
discouraging offers to acquire the Company and of increasing the difficulty of
consummating any such offer.
NO PRIOR MARKET FOR COMMON STOCK
Prior to the Offering, there has been no public market for the Common Stock.
The Common Stock has been approved for listing on the New York Stock Exchange,
Inc. ("NYSE"), subject to official notice of issuance. See "Underwriting." The
Offering Price may not be indicative of the market price for the Common Stock
after the Offering, and there can be no assurance that an active public market
for the Common Stock will develop or continue after the Offering. See
"Underwriting" for a discussion of factors to be considered in establishing
the initial public offering price. There also can be no assurances that, upon
listing, the Company will continue to meet the criteria for continued listing
of the Common Stock on the NYSE.
RELIANCE ON BOARD OF DIRECTORS AND MANAGEMENT
Stockholders will have no right or power to take part in the management of
the Company except through the exercise of voting rights on certain specified
matters. The Board of Directors will be responsible for directing the
management of the business and affairs of the Company. The Company will rely
upon the services and expertise of its management for strategic business
direction.
ABILITY OF BOARD TO CHANGE POLICIES
The major policies of the Company, including its policies with respect to
acquisitions, financing, growth, operations, debt capitalization and
distributions, will be determined by its Board of Directors. The Board of
Directors may amend or revise these and other policies from time to time
without a vote of the stockholders of the Company. See "Policies and
Objectives with Respect to Certain Activities."
ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATES ON PRICE OF COMMON STOCK
One of the factors that may influence the price of the Common Stock in
public trading markets will be the annual yield from distributions by the
Company on the Common Stock as compared to yields on certain financial
instruments. Thus, an increase in market interest rates will result in higher
yields on certain financial instruments, which could adversely affect the
market price of the Common Stock.
32
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THE COMPANY
GENERAL
The Company, which intends to operate as a REIT, has been formed to own
hotel properties and to continue and expand the hotel acquisition, development
and repositioning operations of AGHI. Upon completion of the Offering and the
Formation Transactions, the Company will own thirteen hotels containing an
aggregate of 3,012 guest rooms, located in nine states. AGHI, which will
manage the Initial Hotels, was founded in 1981 by Mr. Jorns, the Company's
Chairman of the Board, Chief Executive Officer and President. As of March 31,
1996, AGHI operated and managed 74 hotels in 24 states containing an aggregate
of more than 13,865 guest rooms. According to Hotel & Motel Management, a
leading hotel trade publication, AGHI was the nation's fourth largest
independent hotel management company in 1995, based upon number of hotels
under management. The Company's operations will focus on the ownership of
full-service hotels in major metropolitan markets, including hotels that are
in close proximity to the airports that serve such markets, and, to a lesser
extent, prominent hotels in major tourist areas. The Company expects to
capitalize on AGHI's expertise to achieve revenue growth at the Company's
hotels. Pursuant to the terms of the Management Agreements, and for so long as
AGHI is managing hotels owned by the Company, AGHI has agreed not to own or
develop any additional hotel properties. The Company will not have any
economic interest in AGHI's hotel management operations.
The Initial Hotels include eleven full-service hotels and two limited-
service hotels, and are diversified by franchise affiliation. For the twelve
months ended March 31, 1996, the Initial Hotels had a weighted average
occupancy of 73.0% and an ADR of $70.97. Ten of the Initial Hotels operate
under franchise licenses with nationally recognized hotel companies, which
include one Hilton, one Courtyard by Marriott, six Holiday Inns, one Hampton
Inn and one Days Inn. Six of the Initial Hotels are located in close proximity
to major airports, including two Holiday Inns in Dallas/Fort Worth, a Holiday
Inn in New Orleans, a Hampton Inn in Richmond, and independent hotels in San
Jose and Albuquerque. One Initial Hotel, a Days Inn, is located in the major
tourist area of Ocean City, Maryland. The remaining six Initial Hotels are
located in major metropolitan markets, including a Hilton in Toledo, Ohio, a
Courtyard by Marriott in Secaucus, New Jersey (immediately adjacent to New
York City), a Holiday Inn in San Diego, California, a Holiday Inn in San Jose,
California, a Holiday Inn Select in Madison, Wisconsin, and a prestigious
independent hotel affiliated with the Small Luxury Hotels located in the
French Quarter section of New Orleans, Louisiana. Certain of the Initial
Hotels, including the Holiday Inn Select in Madison, Wisconsin, and the
Holiday Inn Dallas DFW Airport South in Irving, Texas, have garnered
prestigious awards, including Holiday Inn's Torchbearer (awarded to those
hotels that are deemed to be leaders in the community, based on their
involvement in community and civic affairs), Modernization (awarded to those
hotels that complete the most effective total renovation projects), Quality
Excellence (awarded to those hotels that, based upon a quality indexing
system, noticeably exceed guest expectations), and Hotel of the Year (as
determined by a panel of three members of Holiday Inn Worldwide senior
management) awards.
The Company will seek to achieve revenue growth principally through the
acquisition and subsequent product and brand repositioning of hotels.
Consistent with this strategy, the Company has scheduled approximately $24.6
million (an average of approximately $13,400 per guest room) to be spent on
renovations and refurbishments within one year after the completion of the
Offering at seven of the Initial Hotels to convert the hotels to leading
franchise brands and reposition such hotels for future revenue growth. Upon
completion of the franchise conversions, the Initial Hotels will consist of
one Wyndham Hotel, two DoubleTree Hotels, two Crowne Plazas, one Hilton, one
Courtyard by Marriott, one Holiday Inn Select (the premium Holiday Inn brand),
two Holiday Inns, two Hampton Inns and one luxury independent hotel. There can
be no assurance that such brand conversions and hotel repositionings will
occur as planned.
The Company intends to capitalize on the comprehensive hotel acquisition,
development, and operations experience of the Company's senior management
team, including Mr. Jorns, the founder of AGHI, the Company's Chairman of the
Board, Chief Executive Officer and President, Mr. Wiles, the Company's
Executive Vice President, Mr. Barr, the Company's Executive Vice President and
Chief Financial Officer, and
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Mr. Valentine, the Company's Senior Vice President--Acquisitions. These four
executive officers have an average of over 25 years of experience in the real
estate and lodging industries and the finance and accounting fields. The
Company believes that AGHI's extensive hotel operations and the significant
industry relationships of the Company's senior management team will provide
the Company with a competitive advantage in identifying opportunities for
strategic acquisitions of hotel properties before they are widely marketed for
sale.
In order to qualify as a REIT, the Company may not operate hotels. As a
result, the current principals of AGHI (including Messrs. Jorns and Wiles) and
Mr. Barr have formed the Lessee, which will lease the Initial Hotels from the
Company pursuant to separate Participating Leases. The Participating Leases
are designed to allow the Company to achieve substantial participation in any
future growth of revenues generated at the Initial Hotels. Messrs. Jorns,
Wiles and Barr own collectively an approximate 23.0% interest in the Lessee.
The Lessee, in turn, will enter into separate Management Agreements with AGHI
to operate the Initial Hotels. The terms of the Participating Leases, the
Management Agreements and related agreements have been structured to align the
interests of the Lessee and AGHI with the interests of the Company's
stockholders. See "The Initial Hotels--The Participating Leases" and "--The
Management Agreements."
The Company attributes the success of the Initial Hotels to the slowing in
recent years of new hotel construction nationally and improving economic
conditions, both of which followed an extended period of unprofitable industry
performance in the late 1980's and early 1990's. According to Smith Travel
Research, for 1994 and 1995, occupancy rates for the U.S. lodging industry
were 64.7% and 65.5% respectively, reflecting a 2.9% increase in guest room
demand from 1994 to 1995 and a 1.7% increase in guest room supply during the
same period. The Company believes these improved lodging market fundamentals
have created a favorable environment for internal growth at the Initial Hotels
and for acquisitions. The following table compares occupancy, ADR, and REVPAR
at the Initial Hotels with comparable data for all midscale and lower upscale
U.S. hotels as well as all U.S. hotels for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Occupancy
Initial Hotels(1).................. 71.6% 71.7% 72.9% 70.6% 70.7%
AGH Predecessor Hotels(2).......... 74.3 71.1 72.1 73.3 64.2
AGH Acquisition Hotels(3).......... 71.0 71.9 73.1 70.0 72.1
All Midscale Hotels(4)............. 63.0 64.7 64.6 59.5 59.6
All Lower Upscale Hotels(4)........ 67.3 69.9 70.2 67.8 68.3
All U.S. Hotels(4)................. 63.0 64.7 65.5 60.3 61.1
ADR(5)
Initial Hotels(1).................. $ 57.65 $ 62.28 $ 69.19 $65.97 $73.33
AGH Predecessor Hotels(2).......... 57.09 62.10 73.26 67.01 81.10
AGH Acquisition Hotels(3).......... 57.78 62.32 68.30 65.73 71.77
All Midscale Hotels(4)............. 54.55 56.23 58.97 57.37 60.68
All Lower Upscale Hotels(4)........ 71.98 74.72 78.81 78.74 83.67
All U.S. Hotels(4)................. 61.93 64.24 67.34 67.83 72.01
REVPAR(6)
Initial Hotels(1).................. $ 41.26 $ 44.67 $ 50.46 $46.56 $51.81
AGH Predecessor Hotels(2).......... 42.42 44.14 52.84 49.10 52.09
AGH Acquisition Hotels(3).......... 41.01 44.79 49.93 45.99 51.75
All Midscale Hotels(4)............. 34.36 36.04 38.08 34.13 36.19
All Lower Upscale Hotels(4)........ 48.44 52.21 55.36 53.39 57.18
All U.S. Hotels(4)................. 39.01 41.56 44.11 40.93 44.02
</TABLE>
- --------
(1) The occupancy, ADR and REVPAR calculations for the Initial Hotels are
derived from room revenue that is included in the audited financial data
relating to each of the Initial Hotels for each of the periods indicated
except for the following hotels for which information is audited only from
the date of acquisition of such hotel by AGHI (such date is set forth in
parentheses): the Hotel Maison de Ville (August 1994), the Holiday Inn
Dallas DFW Airport West (June 1995), the Hampton Inn Richmond Airport
(December 1994) and the
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Courtyard by Marriott-Meadowlands (December 1993). The occupancy, ADR and
REVPAR information for the periods prior to the date of acquisition of the
hotels have been provided to management by the prior owners of such hotels.
(2) The AGH Predecessor Hotels consist of the following four Initial Hotels:
the Holiday Inn Dallas DFW Airport West, the Courtyard by Marriott-
Meadowlands, the Hotel Maison de Ville, and the Hampton Inn Richmond
Airport.
(3) The AGH Acquisition Hotels consist of the following nine Initial Hotels
(four of which are currently managed by AGHI): the Holiday Inn Dallas DFW
Airport South, Hilton Hotel-Toledo, Holiday Inn New Orleans International
Airport, Holiday Inn Park Center Plaza, Holiday Inn Select-Madison,
Holiday Inn Mission Valley, Le Baron Airport Hotel, Days Inn Ocean City,
and Fred Harvey Albuquerque Airport Hotel.
(4) Source: Smith Travel Research. Smith Travel Research has not provided any
form of consultation, advice or counsel regarding any aspect of, and is in
no way associated with, the Offering. The "Midscale" category includes 22
hotel chains designated by Smith Travel Research as "Midscale" hotels. The
"Lower Upscale" category includes 17 hotel chains designated by Smith
Travel Research as "Lower Upscale" hotels. Eight of the franchise brands
of the Initial Hotels are currently within the "Midscale" category. The
Company expects that upon completion of its subsequent product and brand
repositioning program, six of the franchise brands of the Initial Hotels
will be within the "Lower Upscale" category.
(5) Determined by dividing total room revenue by total rooms sold.
(6) Determined by dividing total room revenue by total available rooms.
Management believes that the full-service hotel segment, in particular, has
potential for improved performance as the economy continues to improve and as
business and leisure travel activity increases. The Company has targeted the
full-service segment of the hotel industry due, in part, to its belief that
the approximate three- to five-year lead time from conception to completion of
a full-service hotel in the markets in which the Company intends to focus
represents a significant barrier to entry that will limit competition
resulting from a new supply of guest rooms. Management also believes that the
full-service segment of the market will continue to offer numerous
opportunities to acquire hotels at attractive multiples of cash flow, and at
discounts to replacement value, including underperforming hotels that may
benefit from new management. The Company believes that a substantial number of
hotels meeting its investment criteria are available at attractive prices in
the markets where AGHI currently operates hotels and in markets which the
Company believes have attractive economic characteristics. The Company
believes its acquisition capabilities will be enhanced by the fact that its
initial capital structure provides significant financial flexibility. Upon
completion of the Offering, the Company will have approximately $19.4 million
of outstanding indebtedness. The Company intends to limit consolidated
indebtedness (measured at the time the debt is incurred) to no more than 45.0%
of the Company's investment in hotels. See "Policies and Objectives with
Respect to Certain Activities--Financing." The Company has obtained a
commitment for the $100 million Line of Credit. See "The Initial Hotels--Line
of Credit."
GROWTH STRATEGIES
The Company will seek to maximize current returns to stockholders through
increases in Cash Available for Distribution and to increase long-term total
returns to stockholders through appreciation in value of the Common Stock. The
Company plans to achieve these objectives through participation in any
increased revenues from the Initial Hotels, pursuant to the Participating Rent
payments under the Participating Leases and by the acquisition and selective
development of additional hotels.
ACQUISITIONS
The Company intends to acquire additional hotels that meet one or more of
the investment criteria outlined below. The Company intends to capitalize on
AGHI's extensive resources and industry contacts available through its hotel
management business, sizable existing management portfolio, and significant
industry and national presence to access acquisition opportunities not readily
available to the market in general. The Company currently has options to
acquire AGHI's interest in two Courtyards by Marriott currently under
development containing an aggregate of 318 guest rooms. See "Development"
below. The Company believes that its
35
<PAGE>
executive officers' experience in the hotel industry will enable the Company
to acquire, upgrade and convert hotels in order to capture the growth
potential from such acquisitions. The Company initially will employ five
professionals devoted exclusively to hotel acquisitions.
The Company will seek 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 underperforming and are candidates for implementation of
market repositioning, franchise conversion and turnaround strategies that
employ the extensive management and marketing experience of AGHI;
. 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.
The Company's ability to make acquisitions will depend on its ability to
access debt and equity financing. Initially, the Company expects to fund its
acquisitions by utilizing funds available under its Line of Credit. Funds
available to the Company under the Line of Credit will be limited to the
maximum principal amount of $100 million and, among other limitations, to
40.0% of the value or cost of the hotels that secure such line. Although as a
public company the Company expects to have available alternative sources of
financing, no commitments relating to such financing exist. Acquisitions
entail risks that acquired hotels will fail to perform in accordance with
expectations and that estimates of the cost of improvements necessary to
reposition hotels will prove inaccurate, as well as general investment risks
associated with any new real estate investment. In addition, future trends in
the hotel industry may make future acquisitions economically impractical.
Moreover, there can be no assurance that the Company will be able to acquire
hotels that meet its investment criteria or that any such hotels' operations
can be successfully improved. See "Risk Factors--Real Estate Investment
Risks--General Risks" and "--Acquisition and Development Risks."
DEVELOPMENT
The Company's executive officers average approximately 17 years of
experience in the development and renovation of real estate. Under the
direction of the Company's executive officers, AGHI has developed six hotel
properties, with an aggregate development cost of approximately $60.0 million,
and has completed redevelopment or repositioning projects at approximately 70
hotel properties, including both full- and limited-service hotels. Presently,
AGHI has two hotels under development, including a 167-room Courtyard by
Marriott in Boise, Idaho that is scheduled for completion in the fourth
quarter of 1996, and a 151-room Courtyard by Marriott in Durham, North
Carolina that is scheduled for completion in the first quarter of 1997. The
Company has an option and a right of first refusal to purchase AGHI's interest
in these option hotels (the "Option Hotels")
36
<PAGE>
for a two-year period following the opening of each such hotel. See "The
Initial Hotels--Options to Purchase and Rights of First Refusal." The Company
anticipates that most of the additional hotels developed in the future will be
in the full-service commercial sector, including such major brands as Hilton,
Marriott's family of brands, Wyndham Hotel, DoubleTree Hotel, Crowne Plaza,
Holiday Inn, Sheraton(R) and Embassy Suites(R). Other than in connection with
the limited expansion of existing hotels, the Company may not engage in
development activities without the consent of the lenders under the Line of
Credit.
The Company's development activities will be limited by the terms of the Line
of Credit and its ability to access financing as well as future trends in the
hotel industry. Like acquisitions, new project development is also subject to
numerous risks, including risks of construction delays or cost overruns that
may increase project costs. Accordingly, there can be no assurance that the
Company will be able to develop hotels that meet its investment criteria or
that any hotels can be successfully developed. See "Risk Factors--Real Estate
Investment Risks--Acquisition and Development Risks."
INTERNAL GROWTH
The Company believes that, based on the historical operating results of the
Initial Hotels, the strength of the Company's and AGHI's existing management
teams and the structure of the Participating Leases, the Initial Hotels should
provide the Company with the opportunity for significant revenue growth. The
Company believes that it has structured its business relationships with AGHI
and the Lessee to provide incentives to operate and maintain the Initial Hotels
in a manner that will increase revenue and the Company's Cash Available for
Distribution. See "The Initial Hotels--The Participating Leases" and "--The
Management Agreements."
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. The Company believes there is
significant potential to increase revenues at the Initial Hotels (especially
those not currently managed by AGHI), and increase Participating Lease payments
by employing 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
. use of Participating Leases designed to capture increased revenues
attributable to improved marketing and yield management techniques that
AGHI will employ at the Initial Hotels not previously operated and
managed by AGHI and any additional hotels acquired by the Company after
the completion of the Offering.
Product Repositioning. The Company believes that a regular program of capital
improvements, including replacement and refurbishment of FF&E at the Initial
Hotels, as well as the renovation and redevelopment of certain of the Initial
Hotels, will maintain the competitiveness of the Initial Hotels and increase
revenues. From January 1, 1993 through March 31, 1996, approximately $15.0
million (an average of approximately $9,000 per guest room) was spent on
renovations and capital improvements at the eight Initial Hotels currently
operated and managed by AGHI. The Company expects to employ a repositioning and
conversion strategy in connection with its hotel acquisitions. Consistent with
this strategy, the Company has scheduled approximately $24.6 million (an
average of approximately $13,400 per guest room) to be spent on renovations and
refurbishments within one year after the completion of the Offering at seven of
the Initial Hotels anticipated to undergo brand conversions within one year
after the closing of the Offering (see "Brand Repositioning" below).
As an example of this strategy, AGHI, after its acquisition in May 1992 of an
interest in the Holiday Inn Dallas DFW Airport South and its retention as
manager, commenced an extensive $2.5 million renovation of the hotel, which
included upgrades of all guest rooms and corridors, common areas, meeting space
and restaurants and the lounge and renovation of the exterior of the building.
At the time of purchase, the hotel had lost its Holiday Inn franchise due to
product deficiencies and was experiencing declining occupancy arising from poor
marketing and insufficient capital improvements. Since the completion of the
initial renovations in 1992, an
37
<PAGE>
additional $2.5 million has been spent to upgrade the hotel. In 1992,
occupancy, ADR and REVPAR at the Holiday Inn Dallas DFW Airport South were
49.1%, $54.18 and $26.61, respectively. By the twelve months ended March 31,
1996, occupancy at the hotel had increased 57.2% to 77.2%, ADR at the hotel
had increased 35.7% to $73.54 and REVPAR at the hotel had increased 113.4% to
$56.79. There can be no assurance that the Company will be able to achieve
similar results with respect to the Initial Hotels or hotels acquired in the
future.
The Participating Leases require the Company to establish reserves of 4.0%
of total revenue for each of the Initial Hotels (which, on a consolidated pro
forma basis for the twelve months ended March 31, 1996, represented
approximately 5.6% of room revenue), which will be utilized by the Lessee for
the replacement and refurbishment of FF&E and for other capital expenditures
designed to enhance the competitive position of the Initial Hotels. The
Company and the Lessee will agree on the use of funds in this reserve and the
Company will have the right to approve the 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 Cash Available for Distribution in excess of distributions
paid (subject to federal income tax restrictions on the Company's ability to
retain earnings) or funds drawn under the Line of Credit 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 Courtyard by Marriott, Crowne Plaza, DoubleTree Hotel,
Holiday Inn, Holiday Inn Select, and Wyndham Hotel brands, in order to improve
the operating performance at these hotels. Seven of the Initial Hotels are
anticipated to undergo brand conversions within one year after the closing of
the Offering. It is expected that the Holiday Inn Park Center Plaza will be
converted from a traditional Holiday Inn to a Crowne Plaza, the Holiday Inn
Select-Madison will be converted to a Crowne Plaza, the Days Inn Ocean City
will be converted to a Hampton Inn, the Le Baron Airport Hotel will be
converted to a DoubleTree Hotel, the Holiday Inn New Orleans International
Airport will be converted from a traditional Holiday Inn to a Holiday Inn
Select, the Holiday Inn Mission Valley will be converted to a DoubleTree
Hotel, and the Fred Harvey Albuquerque Airport Hotel will be converted to a
Wyndham Hotel. 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. See "Risk Factors--
Risks of Operating Hotels Under Franchise Agreements; Approval for Brand
Conversions."
As an example, AGHI implemented its brand repositioning strategy in
connection with its acquisition of the Courtyard by Marriott-Meadowlands in
December 1993. At the time of its acquisition by AGHI, this hotel's operating
performance was declining due to prior management inefficiencies, deferred
maintenance and a lack of capital to effectively compete in its market. In
response to these conditions, AGHI developed a multi-phase strategy, including
repositioning the former Days Hotel to a Courtyard by Marriott and upgrading
the hotel by making approximately $530,000 in renovations of guest rooms and
public space and exterior improvements to the hotel. Since the initial
renovation was completed in May 1994, AGHI has invested an additional $845,400
to further improve the restaurant, lounge, exterior entrances, guest rooms and
meeting facilities. In 1993, occupancy, ADR and REVPAR at the Courtyard by
Marriott-Meadowlands were 74.8%, $65.63 and $49.09, respectively. By the
twelve months ended March 31, 1996, occupancy at the hotel had increased 3.9%
to 77.7%, ADR at the hotel had increased 27.1% to $83.42 and REVPAR at the
hotel had increased 32.0% to $64.82. There can be no assurance that the
Company will be able to achieve similar results with respect to the Initial
Hotels or hotels acquired in the future.
The Company's ability to utilize its repositioning strategies will depend on
its ability to access financing. The Company plans to use funds available
under the Line of Credit to implement its planned conversion and repositioning
strategy at certain of the Initial Hotels. Substantial renovations of hotels
often disrupt the operations of those hotels due to hotel guest rooms and
common areas being out of service for extended periods. See "Risk Factors--
Hotel Industry Risks--Risks of Necessary Operating Costs and Capital
Expenditures; Required Hotel Renovations."
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<PAGE>
Operational Repositioning. The Company expects to achieve internal growth
through the application of AGHI'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 continuing use of (i)
interactive yield management techniques, (ii) highly developed operating
systems and controls, (iii) targeted sales and marketing plans, (iv) proactive
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 by employing AGHI as the
manager of the five Initial Hotels that AGHI does not currently manage, AGHI,
through improved marketing and yield management techniques, will increase the
revenues of these hotels, thereby increasing the rent payable to the Company
by the Lessee under the Participating Leases. The Company and the Lessee
relied on this estimated increase in revenue in establishing the rent payable
to the Company under the Participating Leases relating to these hotels. While
the rent provisions of the Participating Leases are revenue-based, such
provisions have been developed with consideration of the fixed and variable
nature of hotel operating expenses and changes in operating margins typically
associated with increases in revenues. See "The Initial Hotels--The
Participating Leases."
In an effort to align the interests of AGHI and the Lessee with the
interests of the Company's stockholders, the Participating Leases, the
Management Agreements and certain related agreements provide for the
following:
. the partners of the Lessee have agreed upon consummation of the Offering
to (i) initially capitalize the Lessee with $500,000 in cash and (ii)
pursuant to the Lessee Pledge, pledge 275,000 OP Units having a value of
approximately $5.5 million, based on the Offering Price, to the Company
to secure the Lessee's obligations under the Participating Leases;
. until the Lessee's net worth equals the greater of (i) $6.0 million or
(ii) 17.5% of actual rent payments from hotels leased to the Lessee
during the preceding calendar year, the Lessee will 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 the
operations of the Lessee and except for distributions relating to
interest or dividends received by the Lessee from cash or securities held
by it);
. management fees paid to AGHI by the Lessee will include an incentive fee
of up to 2.0% of gross revenues based upon reaching certain gross revenue
targets at the Initial Hotels;
. management fees payable by the Lessee to AGHI will be subordinated to
the Lessee's rent obligations to the Company under the Participating
Leases;
. defaults by the Lessee under each Participating Lease will result in a
cross-default of all other Participating Leases to which the Lessee is a
party allowing the Company to terminate each other lease;
. Messrs. Jorns and Wiles, who are stockholders of AGHI and are also
executive officers of the Company, will agree to use 50% of the dividends
(net of tax liability) 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 additional
interests in the Company; and
. the Board of Directors of the Company will establish a Leasing Committee,
consisting entirely of Independent Directors, that will review not less
frequently than annually the Lessee's compliance with the terms of the
Participating Leases and will review and approve the terms of each new
Participating Lease between the Company and the Lessee.
FINANCING STRATEGY
Upon completion of this Offering, the Company will have approximately $19.4
million of outstanding indebtedness. While its organizational documents
contain no limitation on the amount of debt it may incur, the Company, subject
to the discretion of the Board of Directors, intends to limit consolidated
indebtedness (measured at the time the debt is incurred) to not more than
45.0% of the Company's investment in hotels (calculated in the manner set
forth under "Policies and Objectives with Respect to Certain Activities--
39
<PAGE>
Financing"). The Company may from time to time re-evaluate its debt limitation
policy in light of then current economic conditions, relative costs of debt
and equity capital, market values of its hotels, acquisition and expansion
opportunities and other factors.
As a publicly owned hotel REIT, the Company believes that it will have
improved access to a wide variety of financing sources to fund acquisitions,
such as the ability to issue several types of public and private debt, equity
and hybrid securities, as well as the ability to utilize OP Units as
acquisition consideration. The Company has received a commitment for the Line
of Credit that will be limited to the maximum principal amount of $100 million
and, among other limitations, to 40.0% of the value or cost of the hotels
which secure such line. The Line of Credit initially will be secured by a
first mortgage lien on eleven of the Initial Hotels. Subject to the
limitations described above and other limitations contained in the Line of
Credit, the Company may borrow additional amounts from the same or other
lenders in the future or may issue corporate debt securities in public or
private offerings. Certain of such additional borrowings may be secured by
hotels owned by the Company. Upon the closing of the Offering, the Company
expects to have approximately $60 million of borrowing capacity available
under the Line of Credit. The Company expects that its borrowing capacity
under the Line of Credit will increase to $100 million, assuming all
additional borrowings are used to fund capital improvements to the Initial
Hotels or the acquisition of additional hotels. See "The Initial Hotels--Line
of Credit."
THE OPERATING PARTNERSHIP
Upon completion of the Offering, the Company will acquire an approximately
74.2% interest in the Operating Partnership, a recently formed Delaware
limited partnership. The Company will hold its interest in the Operating
Partnership through two wholly owned subsidiaries, AGH GP and AGH LP. AGH GP
will be the sole general partner of the Operating Partnership and will own a
1.0% general partnership interest in the Operating Partnership. Through AGH
GP, the Company will control the Operating Partnership and its assets. AGH LP
will be one of the Operating Partnership's limited partners (the "Limited
Partners") and will own an approximately 73.2% limited partnership interest in
the Operating Partnership. Other initial limited partners will be the Primary
Contributors and other holders of interests in the Initial Hotels who have
elected to receive OP Units in exchange for all or a portion of their
interests in the Initial Hotels. In their capacity as such, the Limited
Partners will have no authority to transact business for, or participate in
the management, activities or decisions of, the Operating Partnership. The
Operating Partnership will own, directly or through one or more subsidiary
partnerships or limited liability companies (the "Subsidiary Partnerships"),
all of the Initial Hotels and will lease such hotels to the Lessee. The
Operating Partnership will own, directly or indirectly, a 99.9% interest in
each Subsidiary Partnership.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after payment of
estimated expenses incurred in connection with the Offering, are estimated to
be approximately $127.1 million. The Company will contribute the net proceeds
to the Operating Partnership, which, in turn, will use the net proceeds of the
Offering as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Acquisition of the Initial Hotels, including net
closing costs of $195................................. $ 91,044
Repayment of existing mortgage indebtedness, including
associated prepayment penalties....................... 34,275
Working capital, Line of Credit fees, franchise
transfer costs and other expenses..................... 1,809
--------
Total uses of proceeds(1)............................ $127,128
========
</TABLE>
- --------
(1) Includes approximately $900 that will be used to reimburse AGHI for direct
out-of-pocket expenses incurred in connection with the acquisition of the
Initial Hotels, including legal, environmental and engineering expenses.
If the Underwriters' over-allotment option is exercised in full, the Company
intends to use the additional net proceeds of approximately $19.5 million to
fund planned renovations to certain Initial Hotels as described herein, for
the acquisition of additional hotels to be identified in the future and for
working capital.
Mortgage indebtedness to be repaid with the net proceeds of the Offering is
as follows (dollars in thousands):
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
PREPAYMENT AS OF
HOTEL INTEREST RATE MATURITY DATE PENALTY JULY 15, 1995
----- ------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C>
Holiday Inn Dallas DFW
Airport West........... 9.8% June 2000 $450 $ 8,557
Hotel Maison de Ville... 9.3 August 1999 1,538
Hampton Inn Richmond
Airport................ 9.8 December 1999 284 4,768
Holiday Inn Select-
Madison................ 8.5 September 1996 3,872
Hilton Hotel-Toledo..... 8.8 June 1997 7,500
Holiday Inn New Orleans
International Airport.. 8.6 June 1998 7,306
---- -------
Total................. $734 $33,541
==== =======
</TABLE>
Of the indebtedness to be repaid with the net proceeds of the Offering,
approximately $16.1 million was incurred within the twelve months prior to the
date of this Prospectus of which amount (i) approximately $8.6 million was
utilized for the acquisition and refurbishment of the Holiday Inn Dallas DFW
Airport West and (ii) approximately $7.5 million was utilized in connection
with the acquisition of the Hilton Hotel-Toledo.
Currently, the Company does not have any agreement or understanding to
purchase any specific hotel other than the Initial Hotels, although
discussions with various prospective sellers of hotels have been initiated.
The Company will receive options to acquire AGHI's interests in two Courtyards
by Marriott currently under development. See "The Initial Hotels--Options to
Purchase and Rights of First Refusal."
Pending the uses described above, the net proceeds will be invested in
interest-bearing accounts and short-term, interest-bearing securities, which
are consistent with the Company's intention to qualify for taxation as a REIT.
Such investments may include, for example, government and government agency
securities, certificates of deposit, interest-bearing bank deposits and
mortgage loan participations.
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<PAGE>
DISTRIBUTION POLICY
Subsequent to the Offering, the Company intends to make regular quarterly
distributions to its stockholders. The Company's first distribution, for the
period from the closing of the Offering to September 30, 1996, is expected to
be $ per share of Common Stock, representing a pro rata distribution of the
anticipated regular quarterly distribution of $0.40 per share for a full
quarter, which, on an annualized basis, will represent an initial annual
distribution rate of $1.60 per share, or 8.0% of the Offering Price. Based on
the Company's estimated revenues less expenses for the twelve months ended
March 31, 1996, the estimated initial annual distribution per share represents
95.0% of estimated Cash Available for Distribution. Holders of OP Units will
receive equal distributions on a per unit basis. The Company does not expect
to adjust the estimated distribution rate if the Underwriters' over-allotment
option is exercised. See "Partnership Agreement."
The Company has established the expected initial annual distribution rate
based upon the Company's estimate of Cash Available for Distribution, which
has been derived from the statement of estimated revenues less expenses of the
Company for the twelve months ended March 31, 1996. The Company believes the
estimated revenues less expenses for the twelve months ended March 31, 1996
constitutes a reasonable basis for setting the expected annual initial
distribution rate. The Board of Directors, in its sole discretion, will
determine the actual distribution rate based on the Company's actual results
of operations, Cash Available for Distribution, economic conditions, tax
considerations (including those related to REITs) and other factors.
The following table sets forth certain financial information for the twelve
months ended March 31, 1996, which has been used to establish the expected
initial annual distribution per share.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
MARCH 31, 1996
----------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Estimated revenues less expenses....................... $ 9,501
Add back non-cash items:
Pro forma depreciation(1) ............................. 4,861
-------
Pro forma Funds From Operations(2)..................... 14,362
Adjustments:
Pro forma amortization(1).............................. 480
Pro forma amortization of unearned officers'
compensation(1)....................................... 74
Estimated cash used to pay interest expenses related to
certain capital expenditures(3)....................... (409)
Estimated cash used in investing activities(4)......... (2,364)
-------
Estimated Cash Available for Distribution(1)(5)........ $12,143
=======
Aggregate expected initial annual distribution on
Common Stock(6)....................................... $11,529
Expected initial annual distribution per share of
Common Stock.......................................... $ 1.60
Expected payout ratio based on estimated Cash Available
for Distribution(7)................................... 95.0%
</TABLE>
- --------
(1) Amounts are adjusted to reflect the Company's ownership percentage in the
Operating Partnership of 74.2%.
(2) Funds From Operations, as defined by NAREIT, represents 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. Funds From Operations does
not represent cash generated from operating activities in accordance with
generally accepted accounting principles, is not necessarily indicative of
cash flow available to fund cash needs and should not be considered as an
alternative to net income as an indication of performance or to cash flow
as a measure of liquidity. Although Funds From Operations has been
computed in accordance with the newly adopted NAREIT definition, Funds
From Operations as presented may not be comparable to other similarly
titled measures used by other REITs. Funds From Operations does not
reflect cash expenditures for capital improvements or principal
amortization of indebtedness on the Initial Hotels.
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<PAGE>
(3) Represents the estimated interest expense (adjusted to reflect the
Company's ownership percentage in the Operating Partnership of 74.2%) that
will be incurred during the twelve months following the closing of the
Offering in order to fund (i) the $24.6 million cost of planned
renovations and refurbishments at the seven Initial Hotels the Company
plans to convert to leading franchise brands in order to reposition such
hotels for future growth and (ii) the $2.6 million of planned improvements
that the Company expects to make at five other Initial Hotels. Estimated
interest expense is computed based upon management's estimate of the
timing of the expenditures relating to the scheduled renovations and
refurbishments multiplied by an assumed interest rate applicable to
borrowings under the Company's Line of Credit (7.4% as of June 14, 1996).
Estimated Cash Available for Distribution does not include the effects of
any revenue increases expected to result from capital expenditures at the
Initial Hotels.
(4) Represents the Company's obligation under the Participating Leases
(adjusted to reflect the Company's ownership percentage in the Operating
Partnership of 74.2%) to reserve and pay for capital improvements
(including the replacement or refurbishment of FF&E) on a pro forma basis
for the twelve months ended March 31, 1996. Such reserves were equal to
4.0% of total revenue for each of the Initial Hotels (which, on a
consolidated pro forma basis, represented approximately 5.6% of room
revenue). See "The Initial Hotels--The Participating Leases." Based on
management's experience, and considering the amounts expended on
renovations and capital improvements at the Initial Hotels since 1993, the
Company believes the amounts reserved under the Participating Leases will
be sufficient to fund reasonably foreseeable capital improvements and
replacements and refurbishments of FF&E. However, the Company may find it
necessary or desirable to spend amounts in excess of the obligated amounts
and may make additional borrowings or use undistributed Cash Available for
Distribution to fund such expenditures. See "Risk Factors--Hotel Industry
Risks--Risks of Necessary Operating Costs and Capital Expenditures;
Required Hotel Renovations" and "The Initial Hotels."
(5) Estimated Cash Available for Distribution has been reduced by
approximately $18,000, which represents the pro forma interest expense
attributable to aggregate indebtedness of $488,690 that will be incurred
by the Company in order to pay principal amortization on the DFW South
Loan and the Secaucus Loans (as defined in "The Initial Hotels--Mortgage
Indebtedness Remaining Following the Offering").
(6) Based on 7,205,518 shares of Common Stock outstanding upon completion of
the Formation Transactions multiplied by the expected initial annual
distribution rate of $1.60 per share. Excludes an aggregate of 2,511,106
shares issuable after one year following the closing of the Offering upon
the exchange of the OP Units issued in the Formation Transactions.
(7) Represents the anticipated initial aggregate annual distribution divided
by estimated Cash Available for Distribution. The expected payout ratio
based upon pro forma estimated Funds From Operations is approximately
80.3%.
The Company anticipates maintaining its expected initial annual distribution
rate unless actual results of operations, economic conditions or other factors
differ from the estimated revenues less expenses for the twelve months ended
March 31, 1996. The Company's actual Cash Available for Distribution will be
affected by a number of factors, including changes in occupancy or ADR at the
Initial Hotels.
The Company anticipates that Cash Available for Distribution will exceed
earnings and profits due to non-cash expenses, primarily depreciation and
amortization, to be incurred by the Company. Distributions by the Company to
the extent of its current or accumulated earnings and profits for federal
income tax purposes, other than capital gain distributions, will be taxable to
stockholders as ordinary dividend income. Any distributions designated by the
Company as capital gain dividends generally will give rise to capital gain tax
treatment for stockholders. Distributions in excess of the Company's current
or accumulated earnings and profits generally will be treated as a non-taxable
reduction of a stockholder's basis in the Common Stock to the extent thereof,
and thereafter as capital gain. Distributions treated as a non-taxable
reduction in basis will have the effect of deferring taxation until the sale
of a stockholder's Common Stock or future distributions in excess of the
stockholder's basis in the Common Stock. Based upon the total estimated Cash
Available for Distribution set forth in the table above, the Company believes
that approximately 21.0% of the Company's expected initial annual distribution
would represent a return of capital for federal income tax purposes. If actual
Cash Available
43
<PAGE>
for Distribution or taxable income varies from these amounts, the percentage of
distributions that represents a return of capital may be materially different.
In order to maintain its qualification as a REIT, the Company must make
annual distributions to its stockholders of at least 95% of its net taxable
income (excluding net capital gains). Based on the Company's estimated revenues
less expenses for the twelve months ended March 31, 1996, the Company would
have been required to distribute approximately $8.6 million, or $1.20 per
share, in order to maintain its status as a REIT. 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 of the deficiency or sell
assets to obtain the cash necessary to make distributions to retain its
qualification as a REIT for federal income tax purposes.
The Board of Directors, in its sole discretion, will determine the actual
distribution rate based on a number of factors, including the amount of Cash
Available for Distribution, the Company's financial condition, capital
expenditure requirements for the Company's hotels, the annual distribution
requirements under the REIT provisions of the Code and such other factors as
the Board of Directors deems relevant. For a discussion of the tax treatment of
distributions to holders of Common Stock, see "Federal Income Tax
Considerations."
44
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the AGH
Predecessor Hotels and the pro forma capitalization of the Company as of March
31, 1996, assuming completion of the Offering and Formation Transactions and
the use of the proceeds from the Offering as described in "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
AGH
PREDECESSOR
HOTELS COMPANY
HISTORICAL PRO FORMA
----------- ------------
<S> <C> <C>
Long-term debt, net of current portion............. $19,583,931 $ 18,863,549(1)
Minority interest in Operating Partnership......... 40,859,319
Stockholders' equity:
Preferred Stock, $0.01 par value per share,
20,000,000 shares authorized, no shares issued
and outstanding ................................
Common Stock, $0.01 par value per share,
100,000,000 shares authorized, 7,205,518 shares
issued and outstanding, as adjusted(2).......... 72,055
Additional paid-in capital....................... 118,438,078
Unearned officers' compensation.................. (1,000,000)
Retained earnings................................ 4,198,306
----------- ------------
Total stockholders' equity....................... 4,198,306 117,510,133
----------- ------------
Total Capitalization........................... $23,782,237 $177,233,001
=========== ============
</TABLE>
- --------
(1) Reflects the Company's long-term debt collateralized by the Holiday Inn
Dallas DFW Airport South and the Courtyard by Marriott-Meadowlands, net of
the current portion of such debt of $488,690. The debt encumbering the
Holiday Inn Dallas DFW Airport South is not prepayable prior to February
1, 1998. The ground lease encumbering the Courtyard by Marriott-
Meadowlands contains provisions that prohibit the Company from including
such hotel as part of the collateral securing the Line of Credit. See "The
Initial Hotels--Mortgage Indebtedness Remaining Following the Offering."
(2) Includes 7,000,000 shares sold in the Offering, 155,518 shares of Common
Stock issued to the Plan in connection with the Formation Transactions and
50,000 shares of restricted Common Stock granted to the Company's
executive officers as stock awards. Excludes 2,511,106 shares issuable one
year after the closing of the Offering upon the exchange of OP Units
issued in connection with the Formation Transactions, 850,000 reserved but
unissued shares of Common Stock under the 1996 Plan and 100,000 reserved
but unissued shares of Common Stock under the Directors' Plan. See
"Management--Stock Incentive Plans," "Formation Transactions" and
"Partnership Agreement--Exchange Rights."
45
<PAGE>
DILUTION
The initial price per share to the public of Common Stock offered hereby
exceeds the net tangible book value per share. Therefore, the holders of OP
Units issued in the Formation Transactions will realize an immediate increase
in the net tangible book value of their OP Units while purchasers of Common
Stock in the Offering will realize an immediate and substantial dilution of
the net tangible book value of their shares. Net pro forma tangible book value
per share is determined by subtracting total liabilities from total tangible
assets and dividing the remainder by the number of shares of Common Stock and
OP Units that will be outstanding after the Offering. The following table
illustrates the dilution per share to purchasers of Common Stock sold in the
Offering, based on the Offering Price.
<TABLE>
<S> <C> <C>
Historical net tangible book value (1)......................... $18.50
Historical AGH Acquisition Hotels net tangible book value (2)..
Increase in net tangible book value attributable to the acqui-
sition of AGH Acquisition Hotels (3).......................... 4.04
Decrease in net tangible book value attributable to expenses
incurred in the Offering and payments for deferred expense
assets........................................................ (0.97)
Decrease in net tangible book value attributable to the alloca-
tion of the minority interest associated with the Offering and
the Formation Transactions.................................... (5.67)
------
Pro forma net tangible book value after the Formation
Transactions (4).............................................. 15.90
Dilution per share purchased in the Offering................... 4.10
------
Offering Price (5)............................................. $20.00
======
</TABLE>
- --------
(1) Historical net tangible book value prior to the Offering is determined by
subtracting total liabilities assumed from total tangible assets purchased
of the AGH Predecessor Hotels ($2.9 million) divided by the total shares
of Common Stock (155,518) issued in the exchange for the net assets of the
AGH Predecessor Hotels in the Formation Transactions. This calculation
does not include the 2,511,106 OP Units which will also be issued in the
exchange for the net assets of the AGH Predecessor Hotels in the Formation
Transactions.
(2) OP Units were issued in connection with the acquisition of the AGH
Acquisition Hotels. No Common Stock was exchanged in connection with such
acquisitions.
(3) Net tangible book value of the AGH Acquisition Hotels attributable to the
allocation of minority interest.
(4) Based on the total pro forma net tangible book value of the Company
($114.6 million) divided by the total shares of Common Stock outstanding
after the Formation Transactions (7,205,518).
(5) Before deducting underwriting discount and estimated expenses of the
Offering.
The following table sets forth the number of shares of Common Stock to be
sold by the Company in the Offering, the total contributions to be paid to the
Company by purchasers of the shares sold in the Offering, the number of shares
of Common Stock and OP Units to be issued in the Formation Transactions, the
stock awards granted to the Company's executive officers and the tangible book
value per share and per OP Unit based on total contributions (determined as if
the consummation of the Formation Transactions occurred on December 31, 1995).
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
ISSUED BY THE COMPANY AND TANGIBLE BOOK
OP UNITS ISSUED BY THE TOTAL CONTRIBUTIONS VALUE
OPERATING PARTNERSHIP TO THE COMPANY PER SHARE/OP UNIT
---------------------------------------------------- -----------------
NUMBER PERCENT AMOUNT PERCENT
-------------- ------------------------- -------
<S> <C> <C> <C> <C> <C>
Shares of Common Stock
sold by the Company in
the Offering........... 7,000,000 72.0% $140,000,000 106.6% $20.00(1)
Shares of Common Stock
(155,518) and OP Units
(2,511,106) issued in
the Formation
Transactions........... 2,666,624 27.5 4,198,306 3.2 $ 1.42(2)
Stock awards............ 50,000 .5
Other................... (12,872,000)(3) (9.8)
-------------- ---------- ------------ -----
Total................... 9,716,624 100.0% $131,326,306 100.0%
============== ========== ============ =====
</TABLE>
- --------
(1) Based on the Offering Price before deducting expenses of the Offering.
(2) Based on the book value of assets to be contributed to the Operating
Partnership in the Formation Transactions.
(3) Represents the expenses of the Offering, net of the effects of the
Formation Transactions.
46
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth (1) selected estimated and pro forma
consolidated financial data for the Company as of and for the year ended
December 31, 1995, the twelve months ended March 31, 1996 and the three months
ended March 31, 1996, (2) selected historical combined financial data for the
Initial Hotels for each of the years in the five-year period ended December
31, 1995 and the three months ended March 31, 1995 and 1996 and pro forma
financial data for the Initial Hotels and Lessee for the year ended December
31, 1995, the twelve months ended March 31, 1996 and the three months ended
March 31, 1996, (3) selected historical combined financial data for the AGH
Predecessor Hotels for each of the years in the three-year period ended
December 31, 1995, and the three months ended March 31, 1995 and 1996 and (4)
selected historical combined financial data for the AGH Acquisition Hotels for
each of the years in the five-year period ended December 31, 1995 and the
three months ended March 31, 1995 and 1996. The selected historical combined
financial data of the AGH Predecessor Hotels for the periods presented
(excluding the historical financial data for the three months ended March 31,
1995 and 1996) and the selected historical combined financial data of the AGH
Acquisition Hotels for each of the years in the three-year period ended
December 31, 1995 have been derived from the historical combined financial
statements and notes thereto of the AGH Predecessor Hotels and the AGH
Acquisition Hotels audited by Coopers & Lybrand L.L.P., independent
accountants, whose reports with respect thereto are included elsewhere in this
Prospectus. The selected historical combined financial data of the AGH
Predecessor Hotels for the three months ended March 31, 1995 and 1996 and the
AGH Acquisition Hotels for each of the years in the two-year period ended
December 31, 1992 and the three months ended March 31, 1995 and 1996 have been
derived from unaudited combined internal statements of operations of the AGH
Predecessor Hotels and the AGH Acquisition Hotels. In the opinion of
management, the unaudited combined financial data include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial information set forth therein.
The statements of estimated revenues less expenses, pro forma and other data
are presented as if the Formation Transactions and the application of the net
proceeds of the Offering had occurred as of January 1, 1995 and therefore
incorporate certain assumptions that are included in the Notes to the
Statements of Estimated Revenues Less Expenses and Pro Forma Statements of
Operations included elsewhere in this Prospectus. The pro forma operating data
for the Initial Hotels and Lessee is presented to reflect the pro forma
operations of the Lessee for the period presented, whose operations are the
source of the Lessee's Participating Lease payments to the Company. The pro
forma balance sheet data is presented as if the Formation Transactions and the
application of the net proceeds of the Offering had occurred on March 31,
1996.
The estimated and pro forma information do not purport to represent what the
Company's financial position or the Company's or the Initial Hotels' and
Lessee's results of operations would have been if the Formation Transactions
and the Offering had, in fact, occurred on such dates, or to project the
Company's, or the Initial Hotels' and Lessee's financial position or results
of operations at any future date or for any future period.
The historical financial information includes the operations of the AGH
Predecessor Hotels for the periods owned by affiliates of AGHI. The Courtyard
by Marriott-Meadowlands was acquired in December 1993; the Hotel Maison de
Ville was acquired in August 1994; the Hampton Inn Richmond Airport was
acquired in December 1994; and the Holiday Inn Dallas DFW Airport West was
acquired in June 1995. Complete historical financial information for each of
the AGH Predecessor Hotels prior to their respective acquisition dates is
unavailable. The historical financial information for the AGH Acquisition
Hotels does not include information related to the Days Inn Ocean City for
each of the years in the two-year period ended December 31, 1992 and the
Holiday Inn Mission Valley for the year ended December 31, 1991. Historical
financial information for these AGH Acquisition Hotels for these periods is
unavailable. Therefore, historical financial information for the AGH
Predecessor Hotels and the Initial Hotels and Lessee does not include
information for the above hotels prior to the dates previously described.
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 Prospectus.
47
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
SELECTED ESTIMATED AND PRO FORMA CONSOLIDATED FINANCIAL DATA(1)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
ESTIMATED REVENUES LESS
EXPENSES DATA:
Participating Lease
revenue(2).................. $ 24,775,142 $25,902,292 $6,527,908
Interest income.............. 31,500 31,500 7,875
------------ ----------- ----------
Total revenue.............. 24,806,642 25,933,792 6,535,783
Depreciation................. 7,404,235 6,551,936 1,485,233
Amortization................. 646,660 646,660 161,665
Real estate and personal
property taxes and property
insurance................... 2,165,073 2,165,073 541,268
General and
administrative(3)........... 1,130,000 1,130,000 282,500
Ground lease expense......... 881,217 902,196 193,156
Amortization of unearned
officers' compensation(4)... 100,000 100,000 25,000
Interest expense............. 1,244,637 1,633,962 408,491
------------ ----------- ----------
Total expenses............. 13,571,822 13,129,827 3,097,313
------------ ----------- ----------
Estimated revenues less
expenses before minority
interest.................... 11,234,820 12,803,965 3,438,470
Minority interest(5)......... 2,898,584 3,303,423 887,125
------------ ----------- ----------
Estimated revenues less
expenses applicable to
common shareholders......... $ 8,336,236 $ 9,500,542 $2,551,345
============ =========== ==========
Estimated revenues less
expenses per common share... $ 1.16 $ 1.32 $ 0.35
============ =========== ==========
Weighted average number of
shares of Common Stock
outstanding................. 7,205,518 7,205,518 7,205,518
============ =========== ==========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-----------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 6,997
Investment in hotel properties, net......................... 176,208,094
Total assets................................................ 179,471,691
Debt........................................................ 19,352,239
Minority interest in Operating Partnership.................. 40,859,319
Stockholders' equity........................................ 117,510,133
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
OTHER DATA:
Funds From Operations(6)..... $ 13,830,178 $ 14,362,079 $ 3,653,388
Cash Available for
Distribution(7)............. 11,663,636 12,142,695 3,195,403
Net cash provided by
operating activities(8)..... 19,385,715 20,102,561 5,110,368
Net cash used in investing
activities(9)............... (3,115,404) (3,186,617) (803,895)
Net cash used in financing
activities(10).............. (16,056,851) (16,035,288) (4,008,823)
Weighted average number of
shares of Common Stock and
OP Units outstanding........ 9,716,624 9,716,624 9,716,624
</TABLE>
See notes on page 51.
48
<PAGE>
INITIAL HOTELS
SELECTED HISTORICAL COMBINED FINANCIAL DATA(11)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue........... $27,963,802 $30,376,150 $36,829,877 $43,541,206 $53,756,926 $11,857,784 $14,186,415
Food and beverage
revenue............... 13,526,143 13,597,748 15,453,080 16,378,861 17,717,760 4,291,351 4,683,138
Other revenue.......... 2,434,535 2,528,364 4,680,010 3,392,275 4,147,900 971,975 1,163,152
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue.......... 43,924,480 46,502,262 56,962,967 63,312,342 75,622,586 17,121,110 20,032,705
Hotel operating
expenses.............. 32,251,012 35,083,148 40,130,782 44,349,278 51,198,375 11,622,390 13,216,152
Depreciation and
amortization.......... 2,575,564 6,329,770 5,847,629 5,986,460 8,131,244 2,839,488 1,567,020
Interest expense....... 3,802,670 4,819,749 4,667,281 4,771,483 6,307,202 1,411,434 1,705,764
Other expenses......... 1,946,193 617,334 2,543,235 2,996,568 3,132,865 763,398 789,611
----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues over (under)
expenses(12).......... $ 3,349,041 $ (347,739) $ 3,774,040 $ 5,208,553 $ 6,852,900 $ 484,400 $ 2,745,158
=========== =========== =========== =========== =========== =========== ===========
OTHER DATA:
Net cash provided by
operating activities.. 9,368,516 13,928,371 14,882,312 1,885,863 2,093,782
Net cash used in
investing activities.. (7,154,227) (13,895,746) (14,717,583) (1,252,875) (1,156,627)
Net cash provided by
(used in) financing
activities............ (1,354,888) 829,741 1,810,771 (507,506) 48,096
</TABLE>
LESSEE
SELECTED PRO FORMA FINANCIAL DATA (1)(13)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED TWELVE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- ------------------- ------------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue........... $55,330,171 $56,830,028 $14,201,906
Food and beverage
revenue............... 18,191,504 18,335,582 4,732,323
Other revenue.......... 4,363,432 4,499,821 1,163,152
----------- ----------- -----------
Total revenue.......... 77,885,107 79,665,431 20,097,381
Hotel operating
expenses.............. 52,582,000 53,060,887 13,149,844
Depreciation and
amortization.......... 63,000 63,000 15,750
Interest expense....... 31,500 31,500 7,875
Other expenses......... 58,084 44,773 17,981
Participating Lease
expenses(2)........... 24,775,142 25,902,292 6,527,908
----------- ----------- -----------
Revenues over
expenses.............. $ 375,381 $ 562,979 $ 378,023
=========== =========== ===========
</TABLE>
See notes on page 51.
49
<PAGE>
INITIAL HOTELS
SELECTED HISTORICAL OPERATING DATA
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
AGH PREDECESSOR
HOTELS(14)
Occupancy............. 77.5% 74.6% 74.3% 71.1% 72.1% 73.3% 64.2%
ADR................... $54.93 $64.84 $57.09 $62.10 $73.26 $67.01 $81.10
REVPAR................ $63.61 $44.96 $42.42 $44.14 $52.84 $49.10 $52.09
AGH ACQUISITION
HOTELS(15)
Occupancy............. 70.7% 68.6% 71.0% 71.9% 73.1% 70.0% 72.1%
ADR................... $54.93 $64.84 $57.78 $62.32 $68.30 $65.73 $71.77
REVPAR................ $38.86 $44.50 $41.01 $44.79 $49.93 $45.99 $51.75
INITIAL HOTELS
Occupancy............. 71.3% 69.1% 71.6% 71.7% 72.9% 70.6% 70.7%
ADR................... $57.19 $64.44 $57.65 $62.28 $69.19 $65.97 $73.33
REVPAR................ $40.75 $44.53 $41.26 $44.67 $50.46 $46.56 $51.81
</TABLE>
AGH PREDECESSOR HOTELS
SELECTED HISTORICAL COMBINED FINANCIAL DATA(16)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ------------------------
1993 1994 1995 1995 1996
-------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue........... $ 17,941 $3,431,654 $ 9,020,479 $1,625,360 $2,624,614
Food and beverage reve-
nue................... 6,158 552,697 1,293,238 215,333 509,331
Other revenue.......... 1,448 223,211 568,415 102,367 173,450
-------- ---------- ----------- ---------- ----------
Total revenue.......... 25,547 4,207,562 10,882,132 1,943,060 3,307,395
Hotel operating ex-
penses................ 8,741 3,173,721 7,565,824 1,314,194 2,253,656
Depreciation and amor-
tization.............. 46,982 364,513 2,480,054 1,041,418 304,936
Interest expense....... 430,535 1,572,244 255,552 457,146
Other expenses......... 831 525,287 754,193 123,827 163,058
-------- ---------- ----------- ---------- ----------
Net income (loss)...... $(31,007) $ (286,494) $(1,490,183) $ (791,931) $ 128,599
======== ========== =========== ========== ==========
</TABLE>
AGH ACQUISITION HOTELS
SELECTED HISTORICAL COMBINED FINANCIAL DATA(15)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------ -----------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue........... $27,963,802 $30,376,150 $36,811,936 $40,109,552 $44,736,447 $10,232,424 $11,561,801
Food and beverage
revenue............... 13,526,143 13,597,748 15,446,922 15,826,164 16,424,522 4,076,018 4,173,807
Other revenue.......... 2,434,535 2,528,364 4,678,562 3,169,064 3,579,485 869,608 989,702
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue.......... 43,924,480 46,502,262 56,937,420 59,104,780 64,740,454 15,178,050 16,725,310
Hotel operating
expenses.............. 32,251,012 35,083,148 40,122,041 41,175,557 43,632,551 10,308,196 10,962,496
Depreciation and
amortization.......... 2,575,564 6,329,770 5,800,647 5,621,947 5,651,190 1,798,070 1,262,084
Interest expense....... 3,802,670 4,819,749 4,667,281 4,340,948 4,734,958 1,155,882 1,248,618
Other expenses......... 1,946,193 617,334 2,542,404 2,471,281 2,378,672 639,571 635,553
----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues over (under)
expenses.............. $ 3,349,041 $ (347,739) $ 3,805,047 $ 5,495,047 $ 8,343,083 $ 1,276,331 $ 2,616,559
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes on following page.
50
<PAGE>
SELECTED FINANCIAL INFORMATION FOOTNOTES
(1) The estimated and pro forma information do not purport to represent what
the Company's financial position or the Company's or the Initial Hotels'
and Lessee's results of operations would actually have been if the
consummation of the Formation Transactions and the Offering had, in fact,
occurred on such dates, or to project the Company's financial position or
the Company's and Initial Hotels' and Lessee's results of operations at
any future date or for any future period.
(2) Represents 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
historical revenues of the Initial Hotels. The departmental revenue
thresholds in certain of the Participating Lease formulas adjust in the
future beginning January 1, 1997. See "The Initial Hotels--The
Participating Leases."
(3) Represents salaries and wages, professional fees, directors' and
officers' insurance, allocated rent, supplies and other and other
operating expenses to be paid by the Company. These amounts are based on
historical general and administrative expenses as well as probable 1996
expenses.
(4) Represents amortization of unearned officers' compensation, represented
by an aggregate of 50,000 shares of restricted Common Stock issuable to
executive officers, which shares vest 10.0% at the date of grant (5,000
shares at $20.00 per share).
(5) Calculated as 25.8% of estimated revenues less expenses before minority
interest for all periods.
(6) Represents Funds From Operations of the Company. The items added back to
estimated revenues less expenses applicable to common stockholders have
been adjusted by the Company's ownership percentage in the Operating
Partnership of 74.2% for all periods presented. The following table
computes Funds From Operations under the newly adopted 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 newly
adopted NAREIT definition, Funds From Operations as presented may not be
comparable to other similarly titled measures used by other REITs. Funds
From Operations does not reflect cash expenditures for capital
improvements or principal amortization of indebtedness on the Initial
Hotels.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
TWELVE THREE
PRO FORMA MONTHS MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995(1) MARCH 31, 1996(1) MARCH 31, 1996(1)
-------------------- ----------------- -----------------
<S> <C> <C> <C>
Estimated revenues less
expenses applicable to
common stockholders ... $ 8,336,236 $ 9,500,542 $2,551,345
Depreciation............ 5,493,942 4,861,537 1,102,043
----------- ----------- ----------
Funds From Operations... $13,830,178 $14,362,079 $3,653,388
=========== =========== ==========
Weighted average number
of shares of Common
Stock outstanding...... 7,205,518 7,205,518 7,205,518
=========== =========== ==========
</TABLE>
51
<PAGE>
(7) Cash Available for Distribution represents Funds From Operations of the
Company plus the Company's ownership percentage in the Operating
Partnership of 74.2% 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 74.2% share of
the sum of 4.0% of total revenue for each of the Initial 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 Participating Leases and the estimated cash used
to pay interest expense related to (i) the $24.6 million cost of planned
renovations and refurbishments at the seven Initial Hotels the Company
plans to convert to leading franchise brands in order to reposition such
hotels for future revenue growth and (ii) the $2.6 million of planned
improvements that the Company expects to make at five other Initial
Hotels. Estimated Cash Available for Distribution does not include the
effects of any revenue increases expected to result from capital
expenditures of the Initial Hotels.
(8) Represents estimated revenues less expenses 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 cash used in investing activities 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 Initial 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 interest of the Company. See "The Initial
Hotels--The Participating Leases."
(10) Represents estimated initial distributions to be paid based on the
initial annual distribution rate of $1.60 per share and an aggregate of
9,716,624 shares of Common Stock and OP Units outstanding plus the debt
service on the DFW South Loan and the Secaucus Loans (as defined in "The
Initial Hotels--Mortgage Indebtedness Remaining Following the Offering").
(11) The Initial Hotels' financial data is derived by adding selected
financial data of the AGH Predecessor Hotels and the AGH Acquisition
Hotels. Such financial data exclude information regarding the AGH
Predecessor Hotels for periods prior to their acquisition by AGHI. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(12) Income taxes for the AGH Acquisition Hotels have not been deducted in
calculating revenue over (under) expenses.
(13) Pro forma amounts as if the Operating Partnership recorded depreciation
and amortization and paid real and personal property taxes and property
insurance contemplated by the Participating Leases, and the Formation
Transactions and the Offering occurred on January 1, 1995.
(14) Includes information from each AGH Predecessor Hotel for all periods
presented except that no information was available for the Holiday Inn
Dallas DFW Airport West, the Hampton Inn Richmond Airport, and the Hotel
Maison de Ville for the periods ended December 31, 1991 and 1992.
Information with respect to the periods before their respective dates of
acquisitions by affiliates of AGHI is based on information furnished to
management by the prior owners of the hotels.
(15) Includes information from each AGH Acquisition Hotel for all periods
presented except that no information was available for the Days Inn Ocean
City for the periods ended December 31, 1991 and 1992 and for the Holiday
Inn Mission Valley for the period ended December 31 1991. Information
with respect to the AGH Acquisition Hotels was obtained from the owners
of the AGH Acquisition Hotels and includes information for all periods.
(16) Information is for the periods owned by AGHI.
52
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Upon consummation of the Offering and the Formation Transactions, the
Company will own an approximate 74.2% interest in the Initial Hotels through
its interest in the Operating Partnership. In order for the Company to qualify
as a REIT, neither the Company nor the Operating Partnership can operate
hotels; therefore, the Operating Partnership will lease the Initial Hotels to
the Lessee. The principal source of revenue for the Operating Partnership and
the Company will be lease payments paid by the Lessee under the Participating
Leases. Participating Rent will be based upon the Initial Hotels' gross
revenues. The Lessee's ability to make payments to the Company under the
Participating Leases will be dependent on the Lessee's and AGHI's ability to
generate cash flow from the operations of the Initial Hotels.
The accompanying discussion and analysis of financial condition and results
of operations is based on the combined historical financial statements of the
AGH Predecessor Hotels and the AGH Acquisition Hotels that are included
elsewhere in this Prospectus. The AGH Predecessor Hotels' financial statements
include the results of operations of the following hotels since their dates of
acquisition by AGHI: Courtyard by Marriott-Meadowlands (December 1993), Hotel
Maison de Ville (August 1994), Hampton Inn Richmond Airport (December 1994)
and Holiday Inn Dallas DFW Airport West (June 1995). The AGH Acquisition
Hotels' financial statements include the results of operations of the
following hotels for all periods presented: Holiday Inn Dallas DFW Airport
South, Hilton Hotel-Toledo, Holiday Inn New Orleans International Airport,
Holiday Inn Park Center Plaza, Holiday Inn Select-Madison, Holiday Inn Mission
Valley, Le Baron Airport Hotel, Days Inn Ocean City and Fred Harvey
Albuquerque Airport Hotel. The four AGH Predecessor Hotels were combined into
one set of financial statements since they will be acquired by the Company and
are presently controlled by shareholders of AGHI. The nine AGH Acquisition
Hotels were combined into one set of financial statements since they will be
acquired by the Company primarily from parties unaffiliated with AGHI. The
Holiday Inn Dallas DFW Airport South Hotel is included in the AGH Acquisition
Hotels since AGHI owns only a minority non-controlling interest in such hotel.
The Hilton Hotel-Toledo is included in the AGH Acquisition Hotels since AGHI
purchased the hotel subsequent to March 31, 1996.
Estimated Revenues Less Expenses of the Company
On an estimated basis for the twelve months ended March 31, 1996, the
Company would have had $25,902,292 in revenue from the Participating Leases,
calculated by applying the rent provisions of the Participating Leases to the
estimated revenues of the Initial Hotels, and $31,500 in interest income from
the FF&E Note issued by the Lessee. Pro forma expenses would have been
$16,433,250. Depreciation expense would have been $6,551,936, which represents
depreciation of the AGH Predecessor Hotels' historical carryover cost basis
plus depreciation of the AGH Acquisition Hotels' new cost basis. General and
administrative expenses would have been $1,130,000 representing salaries and
wages of $561,000, professional fees of $125,000, directors' and officers'
insurance expense of $90,000 and other expenses of $354,000. Interest expense
would have been $1,633,962 on three notes totalling approximately $19.3
million related to the Holiday Inn Dallas DFW Airport South and the Courtyard
by Marriott-Meadowlands. The notes mature between December 2000 and February
2001 and bear interest at fixed rates ranging from 7.50% to 8.75%.
53
<PAGE>
RESULTS OF OPERATIONS OF THE AGH PREDECESSOR HOTELS
The following table sets forth certain combined historical financial
information for the AGH Predecessor Hotels as a percentage of combined AGH
Predecessor Hotels' revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------- ---------------------
1994 1995 1995 1996
------ ------ --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA:
Room revenue.............. 81.6% 82.9% 83.6% 79.4%
Food and beverage reve-
nue...................... 13.1% 11.9% 11.1% 15.4%
Other revenue............. 5.3% 5.2% 5.3% 5.2%
------ ------ --------- ---------
Total revenue........... 100.0% 100.0% 100.0% 100.0%
Hotel operating expenses.. 75.4% 69.6% 67.6% 68.1%
Depreciation and amortiza-
tion..................... 8.7% 22.8% 53.6% 9.2%
Interest expense.......... 10.2% 14.4% 13.2% 13.8%
Other corporate expenses.. 12.5% 6.9% 6.4% 5.0%
------ ------ --------- ---------
Net loss................ (6.8%) (13.7%) (40.8%) 3.9%
====== ====== ========= =========
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------- ---------------------
1994 1995 1995 1996
------ ------ --------- ---------
<S> <C> <C> <C> <C>
KEY FACTORS:
Occupancy................. 71.1% 72.1% 73.3% 64.2%
ADR....................... $62.10 $73.26 $ 67.01 $ 81.10
REVPAR.................... $44.14 $52.84 $ 49.10 $ 52.09
</TABLE>
As previously described, the year-to-year comparisons of the results of
operations of the AGH Predecessor Hotels are significantly impacted by the
hotel acquisitions. Net losses incurred for each of the three years ended
December 31, 1993, 1994 and 1995 were ($31,007), ($286,494) and ($1,490,183),
respectively. The AGH Predecessor Hotels generated net cash from operating
activities of $147,616, $217,282 and $790,304 for each of the three years
ended December 31, 1993, 1994 and 1995, respectively.
Comparison of the three months ended March 31, 1996 to the three months ended
March 31, 1995
Room revenue increased to $2,624,614 from $1,625,360, an increase of
$999,254 or 61.5%, principally resulting from: (i) an increase of $950,688 in
revenue due to the acquisition of the Holiday Inn Dallas DFW Airport West in
June 1995, (ii) an increase in the Courtyard by Marriott-Meadowlands' room
revenues of $74,391 due to an increase in ADR to $88.32 from $80.79, and (iii)
a decrease in the Hotel Maison de Ville's room revenues of $25,694 because of
a decrease in occupancy of 7.4%, which was partially offset by ADR improvement
of 3.4% or $8.14 to $249.86.
Food and beverage revenue increased to $509,331 from $215,333, an increase
of $293,998 or 136.5%. The increase is due primarily to the acquisition of the
Holiday Inn Dallas DFW Airport West, which produced food and beverage revenues
in the first quarter of 1996 of $284,825. Increased occupancy at the Courtyard
by Marriott-Meadowlands accounted for the remainder of the increase in food
and beverage revenues.
Other revenue, which includes telephone revenues, interest income and
miscellaneous income, increased to $173,450 from $102,367, an increase of
$71,083 or 69.4%. Of the increase, $67,188 was due to the acquisition of the
Holiday Inn Dallas DFW Airport West discussed above.
Hotel operating expenses increased to $2,253,656 from $1,314,194, an
increase of $939,462 or 71.5%. The increase was due, in part, to the
acquisition of the Holiday Inn Dallas DFW Airport West, which had expenses of
$955,182 in 1996. Hotel operating expenses as a percentage of total revenue
increased from 67.6% in 1995 to 68.1% in 1996. The increase is primarily
attributable to the acquisition of the Holiday Inn Dallas DFW Airport West,
which incurred operating expenses as a percentage of total revenue for 1996 of
73.3%. This percentage is higher than the other hotels due to certain
transitional expenses incurred by the hotel.
54
<PAGE>
Depreciation and amortization decreased to $304,936 from $1,041,418, a
decrease of $736,482 or 70.7%. The decrease is related to the accelerated
depreciation on FF&E that was replaced during the recent renovations at two of
the AGH Predecessor Hotels.
Interest and other expenses increased to $620,204 from $379,379, an increase
of $240,825 or 63.5%. The acquisition of the Holiday Inn Dallas DFW Airport
West in June 1995 and the interest expense related to the mortgage
indebtedness incurred in connection with the acquisition accounted for nearly
all of the increase.
Comparison of year ended December 31, 1995 to year ended December 31, 1994
Room revenue increased to $9,020,479 from $3,431,654, an increase of
$5,588,825 or 162.9%, principally resulting from: (i) an increase of
approximately $2,056,000 in revenue due to the acquisition of the Holiday Inn
Dallas DFW West in June 1995; approximately $1,850,000 in revenue from the
Hampton Inn Richmond Airport since its acquisition in late December 1994; and
approximately $955,000 in revenues from the Hotel Maison de Ville since its
acquisition in August 1994; (ii) an increase in the Courtyard by Marriott-
Meadowlands' ADR to $81.77 from $73.37; and (iii) an improvement in the
Courtyard by Marriott-Meadowlands' occupancy percentage to 77.8% from 70.1%.
The increases in both ADR and occupancy were due primarily to the
repositioning strategy implemented when the Courtyard by Marriott-Meadowlands
was converted from a Days Hotel in 1994.
Food and beverage revenue increased to $1,293,238 from $552,697, an increase
of $740,541, or 134.0% due primarily to activity at two of the three
acquisitions described above. Other revenue increased to $568,415 from
$223,211, or 154.7%, due to the activity at the three acquisitions described
above.
Hotel operating expenses increased to $7,565,824 from $3,173,721, an
increase of $4,392,103 or 138.4%. The acquisition of the Hotel Maison de Ville
(acquired August 1994), the Hampton Inn Richmond Airport (acquired December
1994) and the Holiday Inn Dallas DFW Airport West (acquired June 1995)
accounted for $968,511, $1,066,733 and $1,932,980 of the expense increase,
respectively. The remainder of the increase is related to the conversion of
the Courtyard by Marriott-Meadowlands from a Days Hotel. The hotel experienced
an increase in revenues of approximately $750,000 following the franchise
repositioning and consequently had an increase in operating expenses. Hotel
operating expenses as a percentage of total revenue decreased from 75.4% in
1994 to 69.5% in 1995. The decrease is primarily attributable to the inclusion
of only the Courtyard by Marriott-Meadowlands and the Hotel Maison de Ville in
the 1994 operating results, which at the time were being transitioned to the
AGH Predecessor Hotels' management. Consequently, hotel operating expenses as
a percentage of total revenue were higher for these hotels in 1994 than in
1995.
Depreciation and amortization increased to $2,480,054 from $364,513, an
increase of $2,115,541 due in part to the following: (i) depreciation on the
assets of the three acquisitions described above, (ii) depreciation on
approximately $1,300,000 and approximately $2,200,000 of FF&E renovations and
additions during 1994 and 1995, respectively, and (iii) accelerated
depreciation on the FF&E replaced during the renovations.
Interest and other expenses increased to $2,326,437 from $955,822, an
increase of $1,370,615. The acquisitions in 1995 and 1994 increased debt by
approximately $8,300,000 and approximately $6,100,000, respectively. Related
interest expense increased by $1,141,709 due to the additional indebtedness
outstanding.
Comparison of year ended December 31, 1994 to year ended December 31, 1993
Room revenue increased to $3,431,654 from $17,941, an increase of
$3,413,713, principally resulting from (i) an increase of approximately
$3,072,000 in revenue from the Courtyard by Marriott-Meadowlands following its
acquisition on December 30, 1993 and (ii) approximately $342,000 in revenue
attributable to the acquisition of the Hotel Maison de Ville in August 1994.
The only room revenue reported for 1993 for the AGH Predecessor Hotels was
$17,941 from the acquisition of the Courtyard by Marriott-Meadowlands on
December 30, 1993.
Food and beverage revenue increased to $552,697 from $6,158, a change of
$546,539, due primarily to the late 1993 acquisition of the Courtyard by
Marriott-Meadowlands compared to a full year's food and beverage revenue in
1994 and the acquisition of the Hotel Maison de Ville in August 1994. Other
revenue increased to $223,211 from $1,448, an increase of $221,763, due
primarily to the acquisitions described above.
55
<PAGE>
Hotel operating expenses increased to $3,173,721 from $8,741, an increase of
$3,164,980. The expenses from 1993 include only two days of operations for the
Courtyard by Marriott-Meadowlands. Hotel operating expenses as a percentage of
total revenue were 75.4% in 1994.
Depreciation and amortization, interest and other expenses increased to
$1,320,335 from $47,813, representing an increase of $1,272,522, attributable
to depreciation of assets acquired in the hotel acquisitions described above.
RESULTS OF OPERATIONS OF AGH ACQUISITION HOTELS
The following table sets forth certain combined historical financial
information for the AGH Acquisition Hotels as a percentage of combined AGH
Acquisition Hotels' revenues for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------------
1993 1994 1995 1995 1996
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Room revenue................ 64.7% 67.9% 69.1% 67.4% 69.1%
Food and beverage revenue... 27.1% 26.8% 25.4% 26.9% 25.0%
Other revenue............... 8.2% 5.3% 5.5% 5.7% 5.9%
------- ------- ------- --------- ---------
Total revenue............. 100.0% 100.0% 100.0% 100.0% 100.0%
Hotel operating expenses.... 70.5% 69.7% 67.4% 67.9% 65.5%
Depreciation and amortiza-
tion....................... 10.2% 9.5% 8.7% 11.8% 7.5%
Interest expense............ 8.2% 7.3% 7.3% 7.6% 7.5%
Other expenses.............. 4.4% 4.2% 3.7% 4.3% 3.9%
------- ------- ------- --------- ---------
Revenues over expenses...... 6.7% 9.3% 12.9% 8.4% 15.6%
======= ======= ======= ========= =========
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------------
1993 1994 1995 1995 1996
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
KEY FACTORS
Occupancy .................. 71.0% 71.9% 73.1% 70.0% 72.1%
ADR......................... $ 57.78 $ 62.32 $ 68.30 $65.73 $71.77
REVPAR...................... $ 41.01 $ 44.79 $ 49.93 $45.99 $51.75
</TABLE>
No assurance can be given that the trends reflected in this data will
continue or that occupancy, ADR and REVPAR will not decrease due to changes in
national or local economic or hospitality industry conditions.
Comparison of the three months ended March 31, 1996 to the three months ended
March 31, 1995
Room revenue improved to $11,561,801 from $10,232,424, an increase of
$1,329,377 or 13.0%. The change was attributable to the overall occupancy
growth to 72.1% from 70.0% and the overall improvement of ADR to $71.77 from
$65.73. Additionally, the two Initial Hotels located in San Jose, California,
experienced REVPAR growth of 37.2% and 58.4%, respectively, primarily due to
improved hotel industry fundamentals in San Jose.
Food and beverage revenue increased to $4,173,807 from $4,076,018, an
increase of $97,789 or 2.4%, primarily because of the overall occupancy
percentage growth of 2.7%. Other revenue, which includes telephone revenue,
increased to $989,702 from $869,608, an increase of $120,094 or 13.8%, also
due to the overall increase in occupancy.
Hotel operating expenses increased to $10,962,496 from $10,308,196, an
increase of $654,300 or 6.3%. The majority of the increase, $408,465, related
to the Holiday Inn Park Center Plaza and the Le Baron Airport Hotel due to
higher labor and variable costs at such hotels related to the rise in
occupancy in the first quarter of 1996. Hotel operating expenses as a
percentage of total revenue decreased from 67.9% in 1995 to 65.5% in 1996. The
56
<PAGE>
decrease is primarily attributable to the overall increase in ADR at the AGH
Acquisition Hotels. Revenue increases resulting from rate improvements
generally do not result in increases in certain variable costs; consequently,
operating expenses are lower when expressed as a percentage of revenue.
Depreciation and amortization decreased to $1,222,556 from $1,729,152, a
decrease of $506,596 primarily due to accelerated depreciation in 1995 for
FF&E replaced during the renovations at the Holiday Inn Dallas DFW Airport
South.
Interest and other expenses increased to $1,511,214 from $1,397,421, an
increase of $113,793 or 8.1% primarily attributable to the refinancing of the
Holiday Inn Dallas DFW Airport South. As part of the refinancing, the owners
of the Holiday Inn Dallas DFW Airport South received distributions of
approximately $7,740,000.
Comparison of year ended December 31, 1995 to year ended December 31, 1994
Room revenue increased to $44,736,447 from $40,109,552, an increase of
$4,626,895 or 11.5%, principally as a result of a 9.6% increase in overall ADR
to $68.30 from $62.32 and an improvement in overall occupancy to 73.1% from
71.9%. The increases in ADR and occupancy are primarily attributable to the
completion of renovations at the Initial Hotels in 1994 and 1995.
Additionally, the two Initial Hotels located in San Jose, California,
experienced REVPAR growth of 23.5% and 20.3%, respectively, primarily due to
improved hotel industry fundamentals in San Jose.
Food and beverage revenue improved to $16,424,522 from $15,826,164, an
increase of $598,358 or 3.8%, and other revenue increased to $3,579,485 from
$3,169,064, an increase of $410,421 or 13.0% principally as a result of the
increase in overall occupancy.
Hotel operating expenses increased to $43,632,551 from $41,175,557, an
increase of $2,456,994 or 6.0%; however, as a percentage of total revenue,
expenses decreased to 67.4% from 69.7%. Advertising costs and utilities
decreased as a percentage of total revenues and maintenance expense decreased
as a percentage of total revenues due to the completion of renovations at the
hotels.
Interest and other expenses increased to $5,632,372 from $5,161,116, an
increase of $471,256 or 9.1%, primarily attributable to increased variable
interest rates of certain debt during 1995.
Comparison of year ended December 31, 1994 to year ended December 31, 1993
Room revenue increased to $40,109,552 from $36,811,936, an increase of
$3,297,616 or 9.0%, principally as a result of a 2.7% overall improvement in
ADR to $62.32 from $57.78 and a .09% increase in overall occupancy. The
increases in ADR and occupancy were primarily due to improving market
conditions in Irving, Texas, Toledo, Ohio, Albuquerque, New Mexico, and San
Jose, California.
Food and beverage revenue increased to $15,826,164 from $15,446,922, an
increase of $379,242 or 2.5%. Other revenue decreased to $3,169,064 from
$4,678,562, a decline of $1,509,498 or 32.3%. In 1993, other revenue included
$1,814,609 of proceeds from a settlement payment relating to a default on the
lease of the Holiday Inn New Orleans International Airport Hotel in 1992.
Excluding this item, other revenue increased $305,111 or 6.5% attributable to
the overall increased occupancy percentage.
Hotel operating expenses rose to $41,175,557 from $40,122,041, an increase
of $1,053,516 or 2.6%. The increase was consistent with the increase in
overall occupancy.
Interest and other expenses decreased to $5,161,116 from $5,576,836, a
decrease of $415,720 or 7.5%, primarily attributable to a decrease in interest
expense due to a lower weighted average balance of indebtedness in 1994. In
1994, the AGH Acquisition Hotels made net principal repayments on indebtedness
of $2,459,985.
57
<PAGE>
RESULTS OF OPERATIONS OF THE INITIAL HOTELS
The following table sets forth certain combined historical financial
information for the Initial Hotels as a percentage of the Initial Hotels'
total revenue for the periods indicated. The changes in room revenue, food and
beverage revenue, hotel operating expenses, and revenues over expenses for the
Initial Hotels resulted primarily from changes at the AGH Predecessor Hotels
and the AGH Acquisition Hotels, as previously discussed.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------------
1993 1994 1995 1995 1996
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA
Room revenue............ 64.7% 68.8% 71.1% 69.3% 70.8%
Food and beverage reve-
nue.................... 27.1 25.9 23.4 25.1 23.4
Other revenue........... 8.2 5.3 5.5 5.6 5.8
------- ------- ------- --------- ---------
Total revenue........ 100.0% 100.0% 100.0% 100.0% 100.0%
Hotel operating ex-
penses................. 70.5 70.0 67.7 67.9 66.0
Depreciation............ 10.3 9.5 10.8 16.6 7.8
Interest expense........ 8.2 7.5 8.3 8.2 8.5
Other expenses.......... 4.4 4.8 4.1 4.5 4.0
------- ------- ------- --------- ---------
Revenues over expenses.. 6.6% 8.2% 9.1% 2.8% 13.7%
======= ======= ======= ========= =========
KEY FACTORS
Occupancy............... 71.6% 71.7% 72.9% 70.6% 70.7%
ADR..................... $57.65 $62.28 $69.19 $65.97 $73.33
REVPAR.................. $41.26 $44.67 $50.46 $46.56 $51.81
</TABLE>
Comparison of the three months ended March 31, 1996 to the three months ended
March 31, 1995
Room revenue increased to $14,186,415 from $11,857,784, an increase of
$2,328,631 or 19.6%. Food and beverage revenues rose to $4,683,138 from
$4,291,351, an increase of $391,787 or 9.1%. Hotel operating expenses
increased to $13,216,152 from $11,622,390, an increase of $1,593,762 or 13.7%.
Accordingly, revenues over expenses increased to $2,754,158 from $484,400, an
increase of $2,269,758.
Comparison of year ended December 31, 1995 to year ended December 31, 1994
Room revenue increased to $53,756,926 from $43,541,206, an increase of
$10,215,720 or 23.5%. Food and beverage revenue increased to $17,717,760 from
$16,378,861, an increase of $1,338,899 or 8.2%. Hotel operating expenses
increased to $51,198,374 from $44,349,278, an increase of $6,849,096 or 15.4%.
As a result, revenues over expenses increased by $1,644,347 or 31.6%.
Comparison of year ended December 31, 1994 to year ended December 31, 1993
Room revenue increased to $43,541,206 from $36,829,877, an increase of
$6,711,329 or 18.2%. Food and beverage revenue increased to $16,378,861 from
$15,453,080, an increase of $925,781 or 6.0%. Hotel operating expenses
increased to $44,349,278 from $40,130,781, an increase of $4,218,497 or 10.5%.
As a result, revenues over expenses increased by $1,434,513 or 38.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to stockholders, will be its share of the Operating
Partnership's cash flow from the Participating Leases. The Lessee's
obligations under the Participating Leases are initially secured by the pledge
of 275,000 OP Units. 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, will be dependent on the ability of the
Lessee and AGHI to generate sufficient cash flow from the Initial Hotels.
Upon consummation of the Offering and application of the net proceeds, the
Company will have approximately $19.4 million of outstanding indebtedness. In
addition, the Company intends to acquire additional hotels and may incur
additional indebtedness to make such acquisitions or to meet distribution
requirements
58
<PAGE>
imposed on it under the Code to the extent that working capital and cash flow
from the Company's investments are insufficient to make such distributions.
The Company intends to limit consolidated indebtedness (measured at the time
the debt is incurred) to no more than 45.0% of the Company's investment in
hotels.
The Company has obtained a commitment for the $100 million Line of Credit,
which the Company will use to fund the acquisition of additional hotels, make
renovations and capital improvements to hotels and for working capital
requirements. The Line of Credit will be collateralized by, among other
things, first mortgage liens on all of the Initial Hotels (other than the
Holiday Inn Dallas DFW Airport South and Courtyard by Marriott-Meadowlands)
and, in certain circumstances, a mortgage lien on any subsequently acquired
hotels. While the Line of Credit permits borrowings up to $100 million, the
Company's aggregate advances under the Line of Credit are limited to the
lesser of (i) 40% of the aggregate appraised value of the Initial Hotels and
any other hotels securing the Line of Credit after giving effect to the
Company's use of proceeds from any indebtedness towards hotel acquisitions and
certain renovations and capital improvements, (ii) 40% of the aggregate
purchase price of the Initial Hotels and any other hotels securing the Line of
Credit after giving effect to the Company's use of proceeds from any such
indebtedness for hotel acquisitions and certain renovations and capital
improvements, and (iii) the combined trailing twelve months EBITDA (generally
defined as net income of the Company before interest expense, taxes,
depreciation and amortization to the extent each reduces net income) generated
by the Initial Hotels and any other hotels securing the Line of Credit,
multiplied by 5.0. Upon the closing of the Offering, the Company expects to
have approximately $60 million of borrowing capacity available under the Line
of Credit. The Company expects that its borrowing capacity under the Line of
Credit will increase to approximately $100 million, assuming all additional
borrowings are used to fund capital improvements to the Initial Hotels or the
acquisition of additional hotels. Outside of the Line of Credit, the Company
and its subsidiaries may not incur any additional debt or recourse
obligations. The Line of Credit will have an initial term of three years.
Borrowings under the Line of Credit will bear interest at 30-day, 60-day or
90-day LIBOR (the "London Interbank Offered Rate"), at the option of the
Company, plus 1.85% per annum, payable monthly in arrears. Economic conditions
could result in higher interest rates, which could increase debt service
requirements on borrowings under the Line of Credit and which could reduce the
amount of Cash Available for Distribution. In addition, the Line of Credit
provides 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 Line of Credit lenders must approve the lessee and
the franchise brand of any hotel securing the Line of Credit in the future.
See "The Initial Hotels--Line of Credit."
The Company will invest in additional hotel properties only as suitable
opportunities arise, and the Company will not undertake investments unless
adequate sources of financing are available. It is expected that future
investments in hotel properties will be financed, in whole or in part, with
the balance of the proceeds from the Offering, if any, proceeds from
additional issuances of Common Stock, borrowings under the Line of Credit or
from the issuance of other debt or equity securities.
Approximately $18.3 million was spent on capital improvements at the Initial
Hotels during the period January 1, 1993 to March 31, 1996, as described in
the following table. The majority of the improvements are considered by the
Company to be revenue producing, as routine maintenance items are recorded as
hotel operating expenses.
<TABLE>
<CAPTION>
HOTEL DESCRIPTION COST
----- ----------- ----
<S> <C> <C>
AGH PREDECESSOR HOTELS
Holiday Inn Dallas DFW Extensive upgrades to guest rooms, public $ 4,582,000
Airport West........... areas, food and beverage outlets, and
meeting room facilities.
Courtyard by Marriott- Expenditures to convert the hotel from a 1,500,000
Meadowlands............ Days Hotel; additional guest room upgrades;
reconstruction of the restaurant and lounge
areas.
</TABLE>
Continued on next page.
59
<PAGE>
<TABLE>
<CAPTION>
HOTEL DESCRIPTION COST
----- ----------- ----
<S> <C> <C>
Hampton Inn Richmond Guest room soft goods and carpet upgrades; $ 443,000
Airport................ public area carpeting; and a new front
office system.
Hotel Maison de Ville... Extensive renovation to the cottages and 849,000
guest rooms, including refurbishment of
antique furniture; improvements to the
lobby area and garden court areas.
AGH ACQUISITION HOTELS
Hilton Hotel-Toledo..... Cosmetic upgrades for guest rooms; carpet 1,069,000
for corridors; renovation of meeting
facilities, lobby and the restaurant.
Holiday Inn Dallas DFW
Airport South.......... Holidome cosmetic upgrades; guest room and 2,776,000
corridor carpets; significant renovations
to meeting rooms, conference and banquet
facilities; guest room and guest bathroom
improvements.
Holiday Inn New Orleans
International Airport.. Renovation of the building exterior, public 3,236,000
areas, meeting rooms, restaurant, and the
Holidome area.
Days Inn Ocean City..... Total guest room cosmetic upgrades and 529,000
public area renovations.
Holiday Inn Select- Improvements to convert to the Holiday Inn 473,000
Madison................ Select brand, including upgraded amenities
and cosmetic packages for the rooms.
Holiday Inn Park Center 304,000
Plaza.................. Renovations to the lobby and meeting areas.
Fred Harvey Albuquerque
Airport Hotel.......... Renovation of the restaurant, lobby, front 664,000
desk, gift shop and meeting rooms;
installation of a fire sprinkler system.
Le Baron Airport Hotel.. Renovations to two floors of guest rooms 993,000
and bathrooms; ballroom carpet; and
miscellaneous equipment.
Holiday Inn Mission Improvements to the public areas including 926,000
Valley................. the lobby, front desk, restaurant, lounge
and meeting rooms; upgrade of 100 guest
rooms.
-----------
Total...................................... $18,344,000
===========
</TABLE>
The Participating Leases require the Company to establish annual minimum
reserves equal to 4.0% of total revenue for each of the Initial Hotels (which,
for the twelve months ended March 31, 1996, represented approximately 5.6% of
room revenue), which reserves 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 Initial Hotels. The Company and the
Lessee will agree on the use of funds in this reserve, and the Company will
have the right
60
<PAGE>
to approve the Lessee's long-term capital expenditure budgets. Based on the
experience of AGHI in operating the AGHI Predecessor Hotels, the Company
believes that such amount will be sufficient to fund required expenditures for
the term of the Participating Leases. The Company anticipates entering into a
similar arrangement with respect to future hotel properties in which it
invests. While the Company expects its reserve to be adequate to fund
recurring capital needs (including periodic renovations), the Company may use
Cash Available for Distribution in excess of distributions paid (subject to
federal income tax restrictions on the Company's ability to retain earnings)
or funds drawn under the Line of Credit or other borrowings to fund additional
capital improvements, as necessary, including major renovations at the
Company's hotels.
Net cash provided by operating activities for the year ended December 31,
1995 was $790,304, an increase from $217,282 for the year ended December 31,
1994. The increase is primarily due to an increase in operating income of
approximately $1.0 million which was partially offset by a net decrease in
cash from changes in working capital items.
Net cash used in investing activities for the year ended December 31, 1995
was $10,364,977, an increase from $8,992,154 for the year ended December 31,
1994. The increase was mainly due to renovations and hotel acquisitions as
described above.
Net cash used in financing activities for the year ended December 31, 1995
was $9,817,215, an increase from $8,646,822 for the year ended December 31,
1994. The increase was mainly due to borrowings associated with the previously
described acquisitions, which increase was partially offset by lower capital
contributions received in 1995.
FRANCHISE CONVERSIONS AND OTHER CAPITAL IMPROVEMENTS
The Company expects to spend up to approximately $24.6 million on additional
capital improvements during the twelve months following the completion of the
Offering in connection with the planned renovation and conversion of the
Holiday Inn Select-Madison, the Holiday Inn Park Center Plaza, the Fred Harvey
Albuquerque Airport Hotel, the Le Baron Airport Hotel, the Days Inn Ocean
City, the Holiday Inn Mission Valley, and the Holiday Inn New Orleans
International Airport to new franchise brands. In certain circumstances, such
renovations and improvements are being completed in connection with franchisor
requirements. The following table describes such renovations and improvements.
<TABLE>
<CAPTION>
DESCRIPTION OF
HOTEL RENOVATION/IMPROVEMENT ANTICIPATED COST
----- --------------------------------- ----------------
<S> <C> <C>
Holiday Inn Select- Upgrade guest rooms and public $1,714,000
Madison.................. areas in connection with
conversion to Crowne Plaza brand.
Holiday Inn Park Center Upgrade guest rooms and public 4,667,000
Plaza.................... areas and convert ninth floor to
Club level in connection with
conversion to Crowne Plaza brand.
Fred Harvey Albuquerque Upgrade guest rooms and public 5,017,000
Airport Hotel............ areas and convert meeting space
to additional guest rooms in
connection with conversion to
Wyndham Hotel brand.
Le Baron Airport Hotel.... Upgrade public areas and guest 6,500,000
rooms and convert ninth floor to
concierge floor in connection
with conversion to
DoubleTree Hotel brand.
</TABLE>
Continued on next page.
61
<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION OF
HOTEL RENOVATION/IMPROVEMENT ANTICIPATED COST
----- --------------------------------- ----------------
<S> <C> <C>
Days Inn Ocean City....... Upgrade guest rooms and public 1,905,000
areas in connection with
conversion to Hampton Inn brand.
Holiday Inn Mission Upgrade guest rooms and public 2,505,000
Valley................... areas in connection with
conversion to DoubleTree Hotel
brand.
Holiday Inn New Orleans Upgrade guest rooms and public 2,295,000
International Airport.... areas in connection with
conversion to Holiday Inn Select
brand.
-----------
Total............................ $24,603,000
===========
</TABLE>
In addition, the Company expects to spend up to $2.6 million on additional
capital improvements during the twelve months following the completion of the
Offering in connection with certain renovations and improvements that are
anticipated to be made at certain of the Initial Hotels that will not undergo
a conversion of franchise brands. Such improvements include upgrading the
exterior, guest rooms and Holidome public area at the Holiday Inn Dallas DFW
Airport South, upgrading the guest rooms and public areas at the Hilton Hotel-
Toledo and upgrading the public areas and the restaurant at the Holiday Inn
Dallas DFW Airport West.
There can be no assurance that the Company will be able to complete the
scheduled capital improvements within the twelve months following the
completion of the Offering or that the anticipated costs for the capital
improvements will not exceed the amounts budgeted for that purpose. The
Company intends to use borrowings under the Line of Credit and the FF&E
reserve established under the Participating Leases to fund these expenditures.
See "The Initial Hotels--The Participating Leases."
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 in the face of inflation. Since 1987, industry-wide annual
increases in ADR have failed to keep pace with inflation.
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. Revenue for hotels in
tourist areas generally is substantially greater during the tourist season
than other times of the year. Seasonal variations in revenue at the Initial
Hotels may cause quarterly fluctuations in the Company's lease revenue.
62
<PAGE>
THE HOTEL INDUSTRY
According to Smith Travel Research, the United States lodging industry is
currently experiencing a significant recovery from an extended period of
unprofitable performance in the late 1980's and early 1990's. The Company
believes that this broad industry recovery will contribute to growth in
occupancy, room rates and revenue at the Initial Hotels (and hotels
subsequently acquired by the Company) which, in turn, will result in increases
in the Company's Cash Available for Distribution.
According to Smith Travel Research, the hotel industry experienced an
extended period of unprofitable performance from 1986 to 1991. The industry
downturn resulted from a dramatic increase in the supply of hotel rooms that
significantly outpaced growth in demand. The growth in supply, which resulted
from the development of new hotels, was supported by the availability of
financing from banks, savings and loans, insurance companies, high yield bonds
and various tax incentives. According to Smith Travel Research, and as
demonstrated in the chart below, total room supply in the United States
increased by 32.0%, or approximately 750,000 rooms, from 1980 to 1991. Of this
increase, approximately 567,000 rooms were added between 1985 and 1991. In all
but two of these years (1988 and 1989), increases in supply substantially
exceeded growth in demand. In some years, demand remained flat or even
declined. As a result of the extended supply/demand imbalance, overall hotel
occupancy rates dropped steadily from 70.6% in 1980 to a 20-year low of 60.9%
in 1991. The graph set forth below illustrates the relationship between supply,
demand and occupancy. Increases in demand in excess of increases in supply
necessarily result in higher occupancy.
LOGO
63
<PAGE>
The hotel industry began its recovery in 1992. New hotel construction
declined considerably as lenders who previously supported development focused
on restructurings and foreclosures of existing hotel loans. With minimal new
capital available for hotel construction, the growth in room supply declined
from a high of 4.2% in 1988 to 1.7% in 1995, and has averaged approximately
1.8% since 1992. By contrast, room demand has increased with the improving
economy, and average occupancy and room rates have moved steadily upward.
According to Smith Travel Research, overall hotel occupancy increased from
60.9% in 1991 to 65.5% in 1995. Average room rate growth increased from 1.4%
in 1992 to 4.8% in 1995.
While the hotel industry's recovery has been broad-based, the Company
believes that the greatest continuing growth in occupancy and room rates will
occur in the full-service segment of the industry due to the relative lack of
current new construction of full-service hotels and the lead time required for
new full-service hotels to be developed and opened. Accordingly, the Company
intends to focus its acquisition and selected development activities primarily
on full-service hotels. The Company also believes the hotel industry's
difficulties in the 1980's and changes in tax and banking laws have produced a
more responsible relationship between hotel developers and financing sources.
As a result, the Company believes that future additions to full-service hotel
supply will be more demand-driven, minimizing the overbuilding in key markets
that characterized supply growth in the late 1980's, and increasing the
prospect for continued growth of revenues in the hotel industry for the
foreseeable future.
THE INITIAL HOTELS
The thirteen Initial Hotels are diversified by five different national hotel
affiliations, including Hilton, Courtyard by Marriott, Holiday Inn, Hampton
Inn and Days Inn and include eleven full-service hotels, including one hotel
with a conference center, and two limited-service hotels. In addition, the
Company plans to reposition, within one year after the completion of the
Offering, seven of the Initial Hotels (four Holiday Inns, one Days Inn and two
independent hotels), through an upgrade and conversion into hotels that
operate under the Wyndham Hotel, DoubleTree Hotel, Crowne Plaza, Holiday Inn
Select and Hampton Inn 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 organization. There can be no assurance,
however, that such brand conversions and repositionings will occur as planned
or that, if such brand conversions and repositionings occur, the affected
hotels will experience occupancy and rate increases. The Company believes that
the diversity of its initial portfolio moderates the potential effects on the
Company of regional economic conditions or local market competition affecting
specific hotel franchises, hotel markets, or price segments within the
industry. The hotels are located primarily in major metropolitan areas at or
in close proximity to commercial airports, interstate highways and local
commercial demand generators such as regional shopping centers, convention
centers, and tourist attractions.
The following table sets forth certain information with respect to the
Initial Hotels. The chart summarizes the historical performance of the Initial
Hotels for each of the three years ended December 31, 1995 and for the three
months ended March 31, 1995 and 1996. This information is provided for all
Initial Hotels, including those not owned or managed by AGHI or its affiliates
prior to the Offering, for the full three-year period. The operating
performance of the Holiday Inn Dallas DFW Airport West and the Hampton Inn
Richmond Airport was impacted during 1995 by extensive and ongoing renovations
at those hotels.
64
<PAGE>
<TABLE>
<CAPTION>
RENOVATION AND THREE MONTHS ENDED
CAPITAL YEAR ENDED DECEMBER 31, MARCH 31,
YEAR NUMBER OF IMPROVEMENT ----------------------------------------- ------------------------
INITIAL OPENED/ GUEST EXPENDITURES % % %
HOTEL/LOCATION(1) RENOVATED(2) ROOMS 1/1/93-3/31/96 1993 1994 CHANGE 1995 CHANGE 1995 1996 CHANGE
- ----------------- ------------ --------- -------------- ------- ------- ------ ------- ------ ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AGH PREDECESSOR HOTELS(3)
Holiday Inn
Dallas DFW
Airport West(4)
Bedford,
Texas......... 1974/1995 243 $ 4,582
Occupancy...... 74.2% 70.0% (5.7%) 69.4% (0.8%) 80.1% 62.1% (22.5%)
ADR............ $ 46.37 $ 48.85 5.3% $ 60.08 23.0% $ 48.32 $ 69.58 44.0%
REVPAR......... $ 34.41 $ 34.19 (0.6%) $ 41.70 22.0% $ 38.72 $ 43.23 11.6%
Courtyard by
Marriott-
Meadowlands(4)
Secaucus, New
Jersey......... 1989/1994 165 1,500
Occupancy...... 74.8% 70.1% (6.3%) 77.8% 10.9% 68.2% 68.0% (0.3%)
ADR............ $ 65.63 $ 73.37 11.8% $ 81.77 11.4% $ 80.79 $ 88.32 9.3%
REVPAR......... $ 49.09 $ 51.44 4.8% $ 63.58 23.6% $ 55.08 $ 60.04 9.0%
Hampton Inn
Richmond
Airport(4)
Richmond,
Virginia....... 1987/1995 124 443
Occupancy...... 75.9% 76.3% 0.6% 70.8% (7.2%) 66.6% 62.7% (5.9%)
ADR............ $ 46.71 $ 50.84 8.8% $ 57.69 13.5% $ 55.07 $ 59.13 7.4%
REVPAR......... $ 35.45 $ 38.81 9.5% $ 40.86 5.3% $ 36.69 $ 37.08 1.1%
Hotel Maison de
Ville(4)
New Orleans,
Louisiana...... 1788/1994 23 849
Occupancy...... 64.1% 61.7% (3.8%) 66.5% 7.8% 75.1% 67.7% (9.8%)
ADR............ $188.18 $201.80 7.2% $232.97 15.4% $241.72 $249.86 3.4%
REVPAR......... $120.65 $124.50 3.2% $154.91 24.4% $181.43 $169.16 (6.8%)
AGH ACQUISITION HOTELS(5)
Hilton Hotel-
Toledo(4)
Toledo, Ohio... 1987/1994 213 1,069
Occupancy...... 66.7% 72.5% 8.8% 72.8% 0.3% 69.2% 65.0% (6.1%)
ADR............ $ 52.29 $ 54.59 4.4% $ 59.98 9.9% $ 57.66 $ 63.42 10.0%
REVPAR......... $ 34.87 $ 39.59 13.6% $ 43.65 10.2% $ 39.93 $ 41.23 3.3%
Holiday Inn
Dallas DFW
Airport
South(4)
Irving, Texas.. 1974/1995 409 2,776
Occupancy...... 76.0% 76.7% 0.9% 76.9% 0.3% 75.9% 77.3% 1.8%
ADR............ $ 51.82 $ 63.19 22.0% $ 71.26 12.8% $ 70.76 $ 79.89 12.9%
REVPAR......... $ 39.39 $ 48.44 23.0% $ 54.78 13.1% $ 53.70 $ 61.74 15.0%
Holiday Inn New
Orleans
International
Airport(4)(6)(7)
Kenner,
Louisiana...... 1973/1994 304 3,236
Occupancy...... 80.8% 79.2% (1.9%) 81.2% 2.5% 85.1% 78.2% (8.0%)
ADR............ $ 60.61 $ 61.49 1.5% $ 72.83 18.5% $ 73.70 $ 79.23 7.5%
REVPAR......... $ 48.94 $ 48.71 (0.5%) $ 59.16 21.5% $ 62.69 $ 61.99 (1.1%)
Days Inn Ocean
City(4)(7)(8)
Ocean City,
Maryland....... 1989/1994 162 529
Occupancy...... 45.9% 45.8% (0.3%) 49.3% 7.6% 31.2% 26.6% (14.6%)
ADR............ $ 64.72 $ 70.91 9.6% $ 76.10 7.3% $ 36.99 $ 49.22 33.0%
REVPAR......... $ 29.71 $ 32.47 9.3% $ 37.50 15.5% $ 11.53 $ 13.10 13.6%
Holiday Inn
Select-
Madison(7)(9)
Madison, Wisconsin.. 1987/1995 227 473
Occupancy...... 79.6% 78.7% (1.2%) 79.3% 0.8% 77.8% 75.7% (2.7%)
ADR............ $ 74.47 $ 78.25 5.1% $ 78.46 0.3% $ 77.42 $ 79.25 2.4%
REVPAR......... $ 59.31 $ 61.60 3.9% $ 62.26 1.1% $ 60.20 $ 59.97 (0.4%)
Holiday Inn Park
Center
Plaza(7)(9)
San Jose,
California..... 1975/1990 231 304
Occupancy...... 58.4% 62.2% 6.4% 72.1% 16.0% 65.0% 81.1% 24.8%
ADR............ $ 72.47 $ 73.41 1.3% $ 78.16 6.5% $ 77.61 $ 85.32 9.9%
REVPAR......... $ 42.35 $ 45.66 7.8% $ 56.38 23.5% $ 50.46 $ 69.22 37.2%
Fred Harvey
Albuquerque
Airport
Hotel(7)(10)
Albuquerque,
New Mexico..... 1972/1994 266 664
Occupancy...... 85.2% 83.5% (2.0%) 83.7% 0.2% 80.7% 79.3% (1.7%)
ADR............ $ 48.11 $ 53.23 10.6% $ 53.24 0.0% $ 51.89 $ 52.65 1.5%
REVPAR......... $ 40.98 $ 44.44 8.4% $ 44.55 0.2% $ 41.85 $ 41.75 (0.2%)
Le Baron Airport
Hotel(7)(11)
San Jose,
California..... 1973/1995 327 993
Occupancy...... 64.3% 66.2% 3.0% 65.2% (1.4%) 61.2% 79.5% 30.0%
ADR............ $ 47.85 $ 52.77 10.3% $ 64.40 22.0% $ 59.03 $ 71.93 21.9%
REVPAR......... $ 30.76 $ 34.93 13.5% $ 42.01 20.3% $ 36.12 $ 57.21 58.4%
Holiday Inn
Mission
Valley(7)(11)
San Diego,
California..... 1970/1995 318 926
Occupancy...... 68.6% 69.8% 1.7% 68.5% (1.9%) 66.3% 64.5% (2.7%)
ADR............ $ 61.09 $ 62.94 3.0% $ 65.17 3.5% $ 63.31 $ 61.72 (2.5%)
REVPAR......... $ 41.94 $ 43.94 4.8% $ 44.63 1.6% $ 41.98 $ 39.81 (5.2%)
----- -------
Totals ......... 3,012 $18,344
===== =======
Weighted
Averages:
Initial Hotels
Occupancy...... 71.6% 71.7% 0.2% 72.9% 1.7% 70.6% 70.7% 0.1%
ADR............ $ 57.65 $ 62.28 8.0% $ 69.19 11.1% $ 65.97 $ 73.33 11.2%
REVPAR......... $ 41.26 $ 44.67 8.3% $ 50.46 13.0% $ 46.56 $ 51.81 11.3%
AGH Predecessor
Hotels(3)
Occupancy...... 74.3% 71.1% (4.3%) 72.1% 1.4% 73.3% 64.2% (12.4%)
ADR............ $ 57.09 $ 62.10 8.8% $ 73.26 18.0% $ 67.01 $ 81.10 21.0%
REVPAR......... $ 42.42 $ 44.14 4.0% $ 52.84 19.7% $ 49.10 $ 52.09 6.1%
AGH Acquisition
Hotels(5)
Occupancy...... 71.0% 71.9% 1.3% 73.1% 1.7% 70.0% 72.1% 3.0%
ADR............ $ 57.78 $ 62.32 7.9% $ 68.30 9.6% $ 65.73 $ 71.77 9.2%
REVPAR......... $ 41.01 $ 44.79 9.2% $ 49.93 11.5% $ 45.99 $ 51.75 12.5%
</TABLE>
See notes on following page.
65
<PAGE>
- --------
(1) The occupancy, ADR and REVPAR calculations for the Initial Hotels are
derived from room revenue included in the audited financial data relating
to each of the Initial Hotels for each of the periods indicated except for
the following hotels, for which information is audited only from the date
of acquisition of such hotel by AGHI (such date is set forth in
parentheses): Hotel Maison de Ville (August 1994), Holiday Inn Dallas DFW
Airport West (June 1995), Hampton Inn Richmond Airport (December 1994) and
Courtyard by Marriott-Meadowlands (December 1993). The occupancy, ADR and
REVPAR calculations for the periods prior to the date of acquisition of
the hotels have been provided to management by the prior owners of such
hotels.
(2) Year renovated reflects the calendar year in which management deems that a
significant renovation was completed at the hotel.
(3) The AGH Predecessor Hotels consist of the following four Initial Hotels:
the Holiday Inn Dallas DFW Airport West, the Courtyard by Marriott-
Meadowlands, the Hotel Maison de Ville, and the Hampton Inn Richmond
Airport.
(4) This hotel is currently operated and managed by AGHI. The following sets
forth the date AGHI began managing each such hotel: the Holiday Inn New
Orleans International Airport (February 1995), the Courtyard by Marriott-
Meadowlands (February 1993), the Hilton Hotel-Toledo (February 1993), the
Holiday Inn Dallas DFW Airport South (December 1991), the Holiday Inn
Dallas DFW Airport West (June 1995), the Hampton Inn Richmond Airport
(November 1993), the Hotel Maison de Ville (August 1992) and the Days Inn
Ocean City (February 1993).
(5) The AGH Acquisition Hotels consist of the following nine Initial Hotels
(four of which are currently managed by AGHI): the Holiday Inn Dallas DFW
Airport South, Hilton Hotel-Toledo, Holiday Inn New Orleans International
Airport, Holiday Inn Park Center Plaza, Holiday Inn Select-Madison,
Holiday Inn Mission Valley, Le Baron Airport Hotel, Days Inn Ocean City,
and Fred Harvey Albuquerque Airport Hotel.
(6) The Company plans to reposition this hotel to operate as a Holiday Inn
Select.
(7) There can be no assurance that the brand conversion and repositioning of
this hotel will occur as planned.
(8) The Company plans to reposition this hotel to operate as a Hampton Inn.
(9) The Company plans to reposition this hotel to operate as a Crowne Plaza.
(10) This hotel also has an affiliation with Best Western. The Company plans
to reposition this hotel to operate as a Wyndham Hotel.
(11) The Company plans to reposition this hotel to operate as a DoubleTree
Hotel.
DESCRIPTIONS OF INITIAL HOTELS
Eleven of the Initial Hotels are full-service hotels with an aggregate of
2,726 guest rooms, which target both business and leisure travelers, including
meetings and groups, who prefer a full range of facilities, services and
amenities. After completion of the Company's planned repositionings, the
Company's full-service Initial Hotels will include one Courtyard by Marriott,
one Hilton, two Holiday Inns, one Wyndham Hotel, two DoubleTree Hotels, two
Crowne Plazas, one Holiday Inn Select and one independent hotel. Full-service
hotels generally offer a full range of meeting and conference facilities and
banquet space. Facilities typically include restaurants and lounge areas, gift
shops and recreational facilities, including swimming pools. Full-service
hotels generally provide a significant array of guest services, including room
service, valet services and laundry. As a result, full-service hotels often
generate significant revenue from sources other than guest room revenue.
Two of the Initial Hotels are limited-service hotels with an aggregate of
286 guest rooms, which target both business and leisure travelers. After
completion of the Company's planned repositionings, the Company's limited-
service hotels will consist of two Hampton Inns. Limited-service hotels have
limited or no meeting space. Hotels operating in this market segment generally
seek to minimize operational costs by offering only those basic services
required by travelers; thus, guest room revenues account for substantially all
of the revenues generated by these hotels. Because they cater to both business
and leisure travelers and therefore maintain relatively consistent occupancy
on weekdays and weekends, limited-service hotels often achieve occupancy rates
higher than full-service hotels.
Set forth below is a description of the Company's Initial Hotels.
AGH PREDECESSOR HOTELS
Holiday Inn Dallas DFW Airport West--Bedford, Texas
The Holiday Inn Dallas DFW Airport West is located in Bedford, a suburban
community west of the Dallas/Fort Worth International Airport. Originally
constructed in 1972 with an addition in 1987, the hotel
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contains 243 guest rooms and features approximately 5,190 square feet of
meeting facilities, a restaurant and a theme lounge.
Upon AGHI's acquisition of the hotel in June 1995, AGHI immediately
implemented a significant capital improvement program that included
renovations to the exterior of the building, guest rooms, meeting facilities,
food and beverage outlets and the remaining public space. AGHI also changed
the hotel's guest mix by replacing the lower-rated contract demand business
(principally airline flight crews) with higher rate corporate business.
In 1994, occupancy, ADR and REVPAR at the Holiday Inn Dallas DFW Airport
West were 70.0%, $48.85 and $34.19, respectively. By the twelve months ended
March 31, 1996, occupancy at the hotel had decreased 7.3% to 64.9%, due to the
change in focus from the contract demand business to the higher-rated
corporate business in order to increase ADR and REVPAR. Also, by the twelve
months ended March 31, 1996, ADR at the hotel had increased 35.2% to $66.05
and REVPAR at the hotel increased 25.3% to $42.84. Within the twelve months
following the acquisition of the hotel, the Company plans to make
approximately $240,000 in additional improvements and renovations to the
hotel. The Company is acquiring the hotel, which has been managed by AGHI
since June 1995, from a partnership owned by affiliates of AGHI and certain
investors not affiliated with AGHI.
Courtyard by Marriott-Meadowlands--Secaucus, New Jersey
The Courtyard by Marriott-Meadowlands is located within the Harmon Meadow
mixed-use development across the Hudson River from New York City. The hotel
opened in April 1989 and is situated between two nationally-recognized
restaurants. It contains 165 guest rooms and its features include meeting
facilities, a restaurant, lounge and fitness facilities.
AGHI acquired the Courtyard by Marriott-Meadowlands in December 1993. At the
time of its acquisition by AGHI, this hotel faced declining operating
performance due to prior management inefficiencies, deferred maintenance and a
lack of capital to effectively compete in its market. In response to these
conditions, AGHI developed a multi-phase strategy, including repositioning the
former Days Hotel to a Courtyard by Marriott and upgrading the hotel by making
approximately $530,000 in renovations to guest rooms and public space and
exterior improvements to the hotel. Since May 1994, AGHI has invested an
additional $845,400 to further improve the restaurant, lounge, exterior
entrances, guest rooms and meeting facilities.
In 1993, occupancy, ADR and REVPAR at the Courtyard by Marriott-Meadowlands
were 74.8%, $65.63 and $49.09, respectively. By the twelve months ended March
31, 1996, occupancy at the hotel had increased 3.9% to 77.7%, ADR at the hotel
had increased 27.1% to $83.42 and REVPAR at the hotel had increased 32.0% to
$64.82. The Company is acquiring the hotel, which has been managed by AGHI
since February 1993, from a partnership owned by affiliates of AGHI. See "The
Initial Hotels--Ground Leases."
Hampton Inn Richmond Airport--Richmond, Virginia
The Hampton Inn Richmond Airport is located in an established industrial and
commercial area adjacent to Richmond International Airport. Constructed in
1988, the hotel contains 124 rooms and features hospitality suites, a swimming
pool and complimentary breakfast service. AGHI acquired the hotel in December
1994, after which it implemented a $376,000 capital improvement program which
included the renovation of guest rooms and public areas.
In 1994, occupancy, ADR and REVPAR at the Hampton Inn Richmond Airport were
76.3%, $50.84 and $38.81, respectively. By the twelve months ended March 31,
1996, occupancy at the hotel had decreased 8.5% to 69.9% due to renovations at
the hotel and the change in focus from lower-rated discount business to
higher-rated corporate group business in order to increase ADR and REVPAR.
Also by the twelve months ended March 31, 1996, ADR at the hotel had increased
15.3% to $58.64, and REVPAR at the hotel increased 5.5% to $40.96. Within the
twelve months following the acquisition of the hotel, the Company plans to
make approximately $50,000 in additional improvements to the hotel. The
Company is acquiring the hotel, which has been managed by AGHI since November
1993, from a partnership owned by affiliates of AGHI.
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Hotel Maison de Ville--New Orleans, Louisiana
The Hotel Maison de Ville is situated in a landmark location in the heart of
the French Quarter in New Orleans at the intersection of Bourbon and Rue
Toulouse streets and has had such notable live-ins as John James Audubon and
Tennessee Williams. Originally built in 1788, the 23-room hotel consists of
seven cottages, two suites and fourteen guest rooms. The hotel's features
include an award-winning bistro and outdoor pool. The hotel was acquired by
affiliates of AGHI in August 1994.
After the hotel was acquired, AGHI instituted renovations totaling $650,000
designed to restore the hotel's authentic style. In 1993, occupancy, ADR and
REVPAR at the Hotel Maison de Ville were 64.1%, $188.18 and $120.65,
respectively. By the twelve months ended March 31, 1996, occupancy at the
hotel had increased 0.8% to 64.7%, ADR at the hotel had increased 24.8% to
$234.85 and REVPAR at the hotel had increased 25.9% to $151.84. The restaurant
facilities, three guest rooms and an accounting office at the hotel are
subject to a space lease with a third party lessor; such lease expires in 2014
and requires annual minimum rent of $42,000 (increasing to an annual minimum
rent of $51,000 in the final year of the lease). Within the twelve months
following the acquisition of the hotel, the Company plans to make
approximately $50,000 in additional improvements to the hotel. The Company is
acquiring the hotel, which has been managed by AGHI since August 1992, from a
partnership owned by affiliates of AGHI and certain investors not affiliated
with AGHI.
AGH ACQUISITION HOTELS
Hilton Hotel-Toledo--Toledo, Ohio
The Hilton Hotel-Toledo is located on the campus of the Medical College of
Ohio in Toledo, Ohio. The hotel was developed in 1987, and consistent
upgrading of the property has allowed the hotel to maintain a facility that,
the Company believes, is among the finest in Northwest Ohio. The 213-room
hotel is connected to the Medical College of Ohio at Toledo's Eleanor N. Dana
Conference Center, which has approximately 13,000 square feet of conference
space, and its Morse Health & Fitness Center, both of which may be used by the
hotel's guests. The Morse Health & Fitness Center has over 33,000 square feet
of state-of-the-art fitness equipment, basketball and racquet ball courts and
an indoor running track, and is staffed by fitness professionals. AGHI is the
exclusive supplier of food and beverage services for the Eleanor N. Dana
Conference Center. See "The Initial Hotels--Ground Leases." The Company plans
to invest approximately $340,000 in capital improvements at the hotel during
the twelve months following the closing of the Offering.
In 1993, occupancy, ADR and REVPAR at the Hilton Hotel-Toledo were 66.7%,
$52.29 and $34.87, respectively. By the twelve months ended March 31, 1996,
occupancy at the hotel had increased 7.5% to 71.7%, ADR at the hotel had
increased 17.2% to $61.31 and REVPAR at the hotel had increased 26.1% to
$43.96. Within the twelve months following the acquisition of the hotel, the
Company plans to make approximately $340,000 in additional improvements and
renovations to the hotel. The Company is acquiring the hotel, which has been
managed by AGHI since February 1993, from a partnership owned by affiliates of
AGHI and certain investors not affiliated with AGHI.
Holiday Inn Dallas DFW Airport South--Irving, Texas
The Holiday Inn Dallas DFW Airport South is located near the south entrance
of the Dallas/Fort Worth International Airport in Irving, Texas. The main
building was constructed in 1974 with a guest-room tower added in 1983. The
Holidome(R) facility, a vacation hotel with additional facilities primarily
for children and youth, contains 409 rooms and features an approximately
13,000 square foot conference center, a fitness facility, a theme lounge,
multiple food outlets, indoor and outdoor pools and a "Kids Corner." The
Company believes that the hotel is currently the largest Holiday Inn in the
southwestern United States.
AGHI, after its retention as manager of the Holiday Inn Dallas DFW Airport
South in December 1991 and its acquisition of an interest in the hotel in May
1992, commenced an extensive $2.5 million renovation of the hotel, which
included upgrades of all guest rooms and corridors, common areas, meeting
space, restaurants and the lounge and renovation of the exterior of the
building. At the time of purchase, the hotel had lost its Holiday Inn
franchise due to product deficiencies and was experiencing declining occupancy
arising from poor marketing
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and insufficient capital improvements. Since AGHI's completion of the initial
renovations in 1992, an additional $2.5 million has been spent to upgrade the
hotel. In addition, within the twelve months following the acquisition of the
hotel, the Company has budgeted approximately $1.9 million in additional
improvements and renovations to the hotel.
In 1992, occupancy, ADR and REVPAR at the Holiday Inn Dallas DFW Airport
South were 49.1%, $54.18 and $26.61, respectively. By the twelve months ended
March 31, 1996, occupancy at the hotel had increased 57.2% to 77.2%, ADR at
the hotel had increased 35.7% to $73.54 and REVPAR at the hotel had increased
113.4% to $56.79. The Company is acquiring the hotel, which has been managed
by AGHI since December 1991, from a partnership owned by affiliates of AGHI
and certain investors not affiliated with AGHI.
The Holiday Inn Dallas DFW Airport South constitutes more than 10% of the
aggregate historical cost basis of the Initial Hotels. The aggregate tax bases
of depreciable real and personal property of the hotel for federal income tax
purposes were approximately $3.3 million and $1.0 million, respectively, as of
December 31, 1995. Depreciation is computed for federal income tax purposes
using the straight-line method over a 39-year life for the real property and
declining balance methods over lives which range from five to seven years for
the personal property.
The 1994 realty tax rate for the Holiday Inn Dallas DFW Airport South was
$46.08 per $1,000 of assessed value. The total annual tax at this rate for the
twelve months ended March 31, 1996 was approximately $315,000.
Holiday Inn New Orleans International Airport--Kenner, Louisiana
The Holiday Inn New Orleans International Airport is located in suburban
Kenner, approximately one-half mile from the entrance to the New Orleans
International Airport. The Holidome facility is the closest Holiday Inn to the
New Orleans International Airport. The hotel contains 304 rooms and features
approximately 5,000 square feet of meeting and banquet space, as well as
fitness facilities, a restaurant, a lounge, and a business center. The hotel
underwent a $1.6 million capital improvement program during 1993 and 1994
which included the renovation of the exterior of the building, food and
beverage facilities, guest rooms, meeting rooms and public space.
AGHI began its operation of the hotel in February 1995. In 1994, occupancy,
ADR and REVPAR at the Holiday Inn New Orleans International Airport were
79.2%, $61.49 and $48.71, respectively. By the twelve months ended March 31,
1996, occupancy at the hotel had increased 0.4% to 79.5%, ADR at the hotel had
increased 20.6% to $74.17 and REVPAR at the hotel had increased 21.1% to
$58.99. Within the twelve months following its acquisition of the hotel, the
Company plans approximately $2.3 million in capital expenditures and
renovations in order to reposition the hotel under the Holiday Inn Select
brand. There can be no assurance that such brand conversion will occur. The
Company is acquiring the hotel, which has been managed by AGHI since February
1995, from a limited liability company not affiliated with AGHI.
The Holiday Inn New Orleans International Airport constitutes more than 10%
of the aggregate historical cost basis of the Initial Hotels. The aggregate
tax bases of depreciable real and personal property of the hotel for federal
income tax purposes were approximately $7.4 million and $200,000,
respectively, as of December 31, 1995. Depreciation is computed for federal
income tax purposes using the straight-line method over a 39-year life for the
real property and declining balance methods over lives which range from five
to seven years for the personal property.
The 1995 realty tax rate for the Holiday Inn New Orleans International
Airport was $97.66 per $1,000 of assessed value. The total annual tax at this
rate for the twelve months ended March 31, 1996 was approximately $133,000.
Days Inn Ocean City--Ocean City, Maryland
The Days Inn Ocean City is located on the area's primary commercial
boulevard, one block north of the Ocean City Convention Center and two blocks
west of the Atlantic Ocean beaches, and serves both the leisure
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and conventions markets. The seven-story hotel was built in 1989. It contains
162 rooms and features approximately 3,600 square feet of meeting space and an
indoor pool. A $529,000 capital-improvement program was completed at the hotel
in 1995 which included renovation of the guest rooms, meeting facilities and
public space. The Company intends to invest approximately $1.9 million to
convert and upgrade the hotel to operate under the Hampton Inn brand within
the twelve months following the acquisition of the hotel. There can be no
assurance that such brand conversion will occur.
In 1993, occupancy, ADR and REVPAR at the Days Inn Ocean City were 45.9%,
$64.72 and $29.71, respectively. By the twelve months ended March 31, 1996,
occupancy at the hotel had increased 5.0% to 48.2%, ADR at the hotel had
increased 21.7% to $78.75 and REVPAR at the hotel had increased 27.8% to
$37.96. The Company is acquiring the hotel, which has been managed by AGHI
since February 1993, from a partnership not affiliated with AGHI.
Holiday Inn Select--Madison, Wisconsin
The Holiday Inn Select-Madison is located adjacent to a large regional
shopping center in Madison, Wisconsin. The hotel has been consistently
upgraded since its opening in 1987 and management believes it is in excellent
physical condition. The hotel contains 227 rooms, including 36 suites, in a
mid-rise building designed around a central atrium containing an enclosed
pool, popular restaurant, lobby bar, and lounge. In 1995, the hotel was
designated as a premium-quality "Select" hotel by Holiday Inn Worldwide and
was chosen as the top property out of Holiday Inn's domestic hotels in terms
of product quality and guest satisfaction for which it received the "Hotel of
the Year" award. The hotel has also received several Holiday Inn Torchbearer
and Quality Excellence awards.
Within the twelve months following the acquisition of the hotel, the Company
intends to convert the Holiday Inn Select-Madison to a Crowne Plaza hotel and
has budgeted approximately $1.7 million for capital expenditures and
renovations in order to reposition the hotel within its market. The Company
anticipates that the franchise change, combined with product and service
enhancements and adoption of Crowne Plaza operating standards, will enable
AGHI to further improve the hotel's revenues through higher guest-room rates
commensurate with the improved quality. There can be no assurance that such
brand conversion and improved operating results will occur. The Company is
acquiring the hotel, which is currently not managed by AGHI, from a
partnership not affiliated with AGHI.
The Holiday Inn Select-Madison constitutes more than 10% of the aggregate
historical cost basis of the Initial Hotels. The aggregate tax bases of
depreciable real and personal property of the Holiday Inn Select-Madison for
federal income tax purposes were approximately $5.2 million and $0.4 million,
respectively, as of December 31, 1995. Depreciation is computed for federal
income tax purposes using the straight-line method over a 19-year life for the
real property and declining balance methods over lives which range from three
to ten years for the personal property.
The 1995 realty tax rate for the Holiday Inn Select-Madison was $32.98 per
$1,000 of assessed value. The total annual tax at this rate for the twelve
months ended March 31, 1996 was approximately $255,000.
Holiday Inn Park Center Plaza--San Jose, California
The Holiday Inn Park Center Plaza is located adjacent to the McEnery
Convention Center in downtown San Jose and is within two blocks of the new
world headquarters of Adobe Software and within two miles of San Jose Arena
and San Jose State University. The high-rise hotel and three-level garage were
built in 1975 and underwent an extensive renovation in 1990, including the
public space, guest rooms, food and beverage outlets, and meeting facilities.
The hotel contains 231 rooms and features a fitness facility, outdoor pool,
restaurant and lounge, and over 8,000 square feet of meeting space.
Within the twelve months following the acquisition, the Company intends to
complete an extensive $4.7 million dollar renovation program to convert the
facility from a traditional Holiday Inn into a Crowne Plaza
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hotel. The Company anticipates that the renovation and franchise change will
enable the hotel to increase its ADR, which, according to Smith Travel
Research, currently trails the competition in the downtown market by almost
$25.00. There can be no assurance that such brand conversion and improved
operating results will occur. The Company is acquiring the hotel, which is
currently not managed by AGHI, from a partnership not affiliated with AGHI.
Fred Harvey Albuquerque Airport Hotel--Albuquerque, New Mexico
The Fred Harvey Albuquerque Airport Hotel is located at the entrance to the
Albuquerque International Airport and is within three miles of the University
of New Mexico and the Albuquerque Convention Center. The 14-story high-rise
hotel opened in 1972 and is currently affiliated with Best Western. It
contains 266 rooms and features two restaurants, a lounge, fitness facilities,
an outdoor pool, tennis courts and approximately 8,000 square feet of meeting
space.
The Company intends to complete an extensive $5.0 million dollar renovation
program of the hotel during the twelve months after its acquisition, including
the conversion of the second floor, which is currently used for meeting rooms
and administrative offices, to guest rooms, thereby increasing the number of
guest rooms available to 278. The Company also intends to convert and upgrade
the hotel to operate under the Wyndham Hotel brand within one year of the
completion of the Offering. There can be no assurance that such brand
conversion will occur. The Company is acquiring the hotel, which is currently
not managed by AGHI, from a partnership not affiliated with AGHI. See "The
Initial Hotels--Ground Leases."
Le Baron Airport Hotel--San Jose, California
The Le Baron Airport Hotel is located approximately one mile from the San
Jose International Airport and two miles from downtown San Jose. The hotel was
developed in 1974 and has 327 guest rooms in a nine-story tower. The hotel
contains approximately 21,000 square feet of meeting and banquet space, two
restaurants, a cocktail lounge, an outdoor pool and a fitness center.
The Company has budgeted $6.5 million to complete an extensive renovation
program to upgrade the entire hotel and reposition the facility as a
DoubleTree Hotel within the twelve months following the acquisition of the
hotel. The renovations will include the conversion of currently underutilized
space to an additional 33 guest rooms. The Company believes that the
renovation, the increase in the number of guest rooms, the conversion to the
DoubleTree Hotel brand, and the expected improvements in operational
efficiencies will produce substantial increases in revenue. There can be no
assurance that such brand conversion and improved operating results will
occur. The Company is acquiring the hotel, which is currently not managed by
AGHI, from a partnership not affiliated with AGHI. See "The Initial Hotels--
Ground Leases."
The Le Baron Airport Hotel constitutes more than 10% of the aggregate
historical cost basis of the Initial Hotels. The aggregate tax bases of
depreciable real and personal property of the hotel for federal income tax
purposes were approximately $7.3 million and $3.0 million, respectively, as of
December 31, 1995. Depreciation is computed for federal income tax purposes
using the straight-line method over a 31.5 year life for the real property and
declining balance methods over lives which range from five to seven years for
the personal property.
The 1995 realty tax rate for the Le Baron Airport Hotel was $10.62 per
$1,000 of assessed value. The total annual tax at this rate for the twelve
months ended March 31, 1996 was approximately $126,400.
Holiday Inn Mission Valley--San Diego, California
The Holiday Inn Mission Valley is located approximately one mile from Old
Town, approximately three miles from Jack Murphy Stadium and the San Diego
Zoo, approximately four miles from Sea World, and within
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driving distance of the San Diego central business district and the San Diego
International Airport. The hotel was built in 1975 and was expanded in 1986.
The hotel contains 318 guest rooms and features over 6,000 square feet of
meeting space, a heated outdoor pool and spa, restaurant, lounge and fitness
facilities.
Within the twelve months following its acquisition, the Company plans $2.5
million in capital expenditures and renovations in order to reposition the
hotel under the DoubleTree Hotel brand. There can be no assurance that such
brand conversion will occur. The Company is acquiring the hotel, which is
currently not managed by AGHI, from certain investors not affiliated with
AGHI.
The Holiday Inn Mission Valley constitutes more than 10.0% of the aggregate
historical cost basis of the Initial Hotels. The aggregate tax bases of
depreciable real and personal property of the hotel for federal income tax
purposes were approximately $9.2 million and $3.7 million, respectively, as of
December 31, 1995. Depreciation is computed for federal income tax purposes
using the straight-line method over a 39-year life for the real property and
declining balance methods over lives which range from five to seven years for
the personal property.
The 1995 realty tax rate for the Holiday Inn Mission Valley was $22.26 per
$1,000 of assessed value. The total annual tax at this rate for the twelve
months ended March 31, 1996 was approximately $111,800.
TEN PERCENT HOTELS
The following table compares occupancy, ADR, and REVPAR at each of the five
Initial Hotels that constitutes more than 10% of the aggregate historical cost
basis of the Initial Hotels:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OCCUPANCY
Holiday Inn Dallas DFW
Airport South.......... 63.4% 49.1% 76.0% 76.7% 76.9% 75.9% 77.3%
Holiday Inn New Orleans
International Airport.. 78.6 81.8 80.8 79.2 81.2 85.1 78.2
Holiday Inn Select-
Madison................ 73.9 76.8 79.6 78.7 79.3 77.8 75.7
Le Baron Airport Hotel.. 76.0 68.4 64.3 66.2 65.2 61.2 79.5
Holiday Inn Mission
Valley................. * 58.0 68.6 69.8 68.5 66.3 64.5
ADR
Holiday Inn Dallas DFW
Airport South.......... $48.53 $54.18 $51.82 $63.19 $71.26 $70.76 $79.89
Holiday Inn New Orleans
International Airport.. 57.07 57.48 60.61 61.49 72.83 73.70 79.23
Holiday Inn Select-
Madison................ 70.27 72.41 74.47 78.25 78.46 77.42 79.25
Le Baron Airport Hotel.. 53.83 49.97 47.85 52.77 64.40 59.03 71.93
Holiday Inn Mission
Valley................. * 60.69 61.09 62.94 65.17 63.31 61.72
REVPAR
Holiday Inn Dallas DFW
Airport South.......... $30.78 $26.61 $39.39 $48.44 $54.78 $53.70 $61.74
Holiday Inn New Orleans
International Airport.. 44.87 47.03 48.94 48.71 59.16 62.69 61.99
Holiday Inn Select-
Madison................ 51.96 55.62 59.31 61.60 62.26 60.20 59.97
Le Baron Airport Hotel.. 40.88 34.17 30.76 34.93 42.01 36.12 57.21
Holiday Inn Mission
Valley................. * 35.19 41.94 43.94 44.63 41.98 39.81
</TABLE>
- --------
*Applicable occupancy, ADR and REVPAR data is not available.
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. The Operating
Partnership will lease each Initial Hotel to the Lessee for a term of twelve
years 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 Lessee will enter into a Lease Master Agreement
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(the "Lease Master Agreement"), which will set forth the terms of the Lessee
Pledge and certain other matters. Each Participating Lease with the Lessee
contains terms substantially similar to those described below. The following
summary is qualified in its entirety by the Participating Leases and the Lease
Master Agreement, the forms of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
Participating Lease Terms. Each Participating Lease will have a term of
twelve years, subject to earlier termination upon the occurrence of certain
contingencies described in the Participating Lease (including, particularly,
the provisions described herein under "Damage to Initial Hotels," "Condemnation
of Initial Hotels," and "Termination of Participating Leases on Disposition of
the Initial Hotels").
Base Rent; Participating Rent; Additional Charges. Each Participating Lease
requires the 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 Initial Hotel, and (iii) certain other amounts,
including interest accrued on any late payments or charges ("Additional
Charges"). Commencing in January 1997, Base Rent and Participating Rent
departmental thresholds (departmental revenue on which the rent percentage is
based) will be increased annually by a percentage equal to the percentage
increase in the CPI (as defined in "Glossary") (CPI percentage increase plus
0.75% in the case of the Participating Rent departmental revenue thresholds)
compared to the prior year. At six of the Initial Hotels, the franchise
agreements for the hotels require increases in the franchise royalty rates in
future years and the Participating Leases for those Initial Hotels provide that
the room revenue threshold will be increased to a higher level effective in the
year of the franchise royalty rate increase. At seven of the Initial Hotels,
the Company plans to undertake substantial renovations during the twelve months
following the closing of the Offering in connection with upgrading and
converting those Initial Hotels to new franchise brands. At six of these
hotels, the renovations are expected to significantly negatively affect the
operating margins at these Initial Hotels during the renovation period. As a
result, as set forth in the table below, the Participating Rent formulas in the
Participating Leases for these Initial Hotels contain Participating Rent
thresholds that adjust effective January 1, 1997 and, in one case, adjusts
again effective January 1, 1998, to take into account the impact of such
renovations and will increase by the percentage increase in CPI plus 0.75%
thereafter. In addition, Base Rent relating to these six hotels will adjust
effective January 1, 1997 and will increase by the percentage increase in CPI
thereafter. See the footnotes to the chart on the following page. Following
completion of the planned renovations, the Participating Rent thresholds for
those Participating Leases will increase thereafter based upon increases in the
CPI in the same manner as in the other Participating Leases. Base Rent is
payable weekly in arrears. Participating Rent is payable monthly in arrears in
an estimated amount equal to one-third of the Participating Rent estimated to
be payable during such quarter and will be calculated based on the year-to-date
departmental receipts as of the end of the preceding calendar quarter, and a
prorated amount of each of the applicable departmental revenue thresholds
determined based on the calendar quarter, or portion thereof, of the fiscal
year for which the calculation is being made, and crediting against such amount
the total Participating Rent previously paid for such fiscal year and the
cumulative Base Rent paid for such fiscal year as of the end of the preceding
calendar quarter. 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 annual Base Rent, (ii) Participating Rent
formulas and (iii) the pro forma rent that would have been paid for each
Initial Hotel pursuant to the terms of the Participating Leases based on the
historical revenues for the twelve months ended March 31, 1996, as if the
Company had owned the Initial Hotels and the Participating Leases were in
effect during such twelve-month period and April 1, 1995 was the beginning of
the lease year. For each Initial Hotel, pro forma Participating Rent is greater
than Base Rent.
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<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
MARCH 31, 1996
----------------------------------
(DOLLARS IN THOUSANDS)
PRO FORMA
LEASE PARTICIPATING RENT
EXPIRATION ------------------------
DATE BASE RENT PARTICIPATING PRO FORMA TELEPHONE
(MONTH/ (DOLLARS IN RENT FORMULA TOTAL AND
INITIAL HOTELS YEAR) THOUSANDS) (DOLLARS IN THOUSANDS) REVENUE ROOM F&B OTHER
- -------------- ---------- ----------- --------------------------------- --------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
AGH PREDECESSOR HOTELS
Holiday Inn Dallas DFW
Airport West
--Bedford, Texas....... 6/08 $ 827 Rooms: 25.0% of first $2,650; $ 4,881 $ 1,332 $ 47 $ 61
60.0% of next $825; 70.0%
thereafter; F&B: 5.0% of first
$905; 10.0% thereafter; Telephone
and Other: 22.5%
Courtyard by Marriott-
Meadowlands(1)
--Secaucus, New 6/08 946 Rooms: 20.0% of first $2,150; 4,525 1,519 0 74
Jersey................. 60.0% of next $1,315; 70.0%
thereafter; Telephone and Other:
25.0%
Hampton Inn Richmond --
Airport 6/08 530 Rooms: 30.0% of first $1,155; 1,962 832 0 34
--Richmond, Virginia... 70.0% thereafter; Telephone and
Other: 30.0%
Hotel Maison de Ville(2)
--New Orleans, 6/08 274 Rooms: 15.0% of first $890; 60.0% 1,881 379 32 12
Louisiana.............. of next $210; 70.0% thereafter;
F&B: 5.0% of first $430; 10.0%
thereafter; Telephone and Other:
15.0%
AGH ACQUISITION HOTELS
Hilton Hotel-Toledo
Toledo, Ohio........... 6/08 832 Rooms: 15.0% of first $2,400; 6,094 1,014 258 64
60.0% of next $650; 70.0%
thereafter; F&B: 7.5% of first
$1,800; 22.5% thereafter;
Telephone and Other: 20.0%
Holiday Inn Dallas DFW
Airport South(3)
--Irving, Texas........ 6/08 2,410 Rooms: 25.0% of first $4,650; 12,070 3,550 466 64
60.0% of next $2,950; 70.0%
thereafter; F&B: 10.0% of first
$2,280; 30.0% thereafter;
Telephone and Other: 12.5%
Holiday Inn New Orleans
International Airport
--Kenner, Louisiana.... 6/08 2,099 Rooms: 25.0% of first $3,050; 8,333 3,163 143 118
65.0% of next $2,350; 75.0%
thereafter; F&B: 7.5% of first
$930; 20.0% thereafter; Telephone
and Other: 25.0%
Days Inn Ocean City(4)
--Ocean City, 6/08 719 Rooms: 30.0% of first $1,025; 2,365 1,183 0 38
Maryland............... 70.0% thereafter; Telephone and
Other: 30.0%
Holiday Inn Select-
Madison(5)(6) 6/08 1,597 Rooms: 25.0% of first $2,250; 7,845 2,390 283 85
--Madison, Wisconsin... 60.0% of next $1,950; 70.0%
thereafter; F&B: 10.0% of first
$1,900; 20.0% thereafter;
Telephone and Other: 25.0%
Holiday Inn Park Center
Plaza(7)(8) 6/08 1,091 Rooms: 20.0% of first $3,600; 7,658 1,785 131 153
--San Jose, 65.0% of next $1,050; 75.0%
California............. thereafter; F&B: 5.0% of first
$1,350; 10.0% thereafter;
Telephone and Other: 30.0%
Fred Harvey Albuquerque
Airport Hotel(9)
--Albuquerque, New 6/08 1,202 Rooms: 25.0% of first $2,560; 6,190 1,760 99 74
Mexico................. 60.0% of next $1,060; 70.0%
thereafter; F&B: 5.0% of first
$1,190; 10.0% thereafter;
Telephone and Other: 25.0%
Le Baron Airport
Hotel(10)(11)--San 6/08 1,323 Rooms: 20.0% of first $3,100; 9,199 2,210 184 231
Jose, California....... 60.0% of next $1,975; 70.0%
thereafter; F&B: 5.0% of first
$2,320; 10.0% thereafter;
Telephone and Other: 30.0%
Holiday Inn Mission
Valley(12)(13) 6/08 1,542 Rooms: 25.0% of first $3,570; 6,662 1,963 73 98
--San Diego, 65.0% of next $900; 75.0%
California............. thereafter; F&B: 5.0% of first
$845; 10.0% thereafter; Telephone
and Other: 25.0%
------- ------- ------- ------ ------
Totals.................. $15,392 $79,665 $23,080 $1,716 $1,106
======= ======= ======= ====== ======
AGH Predecessor Hotels.. $ 2,577 $13,249 $ 4,062 $ 79 $ 181
AGH Acquisition Hotels.. 12,815 66,416 19,018 1,637 925
</TABLE>
See notes on following page.
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<PAGE>
- --------
(dollars in thousands)
(1) If food and beverage revenue exceeds $1,000, Participating Rent will
include 5.0% of total food and beverage revenue.
(2) Room revenue departmental Participating Rent thresholds will increase by
4.0% effective January 1, 1997.
(3) Room revenue departmental Participating Rent thresholds will increase by
2.0% effective January 1, 1997 and by an additional 2.0% effective January
1, 1998.
(4) Effective January 1, 1997, the Participating Rent formula adjusts to the
following: Rooms: 30.0% of first $1,400; 70.0% thereafter; Telephone and
Other: 30.0%. Base Rent will reset effective January 1, 1997 to $800 and
increase annually by the percentage increase in CPI thereafter.
(5) Room revenue departmental Participating Rent thresholds will increase by
3.0% effective January 1, 2000.
(6) Effective January 1, 1997, the Participating Rent formula adjusts to the
following: Rooms: 25.0% of first $2,500; 60.0% of next $2,400; 70.0%
thereafter; F&B: 10.0% of first $2,000; 20.0% thereafter; Telephone and
Other: 30%. Base Rent will reset effective January 1, 1997 to $1,750 and
increase annually by the percentage increase in CPI thereafter.
(7) Effective January 1, 1997, the Participating Rent formula adjusts to the
following: Rooms: 20.0% of first $3,875; 65.0% of next $1,300; 75.0%
thereafter; F&B: 5.0% of first $1,625; 10.0% thereafter; Telephone and
Other: 30.0%. Base Rent will reset effective January 1, 1997 to $1,400 and
increase annually by the percentage increase in CPI thereafter.
(8) Room revenue departmental Participating Rent thresholds will increase by
2.0% effective January 1, 1999 and by an additional 2.0% effective January
1, 2000.
(9) Effective January 1, 1997, the Participating Rent formula adjusts to the
following: Rooms: 25.0% of first $3,350; 60.0% of next $1,400; 70.0%
thereafter; F&B: 5.0% of first $1,350; 10.0% thereafter; Telephone and
Other: 25.0%. Base Rent will reset effective January 1, 1997 to $1,450 and
increase annually by the percentage increase in CPI thereafter.
(10) Effective January 1, 1997, the Participating Rent formula adjusts to the
following: Rooms: 20.0% of first $3,350; 60.0% of next $2,800; 70.0%
thereafter; F&B: 5.0% of first $1,850; 15.0% thereafter; Telephone and
Other: 30.0%. Effective January 1, 1998, the Participating Rent formula
adjusts to the following: Rooms: 20.0% of first $3,950; 60.0% of next
$3,100; 70.0% thereafter; F&B: 5.0% of first $1,950; 15.0% thereafter;
Telephone and Other: 30.0%. Base Rent will reset effective January 1,
1997 to $2,100 and increase annually by the percentage increase in CPI
thereafter.
(11) Room revenue departmental Participating Rent thresholds will increase by
4.0% effective January 1, 1999.
(12) Effective January 1, 1997, the Participating Rent formula adjusts to the
following: Rooms: 25.0% of first $3,825; 65.0% of next $950; 75.0%
thereafter; F&B: 5.0% of first $1,000; 10.0% thereafter; Telephone and
Other: 25.0%. Base Rent will reset effective January 1, 1997 to $1,800
and increase annually by the percentage increase in CPI thereafter.
(13) Room revenue departmental Participating Rent thresholds will increase by
3.0% effective January 1, 1999.
Other than real estate and personal property taxes and assessments, rent
payable under the ground leases, casualty insurance, including loss of income
insurance, capital impositions and capital replacements and refurbishments
(determined in accordance with generally accepted accounting principles),
which are obligations of the 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 Initial Hotels. The Participating Leases also
provide for rent reductions and abatements in the event of damage or
destruction or a partial taking of any Initial Hotel as described under
"Damage to Initial Hotels" and "Condemnation of Initial Hotels."
Lessee Capitalization; Lessee Pledge. The partners of the Lessee have agreed
upon consummation of the Offering to (i) initially capitalize the Lessee with
$500,000 in cash and (ii) pursuant to the Lessee Pledge, pledge 275,000 OP
Units having a value of approximately $5.5 million based on the Offering Price
to the Operating Partnership to secure the Lessee's obligations under the
Participating Leases. OP Units subject to the Lessee Pledge may be released
therefrom without duplication, (a) on a one-for-one basis as the Lessee
acquires OP Units or shares of Common Stock or (b) upon the contribution to
the Lessee of cash or an increase in undistributed
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<PAGE>
earnings in an amount equal to the then current market value of the OP Units
to be released from the Lessee Pledge.
Distribution Restrictions. Pursuant to the Lessee Distribution Restriction,
the Lessee will 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 the Lessee while it is a limited partnership and except for
distributions relating to interest or dividends received by the Lessee from
cash or securities held by it) or make any other distributions to affiliates
of the Lessee, other than limited amounts relating to Lessee overhead or
pursuant to the Management Agreements, until the Lessee's net worth equals the
greater of (i) $6 million or (ii) 17.5% of actual rent payments from hotels
leased to the Lessee during the preceding calendar year (annualized for 1996).
During the period of the Lessee Distribution Restriction, the Lessee 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 limitations in the Company's Charter, at the option of
the Operating Partnership, OP Units, in an amount equal to the Lessee'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 Lessee Distribution Restriction, annual rent payments will be
determined on a calendar year basis and will be annualized for any partial
calendar year. Such amount will establish, in part, the threshold for the
Lessee Distribution Restriction for the following calendar year. If the
Lessee's net worth exceeds the Lessee Distribution Restriction, the Lessee may
make distributions to its partners, provided that, after such distribution,
the Lessee's net worth equals or exceeds the Lessee 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 interests
acquired by the Lessee may not be sold or transferred for a period of two
years after their acquisition (other than to partners in the Lessee) unless,
following such transfer, the Lessee Distribution Restriction is satisfied.
Subordination of Management Fees. The Lessee will engage AGHI to operate the
Initial Hotels pursuant to the Management Agreements. See "--The Management
Agreements." 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 FF&E Note, and during the continuance thereof,
no management fees will be made to AGHI with respect to any Initial Hotel. Any
deferred management fee will accrue without interest until any such default
has been cured. In addition, each Management Agreement which the Lessee enters
into must provide that AGHI will repay to the Company any payments made to it
by the Lessee while any such default has occurred and is continuing.
Maintenance and Improvements. The Participating Leases obligate the Company
to establish annually a reserve for capital improvements at each Initial Hotel
(including the periodic replacement or refurbishment of FF&E). The aggregate
amount of such reserves will equal 4.0% of total revenue for each Initial
Hotel (which, on a consolidated pro forma basis for the twelve months ended
March 31, 1996, represented approximately 5.6% of room revenue). 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 Initial 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 Initial Hotels in good order and
repair.
The Lessee will not be obligated to bear the cost of any capital
improvements or capital repairs to the Initial Hotels. With the consent of the
Company, however, the Lessee, at its expense, may make capital additions,
modifications or improvements to the Initial Hotels, provided that such action
does not significantly alter their character or purposes and maintains or
enhances the value of the Initial Hotels. All such alterations, replacements
and improvements shall be 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 will own substantially
all personal property (other than inventory) not affixed to, or deemed a part
of, the real estate or improvements at the Initial Hotels, except to the
extent that ownership of such personal property would cause any portion of the
rents under the Participating Leases not to qualify as "rents from real
property" for REIT income test purposes. See "Federal Income Tax
Considerations--Requirements for Qualification as a REIT--Income Tests" and
"Certain Relationships and Transactions--Sale of Personal Property."
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<PAGE>
Insurance and Property Taxes and Assessments. The Company is responsible for
paying for (i) real estate and personal property taxes and assessments at the
Initial Hotels (except to the extent that personal property associated with
the Initial Hotels is owned by the Lessee), (ii) casualty insurance on the
Initial Hotels and (iii) business interruption insurance covering the Base
Rent and Participating Rent. The aggregate real estate and personal property
tax obligations for the Initial Hotels during the twelve months ended March
31, 1996 were approximately $2.2 million. The Lessee is required to pay or
reimburse the Company for all liability insurance on the Initial Hotels, with
extended coverage, including comprehensive general public liability, workers'
compensation and other insurance appropriate and customary for properties
similar to the Initial 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 an Initial 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 Initial 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 will
indemnify, and will be 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 Initial 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 Initial 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 Initial Hotels and capital
impositions); (v) any breach of the Participating Leases by the Lessee; or
(vi) any breach of any subleases related to the Initial Hotels, provided,
however, that such indemnification will not be construed to require the Lessee
to indemnify the Company against the Company's own negligent acts or omissions
or willful misconduct.
Assignment and Subleasing. The Lessee will not be permitted to sublet all or
any part of the Initial Hotels or assign its interest under any of the
Participating Leases, other than to an affiliate of the Lessee, without the
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<PAGE>
prior written consent of the Company. The Company has generally agreed to
consent to any sublease of any portion of any Initial Hotel that sells
alcoholic beverages to the Beverage Corporations or of a retail portion of any
Initial Hotel (provided such sublease will not cause any portion of the Rents
to fail to qualify as "rents from real property" for REIT income qualification
test purposes). See "Sublease" below. No assignment or subletting will release
the Lessee from any of its obligations under the Participating Leases.
Damage to Initial Hotels. In the event of damage to or destruction of any
Initial 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 and terminate the Participating Lease on the terms and
provisions set forth in the Participating Lease, and the Company generally
shall be entitled to retain any proceeds of insurance related to such damage
or destruction.
In the event that damage to or destruction of an Initial 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 Initial 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
on the terms and conditions set forth in the Participating Lease. In the event
of non-material damage to an Initial 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 Initial Hotel, rent will be
equitably abated.
Condemnation of Initial Hotels. In the event of a total condemnation of an
Initial 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 on Disposition of the Initial Hotels. In
the event the Company enters into an agreement to sell or otherwise transfer
an Initial Hotel, or in the event of material damage to an Initial Hotel which
the Company elects not to repair, rebuild or restore, 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 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 Leases.
Franchise Licenses. The Company has agreed that the Lessee will be the
licensee under each of the Franchise Licenses on the Initial 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. The Company intends to seek similar temporary operational rights with
respect to new Franchise Licenses that are expected to be entered into with
Wyndham, DoubleTree Hotel and Crowne Plaza. There can be no assurance the
Company will receive such temporary operational rights in any new Franchise
Licenses with such franchisors. See "Franchise Agreements."
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Sublease. In order to facilitate compliance with state and local liquor laws
and regulations, in connection with the acquisition of the Initial Hotels, the
Lessee has agreed to sublease those areas of the Initial Hotels 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 will be purchased at the Lessee's expense and
owned by the Lessee. Any inventory used by the Lessee in the operation of each
Initial 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 will have the right to approve
(which approval will not be unreasonably withheld) the engagement by the
Lessee of any operator of an Initial Hotel other than AGHI or an affiliate of
AGHI. 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
The Lessee will engage AGHI to operate the Initial Hotels pursuant to the
Management Agreements. The following is a summary of the Management Agreements
and certain related agreements:
Management Agreement Terms. The Management Agreements will have initial
twelve-year terms. 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 with AGHI requires the Lessee 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 will be 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 shall be
payable quarterly and shall be adjusted at the end of each calendar year to
reflect actual results. Every four years the basis upon which the incentive
fee is calculated shall be renegotiated between the Lessee and AGHI. The
payment of the management fees to AGHI by the Lessee is subordinate to the
Lessee's obligations to the Company under the Participating Leases. The
management fees payable during 1996 and 1997, respectively, will be earned
only to the extent that the Lessee's income during each such year from hotels
leased from the Company exceeds the sum of rent payable under the
Participating Leases plus, Lessee overhead expense plus $50,000. Each
Management Agreement requires AGHI to repay to the Lessee 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, the Lessee has agreed to
reimburse AGHI at cost for all expenses incurred in supervising capital
improvements to be performed at the hotels out of the capital expenditure
reserve funded by the Company under the Participating Leases. 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, for accounting and financial
services performed by AGHI that will be funded by the Lessee under the
Participating Leases. See "The Initial Hotels--The Participating Leases--
Subordination of Management Fees."
Termination of Participating Lease. In the event of a termination of a
Participating Lease for an Initial Hotel, the Management Agreement for such
hotel also will terminate.
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Obligation to Purchase Common Stock. Messrs. Jorns and Wiles, who are
stockholders of AGHI and are also executive officers of the Company, will
agree 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 Offering, additional shares of
Common Stock, or, if any such purchase would violate the ownership limitations
in the Company's Charter, at the option of the Operating Partnership, OP
Units.
Certain Transfer Restrictions. The stockholders of AGHI have agreed, for so
long as more than 50.0% of the initial Management Agreements remain in place,
to grant to the Lessee 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). The Lessee has agreed to
assign this right to the Company or its designee. This right will be
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 shall mean 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 which a stockholder controls at least 50.0% of the voting interests.
The stockholders of AGHI have also agreed to grant to the Lessee 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 agreed to assign this right to the Company or its
designee.
MORTGAGE INDEBTEDNESS REMAINING FOLLOWING THE OFFERING
A portion of the proceeds of the Offering will be utilized to repay all
mortgage indebtedness which encumbers the Initial Hotels other than the
indebtedness encumbering Holiday Inn Dallas DFW Airport South and the
Courtyard by Marriott-Meadowlands. See "Use of Proceeds."
Following the closing of the Offering, the Holiday Inn Dallas DFW South will
continue to be subject to nonrecourse mortgage indebtedness in the outstanding
principal amount as of March 31, 1996 of $14.2 million (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 January 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
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.
Following the closing of the Offering, Courtyard by Marriott-Meadowlands
will continue to be subject to a nonrecourse mortgage indebtedness that
secures two notes in the outstanding principal amounts as of March 31, 1996 of
approximately $4.6 million and $508,500 respectively (the "Secaucus Loans").
The $4.6 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
$39,300 each. This portion of the Secaucus Loans matures on January 1, 2001 at
which time a balloon payment in the amount of approximately $3,985,000 will be
due and payable.
The $508,500 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 $14,750 that
will fully amortize the loan as of January 1, 2001. In connection with the
transfer of the Courtyard by Marriott-Meadowlands hotel to a subsidiary of the
Operating Partnership, the Company has agreed to guarantee up to two years of
debt service, including late fees and reimbursements, to the holder of the
Secaucus Loans.
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LINE OF CREDIT
Neither the Company's Bylaws nor its Charter will limit 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
additional hotels, making renovations and capital improvements to hotels and
for working capital requirements, the Company has obtained a commitment for
the $100 million Line of Credit. The Line of Credit will be secured by, among
other things, first mortgage liens on all of the Initial Hotels, other than
Holiday Inn Dallas DFW Airport South and Courtyard by Marriott-Meadowlands,
and, in certain circumstances (subject to lender approval under the Line of
Credit), a mortgage lien on any subsequently acquired hotel. While the Company
has maximum borrowing capacity of up to $100 million under the Line of Credit,
the Company's aggregate advances under the Line of Credit are limited to the
lesser of (i) 40% of the aggregate appraised value of the Initial Hotels and
any other hotel securing the Line of Credit after giving effect to the
Company's use of proceeds from any indebtedness towards hotel acquisitions and
certain renovations and capital improvements, (ii) 40% of the aggregate
purchase price of the Initial Hotels and any other hotel acquisitions securing
the Line of Credit after giving effect to the Company's use of proceeds from
any indebtedness towards hotel acquisitions and certain renovations and
capital improvements, and (iii) the combined trailing twelve months EBITDA
(generally defined as net income of the Company before interest expense,
taxes, depreciation and amortization to the extent each reduces net income)
generated by the Initial Hotels and any other hotels securing the Line of
Credit, multiplied by 5.0. In addition, the Line of Credit provides 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 Line of Credit lenders must approve the lessee and the franchise brand of
any hotel securing the Line of Credit in the future. Upon the closing of the
Offering, the Company expects to have approximately $60 million of borrowing
capacity available under the Line of Credit. The Company expects that the
borrowing capacity under the Line of Credit will increase to approximately
$100 million, assuming all additional borrowings are used to fund capital
improvements to the Initial Hotels or the acquisition of additional hotels.
Outside of the Line of Credit, the Company and its subsidiaries may not incur
any additional debt or recourse obligations, other than the debt for Holiday
Inn Dallas DFW Airport South and Courtyard by Marriott-Meadowlands. The Line
of Credit will have an initial term of three years that is subject to
extension under certain circumstances for an additional one-year term.
Borrowings under the Line of Credit will bear interest at 30-day, 60-day or
90-day LIBOR, at the option of the Company, plus 1.85% per annum, payable
monthly in arrears. Economic conditions could result in higher interest rates,
which could increase debt service requirements on borrowings under the Line of
Credit and which could reduce the amount of Cash Available for Distribution.
See "Risk Factors--Risks of Leverage; No Limits on Indebtedness."
GROUND LEASES
Four of the Initial 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.
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 Fred Harvey 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 Fred Harvey Albuquerque Airport Hotel for the twelve
months ended March 31, 1996 was 83.3%. See "Risk Factors--Contingent
Obligation to Construct Additional Hotel Rooms."
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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 Le Baron Airport Hotel 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.
FRANCHISE CONVERSIONS AND OTHER CAPITAL IMPROVEMENTS
The Company expects to spend up to $24.6 million on additional capital
improvements during the twelve months following the completion of the
Offering, in connection with the planned renovation and conversion of the
Holiday Inn Select-Madison, the Holiday Inn Park Center Plaza, the Fred Harvey
Albuquerque Airport Hotel, the Le Baron Airport Hotel, the Days Inn Ocean
City, the Holiday Inn Mission Valley and the Holiday Inn New Orleans
International Airport to new franchise brands. In certain circumstances, such
renovations and improvements are being completed in connection with franchisor
requirements. A description of the renovations and improvements that are
anticipated to occur at each such hotel and their anticipated costs are set
forth under "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Franchise Conversions and Other Capital Improvements."
In addition, the Company expects to spend up to $2.6 million on additional
capital improvements during the twelve months following the completion of the
Offering in connection with certain renovations and improvements that are
anticipated to be made at certain of the Initial Hotels that will not undergo
a conversion of franchise brands. Such improvements include upgrading the
exterior, guest rooms and Holidome public areas at the Holiday Inn Dallas DFW
Airport South, upgrading the guest rooms and public areas at the Hilton Hotel-
Toledo and upgrading the public areas and the restaurant at the Holiday Inn
Dallas DFW Airport West.
FRANCHISE AGREEMENTS
Ten of the Initial Hotels are operated under Franchise Licenses with
nationally recognized hotel companies. The Company anticipates that most of
the additional hotels in which it invests will be operated under Franchise
Licenses. The Company believes that the public's perception of quality
associated with a franchisor is an important feature in the operation of a
hotel. Franchisors provide a variety of benefits for franchisees, which
include national advertising, publicity, and other marketing programs designed
to increase brand awareness, training of personnel, continuous review of
quality standards, and centralized reservation systems.
The Franchise Licenses generally specify certain management, operating,
recordkeeping, 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 will 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 Initial
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 will not be entitled
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to terminate the Franchise Licenses unless it receives the prior written
consent of the Company. The Franchise
Licenses will not renew automatically upon expiration. The Lessee will be
responsible for making all payments under the Franchise Licenses to the
franchisors. Under the franchise agreements, the Lessee will pay franchise
royalty fees from 2.0% to 5.0% of room revenue.
HILTON(R), HILTON INN(R), AND THE STYLIZED H(R) ARE REGISTERED TRADEMARKS OF
HILTON HOTELS CORPORATION ("HILTON HOTELS"). NEITHER HILTON INNS, INC. NOR
HILTON HOTELS NOR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, AGENTS OR
EMPLOYEES (COLLECTIVELY, THE "HILTON ENTITIES") SHALL IN ANY WAY BE DEEMED AN
ISSUER OR UNDERWRITER OF THE SHARES OF COMMON STOCK OFFERED HEREBY NOR HAS ANY
OF THE HILTON ENTITIES ENDORSED OR APPROVED THE OFFERING. THE HILTON ENTITIES
HAVE NOT ASSUMED, AND SHALL NOT HAVE, ANY LIABILITY OR RESPONSIBILITY FOR ANY
FINANCIAL STATEMENTS OR OTHER FINANCIAL INFORMATION CONTAINED HEREIN OR ANY
PROSPECTUS OR ANY WRITTEN OR ORAL COMMUNICATIONS REGARDING THE SUBJECT MATTER
HEREOF. A GRANT OF A HILTON FRANCHISE LICENSE FOR CERTAIN OF THE INITIAL
HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY ANY OF THE HILTON ENTITIES (OR ANY OF THEIR
AFFILIATES, SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY, THE OPERATING
PARTNERSHIP, THE LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
COURTYARD BY MARRIOTT(R) IS A REGISTERED TRADEMARK OF MARRIOTT
INTERNATIONAL, INC., WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF
THE FINANCIAL RESULTS OF THE INITIAL HOTELS SET FORTH IN THIS PROSPECTUS. A
GRANT OF A COURTYARD BY MARRIOTT FRANCHISE LICENSE FOR CERTAIN OF THE INITIAL
HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY MARRIOTT INTERNATIONAL, INC. (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY, THE OPERATING
PARTNERSHIP, THE LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
HOLIDAY INN(R) AND CROWNE PLAZA(R) ARE REGISTERED TRADEMARKS OF AND HOLIDAY
INN SELECT SM IS A REGISTERED SERVICE MARK OF, HOLIDAY INNS FRANCHISING, INC.
("HOLIDAY INNS"). HOLIDAY INNS HAS NOT ENDORSED OR APPROVED THE OFFERING OR
ANY OF THE FINANCIAL RESULTS OF THE INITIAL HOTELS SET FORTH IN THIS
PROSPECTUS NOR DOES HOLIDAY INNS HAVE ANY INTEREST IN THE COMPANY, THE LESSEE,
OR THE COMMON STOCK OFFERED HEREBY, EXCEPT AS A FRANCHISOR. A GRANT OF A
HOLIDAY INN, HOLIDAY INN SELECT, OR CROWNE PLAZA FRANCHISE LICENSE FOR CERTAIN
OF THE INITIAL HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY HOLIDAY INNS (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY, THE OPERATING
PARTNERSHIP, THE LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
HAMPTON INN(R) IS A REGISTERED TRADEMARK OF PROMUS HOTELS, INC. NEITHER
PROMUS HOTELS, INC., ITS PARENT, SUBSIDIARIES, DIVISIONS NOR AFFILIATES HAVE
ENDORSED OR APPROVED THE OFFERING. A GRANT OF A HAMPTON INN LICENSE FOR THE
HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY PROMUS HOTELS, INC. (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF AMERICAN GENERAL HOSPITALITY
CORPORATION, AMERICAN GENERAL HOSPITALITY OPERATING PARTNERSHIP, L.P., OR THE
COMMON STOCK OFFERED HEREBY.
WYNDHAM GARDEN(R) IS A REGISTERED TRADEMARK AND WYNDHAM(TM) AND THE WYNDHAM
W(TM) LOGO ARE TRADEMARKS OF WYNDHAM IP CORPORATION, A SUBSIDIARY OF WYNDHAM
HOTEL CORPORATION ("WYNDHAM"). NEITHER WYNDHAM NOR ANY OF ITS
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OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES SHALL IN ANY WAY BE DEEMED AN ISSUER
OR UNDERWRITER OF THE SHARES OF COMMON STOCK OFFERED HEREBY. A GRANT OF A
WYNDHAM FRANCHISE LICENSE FOR CERTAIN OF THE INITIAL HOTELS IS NOT INTENDED
AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR
ENDORSEMENT BY WYNDHAM (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS)
OF THE COMPANY, THE OPERATING PARTNERSHIP OR THE COMMON STOCK OFFERED HEREBY.
WYNDHAM AND ITS OFFICERS, DIRECTORS, AGENTS OR EMPLOYEES HAVE NOT ASSUMED AND
SHALL NOT HAVE ANY LIABILITY OR RESPONSIBILITY ARISING OUT OF OR RELATED TO
THE OFFER OR SALE OF THE COMMON STOCK OFFERED HEREBY, INCLUDING, WITHOUT
LIMITATION, ANY LIABILITY OR RESPONSIBILITY FOR ANY FINANCIAL STATEMENTS,
PROJECTIONS OR OTHER FINANCIAL INFORMATION CONTAINED IN THIS PROSPECTUS OR ANY
WRITTEN OR ORAL COMMUNICATIONS REGARDING THE SUBJECT MATTER HEREOF.
DAYS INN(R), RAMADA(R) AND RAMADA LIMITED(R) ARE REGISTERED TRADEMARKS OF
HFS INCORPORATED, WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF
THE FINANCIAL RESULTS OF THE INITIAL HOTELS SET FORTH IN THIS PROSPECTUS. A
GRANT OF A DAYS INN OR A RAMADA FRANCHISE LICENSE FOR CERTAIN OF THE INITIAL
HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY HFS INCORPORATED (OR ANY OF ITS AFFILIATES,
SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY, THE OPERATING PARTNERSHIP, THE
LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
DOUBLETREE HOTEL(R) IS A REGISTERED TRADEMARK OF DOUBLETREE WHICH HAS NOT
ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE
INITIAL HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A (FRANCHISE/LICENSE)
FOR CERTAIN OF THE INITIAL HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE
INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY DOUBLETREE
(OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE
OPERATING PARTNERSHIP OR THE COMMON STOCK OFFERED HEREBY.
SMALL LUXURY HOTELS(R) IS A REGISTERED TRADEMARK OF SMALL LUXURY HOTELS OF
THE WORLD LIMITED, WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF
THE FINANCIAL RESULTS OF THE INITIAL HOTELS SET FORTH IN THIS PROSPECTUS. A
GRANT OF A SMALL LUXURY HOTELS AFFILIATION LICENSE FOR CERTAIN OF THE INITIAL
HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY SMALL LUXURY HOTELS OF THE WORLD LIMITED
(OR ANY OF ITS AFFILIATES, SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY, THE
OPERATING PARTNERSHIP, THE LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
All other trademarks appearing in this Prospectus are the property of their
respective holders.
EMPLOYEES
The Company will be self-administered and will employ Messrs. Jorns, Wiles,
Barr, Valentine and five additional individuals as well as appropriate support
personnel to manage its operations.
ENVIRONMENTAL MATTERS
Under various federal, state, and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person who arranges for (or transports for) the disposal or
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treatment of a hazardous or toxic substance at a property owned by another may
be liable for the costs of removal or remediation of such substance released
into the environment at that property. The costs of remediation or removal of
such substances may be substantial, and the presence of such substances, or
the failure to promptly remediate such substances, may adversely affect the
owner's ability to sell such real estate or to borrow using such real estate
as collateral. In connection with the ownership and operation of the Initial
Hotels, the Company, the Operating Partnership, or the Lessee, as the case may
be, may be potentially liable for such costs.
Phase I ESAs have been performed on all of the Initial Hotels by a qualified
independent environmental engineer. The purpose of the Phase I ESAs is to
identify potential sources of contamination for which the Initial Hotels may
be responsible and to assess the status of environmental regulatory
compliance. The Phase I ESAs include historical reviews of the Initial Hotels,
reviews of certain public records, preliminary investigations of the sites and
surrounding properties, screening for the presence of ACMs, polychlorinated
biphenyls ("PCBs"), underground storage tanks, and the preparation and
issuance of a written report. The Phase I ESAs do not include invasive
procedures, such as soil sampling or ground water analysis.
The ESAs 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 operation, or liquidity, nor is the
Company aware of any material environmental liability or concerns.
Nevertheless, it is possible that the Phase I 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. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability
or (ii) the current environmental condition of the Initial Hotels will not be
affected by the condition of the properties in the vicinity of the Initial
Hotels (such as the presence of leaking underground storage tanks) or by third
parties unrelated to the Operating Partnership or the Company.
In reliance upon the Phase I ESAs, the Company believes the Initial Hotels
are in compliance in all material respects 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 Initial 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.
OPTIONS TO PURCHASE AND RIGHTS OF FIRST REFUSAL
Pursuant to the option agreements relating to the Option Hotels (the "Option
Agreements"), the Company will have the option and right of first refusal to
acquire AGHI's (i) 50.0% partnership interest in the Boise, Idaho Option Hotel
and (ii) 16.7% partnership interest in the Durham, North Carolina Option
Hotel. The Option Agreements provide that for a period of two years after the
opening of each such hotel, the Company will have the right to purchase AGHI's
interests in each such hotel at a price equal to AGHI's percentage interest in
such hotel times 110.0% of the cost of developing such hotel (including
mortgage debt) for the first year; during the second year of such options, the
purchase price will be increased by any percentage increase in the CPI. The
purchase price will be payable (i) by taking title to AGHI's interest in such
hotel subject to a pro rata portion of the applicable owning partnership's
debt and (ii) by paying the balance of such purchase price in cash or OP
Units, at the option of AGHI. AGHI may sell its interests in the Option Hotels
free and clear of these options prior to the expiration of the two-year
option, period provided that it gives notice to the Company and extends to the
Company a right of first refusal to acquire such interests on the same terms
as that of the proposed sale. The exercise of the option or right of first
refusal may require approval of the partners in the partnerships which own the
Option Hotels that are not affiliated with AGHI, including the approvals of
such partners of a Participating Lease relating to such Option Hotels. AGHI
will not seek such approval until after the Company has exercised its option
or rights of first refusal, and there can be no assurance that such approval
will be granted.
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COMPETITION
The hotel industry is highly competitive. Each of the Initial 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 and REVPAR of the Initial 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 will be 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.
INSURANCE
The Company will carry comprehensive liability, fire, extended coverage and
business interruption insurance with respect to the Initial 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 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 Initial Hotels are adequately insured in
accordance with industry practices.
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. Certain of the current owners of
the Initial Hotels have represented to the Operating Partnership that there is
no material litigation threatened against or affecting the Initial Hotels.
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FORMATION TRANSACTIONS
Set forth below is a description of the principal transactions in connection
with the formation of the Company and the acquisition of the Initial Hotels:
. The Company will sell 7,000,000 shares of Common Stock in the Offering.
All of the net proceeds to the Company from the Offering will be
contributed to AGH GP and AGH LP, which, in turn, will contribute such
proceeds, together with certain other assets acquired from the Plan (as
described below), to the Operating Partnership in exchange for an
approximate 74.2% interest in the Operating Partnership. AGH GP, a wholly
owned subsidiary of the Company, is the sole general partner of the
Operating Partnership and will own a 1.0% interest in the Operating
Partnership. AGH LP, also a wholly owned subsidiary of the Company, will
initially own an approximate 73.2% limited partnership interest in the
Operating Partnership;
. The Company will acquire directly or indirectly a 100.0% interest in each
of the Initial Hotels for an aggregate of 2,511,106 OP Units, 155,518
shares of Common Stock, approximately $91.0 million in cash, and the
assumption of approximately $52.9 million in mortgage indebtedness (of
which amount, approximately $33.5 million will be repaid from the net
proceeds of the Offering), as follows:
. The Operating Partnership will acquire from the Primary Contributors
interests in six of the Initial Hotels (Holiday Inn Dallas DFW
Airport West, Holiday Inn Dallas DFW Airport South, Hotel Maison de
Ville, Hampton Inn Richmond Airport, Courtyard by Marriott-
Meadowlands and Hilton Hotel-Toledo) and the Primary Contributors'
contract right to acquire the Holiday Inn Park Center Plaza in
exchange for 1,157,673 OP Units (valued at approximately $23.2
million, based on the Offering Price);
. The Company will acquire from the Plan interests in five of the
Initial Hotels (Hampton Inn Richmond Airport, Holiday Inn Dallas DFW
Airport West, Hotel Maison de Ville, Courtyard by Marriott-
Meadowlands and Hilton Hotel-Toledo) in exchange for 155,518 shares
of Common Stock (valued at approximately $3.1 million, based on the
Offering Price), and the Company will, in turn, contribute such
interests to the Operating Partnership in exchange for 155,518 OP
Units. The Company's executive officers collectively own less than a
5.0% beneficial interest in the Plan; and
. The Operating Partnership will acquire, directly or as assignee of
the Primary Contributors' contract rights, interests in eight of the
Initial Hotels from parties that are unaffiliated with the Primary
Contributors in exchange for an aggregate 1,353,433 OP Units (valued
at approximately $27.1 million, based on the Offering Price) and
approximately $91.0 million in cash.
. The Operating Partnership will reimburse AGHI for approximately $900,000
in direct out-of-pocket expenses incurred in connection with the
acquisition of the Initial Hotels, including legal, environmental and
engineering expenses;
. The Operating Partnership will lease each Initial Hotel to the Lessee for
a term of twelve years pursuant to a Participating Lease, which will
require Base Rent to be paid on a weekly basis and Participating Rent to
be paid on a monthly basis;
. The Operating Partnership will receive from the Primary Contributors
options to acquire their interests in the two Option Hotels (see "The
Initial Hotels--Options to Purchase and Rights of First Refusal");
. In order for the Company to qualify as a REIT, the Operating Partnership
will sell certain personal property relating to certain of the Initial
Hotels to the Lessee in exchange for the FF&E Note in the aggregate
principal amount of $315,000 that will be secured by such personal
property;
. The Lessee will contract with AGHI to operate the Initial Hotels under
separate Management Agreements providing for the subordination of the
payment of the management fees to the Lessee's obligation to pay rent to
the Operating Partnership under the Participating Leases; and
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. In order to facilitate compliance with state and local liquor laws and
regulations, the Lessee will sublease, pursuant to the Beverage
Subleases, those areas of the Initial Hotels where alcoholic beverages
are served to the Beverage Corporations.
BENEFITS TO THE OFFICERS AND THE PRIMARY CONTRIBUTORS
As a result of the Formation Transactions, officers of the Company and the
Primary Contributors will receive the following benefits:
. Mr. Jorns will receive 184,615 OP Units, Mr. Wiles will receive 56,519 OP
Units, Mr. Barr will receive 10,000 OP Units, Mr. Sowell will receive
538,724 OP Units, Mr. Lewis W. Shaw II will receive 184,615 OP Units, and
Mr. Kenneth W. Shaw will receive 183,199 OP Units, as consideration for
their interests in six of the Initial Hotels and the assignment of the
contract right in respect of one additional Initial Hotel. The OP Units
to be received by Messrs. Jorns, Wiles, Barr, Sowell, Shaw and Shaw
(which are exchangeable for cash, or at the Company's option for Common
Stock, at any time after one year following the completion of the
Offering) will have a value of approximately $3.7 million, $1.1 million,
$200,000, $10.8 million, $3.7 million and $3.7 million, based on the
Offering Price, respectively, and will be more liquid than their
interests in the Initial Hotels once a public trading market for the
Common Stock commences. As of March 31, 1996, the aggregate book value of
the interests and rights to be contributed by such persons was
approximately $3.2 million;
. Messrs. Jorns, Wiles, Barr and Valentine will be granted options to
acquire 225,000, 75,000, 40,000 and 20,000 shares of Common Stock,
respectively, at the Offering Price, which become exercisable in four
equal annual installments commencing on the date of grant;
. Messrs. Jorns, Wiles, Barr and Valentine will receive stock awards of
30,000, 10,000, 6,000 and 4,000 shares of restricted Common Stock,
respectively, which will vest over a four-year period commencing on the
date of grant;
. The Operating Partnership will reimburse AGHI for approximately $900,000
for direct out-of-pocket expenses incurred in connection with the
acquisition of the Initial Hotels, including legal, environmental and
engineering expenses;
. The Operating Partnership will repay approximately $3.75 million of
indebtedness guaranteed by AGHI;
. Certain tax consequences to the Primary Contributors resulting from the
conveyance of their interests in the Initial Hotels to the Operating
Partnership, will be deferred;
. Through its operation of the Initial Hotels pursuant to the Participating
Leases, the Lessee, which is owned by Messrs. Jorns, Wiles, Barr, Sowell,
Shaw and Shaw, will be entitled to all of the cash flow from the Initial
Hotels after the payment of operating expenses, management fees and rent
under the Participating Leases (which cash flow, after establishing a
reserve for tax distributions to its partners, the Lessee will use
annually, until its net worth equals the greater of (i) $6.0 million or
(ii) 17.5% of actual rent payments from hotels leased to the Lessee
during the preceding calendar year, to purchase interests in the
Company). Pursuant to the Management Agreements, AGHI, which is owned by
Messrs. Jorns, Wiles, Sowell, Shaw and Shaw, will receive management fees
from the Lessee in an amount initially equal to a base fee of 1.5% of
gross revenues plus an incentive fee of up to 2.0% of gross revenues that
will be earned incrementally upon reaching certain gross revenue targets.
The management fees payable to AGHI will be subordinate to the rent
payments due to the Company under the Participating Leases. All unpaid
fees will be deferred without interest until such time that all rent is
paid by the Lessee to the Company; and
. Through its operations of the areas of eleven of the Initial Hotels that
serve alcoholic beverages, the Beverage Corporations, which are wholly
owned by Mr. Jorns, will be entitled to all cash flow from
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food and beverage sales generated from such areas after the payment of
rent to the Lessee equal to 30% of gross revenues from such sales; such
arrangement will not, however, reduce Participating Rent payments to the
Company, which it is entitled to receive from such food and beverage
sales.
VALUATION OF INTERESTS
The valuation of the Company has been determined primarily based upon a
capitalization of the Company's estimated Cash Available for Distribution and
other factors discussed in "Underwriting," rather than on the basis of each
hotel's cost or appraised value.
The purchase prices for the interests to be acquired by the Company from
parties unaffiliated with the Primary Contributors were determined pursuant to
arm's-length negotiations. The allocation of consideration among the Primary
Contributors was determined through negotiation and through the Company's
determination of the percentage of estimated adjusted cash flow that is
required to pay the Company's stockholders a specified initial annual
distribution rate, which rate is based upon prevailing market conditions. The
allocation of consideration among the Primary Contributors, in certain
instances, also was affected by performance-oriented structures contained in
the applicable contributing partnership agreements and reallocations of
benefits to be derived among certain of the contributing partners unrelated to
capitalization rates or market values of the Initial Hotels.
TRANSFER OF INITIAL HOTELS
The Company's interest in the Initial Hotels will be acquired pursuant to
various agreements, the forms of which will be filed as exhibits to the
Registration Statement, of which this Prospectus forms a part. These
acquisitions are subject to all of the terms and conditions of such
agreements. The Company will assume all obligations relating to the Initial
Hotels that may arise after the transfer.
The agreements effecting the transfer of the assets or direct or indirect
interest of the partners and other holders of equity in the entities selling
the Initial Hotels will contain representations and warranties from each such
person concerning title to the interests being transferred and the absence of
liens or other encumbrances thereon. Certain of the Primary Contributors
(collectively, the "Indemnitors") have agreed to make additional
representations with respect to the Company and the Initial Hotels concerning
the operation of such Initial Hotels, environmental matters and other
representations and warranties customarily found in similar documents and also
have agreed to indemnify the Company against breaches of such representations
and warranties. These representations and warranties will survive the closing
of the Offering for a period of one year.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Upon the date of this Prospectus, the Board of Directors will consist of
five members, four of whom will be Independent Directors (as defined in
"Policies and Objectives with Respect to Certain Activities--Conflict of
Interest Policies--Charter and Bylaw Provisions"). The Board of Directors will
be divided into three classes serving staggered three-year terms. Initially,
the Company will have four executive officers and five other officers and
support personnel and appropriate support staff. Certain information regarding
the directors, proposed directors and executive officers of the Company is set
forth below.
<TABLE>
<CAPTION>
CLASS/TERM
NAME POSITION AGE EXPIRATION
---- -------- --- --------------
<S> <C> <C> <C>
Steven D. Jorns......... Chairman of the Board, Chief Executive
Officer, and President 47 Class I/1997
Bruce G. Wiles.......... Executive Vice President 44 --
Kenneth E. Barr......... Executive Vice President, Chief Financial
Officer, Secretary and Treasurer 47 --
Russ C. Valentine....... Senior Vice President--Acquisitions 51 --
H. Cabot Lodge III...... Independent Director 40 Class II/1998
James R. Worms.......... Independent Director 51 Class II/1999
James McCurry........... Independent Director 47 Class III/1999
Kent R. Hance........... Independent Director 54 Class III/1998
</TABLE>
Steven D. 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 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, New York Stock Exchange 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 real estate development and brokerage concern,
which specialized in hospitality and development transactions. Mr. Wiles
previously served as President of R.W. Pulley and Associates, Ltd., a large
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 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 reporting, 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
a 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.
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Russ C. 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 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.
H. Cabot Lodge III 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. Prior to September 1995, when he
joined Superconducting Core Technologies, Inc. on a full-time basis, 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
is also 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., Carey
Institutional Properties, and Corporate Property Associates 12.
James R. 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 McCurry has served since September 1994 as Chairman of the Board of
NeoStar Retail Group, Inc., a specialty retailer of consumer software whose
shares are quoted on the Nasdaq National Market System. Mr. McCurry is a
former partner of Bain & Company, an international management consulting firm.
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 has been since 1994 a law partner in the firm Hance,
Scarborough, Woodward & Weisbart, L.L.P., Dallas, 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 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 will be managed by a five-member Board of Directors, a majority
of whom will be Independent Directors. The four Independent Directors will
become directors of the Company as of the effective date of this Prospectus.
The Board of Directors will initially have an Audit Committee, a Compensation
Committee and a Leasing Committee.
Audit Committee. Promptly following the completion of the Offering, the
Board of Directors will establish an Audit Committee that will consist
entirely of Independent Directors. The Audit Committee will make
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recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees, and review the
adequacy of the Company's internal accounting controls.
Compensation Committee. The Board of Directors will establish a Compensation
Committee to determine compensation of the Company's executive officers and
administer the 1996 Plan. The members of the Compensation Committee will
consist entirely of Independent Directors.
Leasing Committee. The Board of Directors will establish a Leasing Committee
that will review not less frequently than annually the Lessee's compliance
with the terms of the Participating Leases and will review and approve the
terms of any new leases between the Company and the Lessee. The Leasing
Committee will consist entirely of Independent Directors.
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.
EXECUTIVE COMPENSATION
The Company was incorporated as a Maryland corporation on April 12, 1996.
Accordingly, the Company did not pay any cash compensation to its executive
officers for the year ended December 31, 1995.
EMPLOYMENT AGREEMENTS
The Company will enter into an employment agreement with Mr. Jorns, pursuant
to which Mr. Jorns will serve as Chairman of the Board, 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, the Company
will enter into employment agreements with Messrs. Wiles, Barr and Valentine,
pursuant to which Mr. Wiles will serve as Executive Vice President, Mr. Barr
will serve as Executive Vice President and Chief Financial Officer and Mr.
Valentine will serve 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. In addition to base salary, each such Executive
Officer is entitled under his employment agreement to receive annual
performance-based compensation as determined by the Compensation Committee.
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 will be 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
Code. In addition, such employment agreements provide for the grant of the
options and the stock awards described under "--Stock Incentive Plans--The
1996 Plan" below.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company will be paid an annual
fee of $17,000. In addition, each such director will be paid $750 for
attendance at each meeting of the Company's Board of Directors and $500 for
attendance at each meeting of a committee of the Company's Board of which such
director is a member. The annual retainer fee will be paid to such directors
50.0% in cash and 50.0% in shares of Common Stock. Meeting fees will be paid
in cash. Directors who are employees of the Company will not receive any fees
for their service on the Board of Directors or a committee thereof. In
addition, the Company will reimburse directors for their out-of-pocket
expenses incurred in connection with their service on the Board of Directors.
Upon the effectiveness of the Registration Statement, each non-employee
director will be granted nonqualified options to purchase 10,000 shares of
Common Stock at the Offering Price that will vest in three annual installments
commencing on the date of grant. Any non-employee director who ceases to be a
director
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will forfeit the right to receive any options not previously vested. See "--
Stock Incentive Plans--The Directors' Plan."
STOCK INCENTIVE PLANS
The Board of Directors will adopt, and the Company's stockholders will
approve, the 1996 Plan and the Directors' Plan for the purposes of (i)
attracting and retaining employees, directors, and other service providers
with ability and initiative, (ii) providing incentives to those deemed
important to the success of the Company and related entities, and (iii)
aligning the interests of these individuals with the interests of the Company
and its stockholders through opportunities for increased stock ownership.
The 1996 Plan
Administration. The 1996 Plan will be administered by the Compensation
Committee. The Compensation Committee may delegate certain of its authority to
administer the 1996 Plan. The Compensation Committee may not, however,
delegate its authority with respect to grants and awards to individuals
subject to Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). As used in this summary, the term "Administrator" means the
Compensation Committee or its delegate, as appropriate.
Eligibility. Each employee of the Company or of an affiliate of the Company
or any other person whose efforts contribute to the Company's performance,
(other than employees of the Lessee and AGHI who are not also employees of the
Company), including an employee who is a member of the Board, but excluding
non-employee directors of the Company, is eligible to participate in the 1996
Plan. The Administrator will select the individuals who will participate in
the 1996 Plan ("Participants") but no person may participate in the 1996 Plan
while he is a member of the Compensation Committee. The Administrator may,
from time to time, grant stock options, stock awards, incentive awards, or
performance shares to Participants.
Options. Options granted under the 1996 Plan may be incentive stock options
("ISOs") or nonqualified stock options. An option entitles a Participant to
purchase shares of Common Stock from the Company at the option price. The
option price may be paid in cash, with shares of Common Stock, or with a
combination of cash and Common Stock. The option price will be fixed by the
Administrator at the time the option is granted, but the price cannot be less
than 100.0% for existing employees (85.0% in connection with the hiring of new
employees) of the shares' fair market value on the date of grant. The exercise
price of an ISO may not be less than 100.0% of the shares' fair market value
on the date of grant, 110.0% of the fair market value in the case of an ISO
granted to a ten percent stockholder of the Company or of certain affiliates
of the Company. Options may be exercised at such times and subject to such
conditions as may be prescribed by the Administrator but the maximum term of
an option is ten years in the case of an ISO or five years in the case of an
ISO granted to a ten percent stockholder.
ISOs may only be granted to employees of the Company or an affiliate;
however, no employee may be granted ISOs (under the 1996 Plan or any other
plan of the Company or an affiliate) that are first exercisable in a calendar
year for Common Stock having an aggregate fair market value (determined as of
the date the option is granted) exceeding $100,000. In addition, no
Participant may be granted options in any calendar year for more than 250,000
shares of Common Stock.
Stock Awards. Participants also may be awarded shares of Common Stock
pursuant to a stock award. A Participant's rights in a stock award may be
nontransferable or forfeitable or both unless certain conditions prescribed by
the Administrator are satisfied. These conditions may include, for example, a
requirement that the Participant continue employment with the Company for a
specified period or that the Company or the Participant achieve stated,
performance-related objectives. The objectives may be stated with reference to
the fair market value of the Common Stock or the Company's, a subsidiary's, or
an operating unit's return on equity, earnings per share, total earnings,
earnings growth, return on capital, Funds From Operations or return on assets.
A stock award that is not immediately vested and nonforfeitable will be
restricted, in whole or in part, for a period of at
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least three years; provided, however, that the period shall be at least one
year in the case of a stock award that is subject to objectives based on one
or more of the foregoing performance criteria. The maximum number of shares of
Common Stock that may be issued in respect of stock awards granted under the
1996 Plan cannot exceed 50,000 shares of Common Stock.
Incentive Awards. Incentive awards also may be granted under the 1996 Plan.
An incentive award is an opportunity to earn a bonus, payable in cash, upon
attainment of stated performance objectives. The objectives may be stated with
reference to the fair market value of the Common Stock or on the Company's, a
subsidiary's, or an operating unit's return on equity, earnings per share,
total earnings, earnings growth, return on capital, Funds From Operations or
return on assets. The period in which performance will be measured will be at
least one year. No Participant may receive an incentive award payment in any
calendar year that exceeds the lesser of (i) 100.0% of the Participant's base
salary (prior to any salary reduction or deferral election) as of the date of
grant of the incentive award or (ii) $250,000.
Performance Share Awards. The 1996 Plan also provides for the award of
performance shares. A performance share award entitles the Participant to
receive a payment equal to the fair market value of a specified number of
shares of Common Stock if certain standards are met. The Administrator will
prescribe the requirements that must be satisfied before a performance share
award is earned. These conditions may include, for example, a requirement that
the Participant continue employment with the Company for a specified period or
that the Company or the Participant achieve stated, performance-related
objectives. The objectives may be stated with reference to the fair market
value of the Common Stock or on the Company's, a subsidiary's, or an operating
unit's return on equity, earnings per share, total earnings, earnings growth,
return on capital, Funds From Operations or return on assets. To the extent
that performance shares are earned, the obligation may be settled in cash, in
Common Stock, or by a combination of the two. No Participant may be granted
performance shares for more than 12,500 shares of Common Stock in any calendar
year.
Share Authorization. All awards made under the 1996 Plan will be evidenced
by written agreements between the Company and the Participant. A maximum of
900,000 shares of Common Stock may be issued under the 1996 Plan. The share
limitation and the terms of outstanding awards shall be adjusted, as the
Compensation Committee deems appropriate, in the event of a stock dividend,
stock split, combination, reclassification, recapitalization or other similar
event.
Termination and Amendment. No option or stock award may be granted and no
performance shares may be awarded under the 1996 Plan more than ten years
after the earlier of (i) the date that the 1996 Plan is adopted by the Board
or (ii) the date that it is approved by the Company's stockholders. The Board
may amend or terminate the 1996 Plan at any time, but, except as set forth in
the immediately preceding paragraph, an amendment will not become effective
without stockholder approval if the amendment materially (i) increases the
number of shares of Common Stock that may be issued under the 1996 Plan (other
than an adjustment as described above), (ii) changes the eligibility
requirements, or (iii) increases the benefits that may be provided under the
1996 Plan.
Initial Awards. The Board of Directors will approve prior to the Offering
the grant of ISOs and nonqualified options to Messrs. Jorns, Wiles, Barr and
Valentine to purchase up to 225,000, 75,000, 40,000 and 20,000 shares of
Common Stock, respectively. The options granted to Messrs. Jorns, Wiles, Barr
and Valentine will become exercisable in four equal annual installments,
commencing on the date of grant, subject to continued employment through the
applicable vesting date. Both the ISOs and the nonqualified options will be
exercisable for ten years from the date of grant at the fair market value of
the Common Stock on the date of grant. The options will be ISOs to the extent
permitted under the ISO "$100,000 limitation" described above. In addition,
Messrs. Jorns, Wiles, Barr and Valentine will be granted restricted stock
awards with respect to 30,000, 10,000, 6,000 and 4,000 shares of Common Stock,
respectively. The awards vest, subject to continued employment, through the
applicable vesting date, pursuant to a schedule beginning on the date of grant
as follows: 10.0% on the date of grant, 20.0% on each of the first and second
anniversaries and 25.0% on each of the third and fourth
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anniversaries of the date of grant. Prior to vesting, such officers will be
entitled to vote and receive dividends with respect to such restricted shares
of Common Stock.
Transferability. Under the 1996 Plan, Participants may be permitted to
transfer non-qualified stock options to certain family members or trusts for
the benefit of family members, provided the Participant does not receive any
consideration for the transfer. In addition, nonqualified options, incentive
awards and awards of Performance Shares may be transferable to the extent
permitted under Rule 16b-3 promulgated under the Exchange Act.
Certain Federal Income Tax Consequences Relating to Options. In general, a
Participant will not recognize taxable income upon the grant or exercise of an
ISO. However, upon the exercise of an ISO, the excess of the fair market value
of the shares received on the date of exercise over the exercise price of the
shares will be treated as an adjustment to alternative minimum taxable income.
When a Participant disposes of shares acquired by exercise of an ISO, the
Participant's gain (the difference between the sale proceeds and the price
paid by the Participant for the shares) upon the disposition will be taxed as
capital gain, provided the Participant (i) does not dispose of the shares
within two years after the date of grant nor within one year after the date of
exercise, and (ii) exercises the option while an employee of the Company or of
an affiliate of the Company or within three months after termination of
employment for reasons other than death or disability. If the first condition
is not met, the Participant generally will realize ordinary income in the year
of the disqualifying disposition. If the second condition is not met, the
Participant generally will recognize ordinary income upon exercise of the
option.
In general, a Participant who receives a nonqualified stock option will
recognize no income at the time of the grant of the option. Upon exercise of a
nonqualified stock option, a Participant will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the date
of exercise over the exercise price of the option. Special timing rules may
apply to a Participant who is subject to Section 16(a) of the Exchange Act.
The employer (either the Company or its affiliate) will be entitled to claim
a federal income tax deduction on account of the exercise of a nonqualified
option. The amount of the deduction will be equal to the ordinary income
recognized by the Participant. The employer will not be entitled to a federal
income tax deduction on account of the grant of any option or the exercise of
an ISO. The employer may claim a federal income tax deduction on account of
certain disqualifying dispositions of Common Stock acquired upon the exercise
of an ISO.
Section 162(m) of the Code places a limitation of $1,000,000 on the amount
of compensation payable to each of the named executive officers that the
Company may deduct for federal income tax purposes. The limit does not apply
to certain performance-based compensation paid under a plan that meets the
requirements of the Code and regulations promulgated thereunder. While the
1996 Plan generally complies with the requirements for performance-based
compensation, options granted at less than 100% of fair market value and stock
awards granted under the 1996 Plan will not satisfy those requirements.
The Directors' Plan
Share Authorization. A maximum of 100,000 shares of Common Stock may be
issued under the Directors' Plan. The share limitation and terms of
outstanding awards shall be adjusted, as the Compensation Committee deems
appropriate, in the event of a stock dividend, stock split, combination,
reclassification, recapitalization or other similar event.
Eligibility. The Directors' Plan provides for the grant of options to
purchase Common Stock and the award of shares of Common Stock to each eligible
director of the Company. No director who is an employee of the Company is
eligible to participate in the Directors' Plan.
Options. The Directors' Plan provides that each eligible director who is a
member of the Board of Directors as of the date that the registration
statement relating to the Offering is declared effective by the SEC will be
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awarded nonqualified options to purchase 10,000 shares of Common Stock on that
date (each such director, a "Founding Director"). Each eligible director who
is not a Founding Director (a "Non-Founding Director") will receive
nonqualified options to purchase 10,000 shares of Common Stock on the date of
the meeting of the Company's stockholders at which the Non-Founding Director
is first elected to the Board of Directors. The options granted to Founding
Directors upon effectiveness of the registration statement relating to the
Offering will have an exercise price equal to the initial public offering
price and will vest in three annual installments (with respect to 3,333, 3,333
and 3,334 shares, respectively) beginning on the date of grant, subject to the
Director's continuous service through such vesting date. The exercise price of
options under future grants will be 100% of the fair market value of the
Common Stock on the date of grant and will vest in the same manner. The
exercise price may be paid in cash, cash equivalents acceptable to the
Compensation Committee, Common Stock or a combination thereof. Options granted
under the Directors' Plan are exercisable for ten years from the date of
grant. Upon termination of service as a director, options which have not
vested are forfeited and vested options may be exercised until they expire.
Certain Federal Income Tax Consequences Relating to Options. Generally, an
eligible director does not recognize any taxable income, and the Company is
not entitled to a deduction upon the grant of an option. Upon the exercise of
an option, the eligible director recognizes ordinary income equal to the
excess of the fair market value of the shares acquired over the option
exercise price, if any. Special rules may apply as a result of Section 16 of
the Exchange Act. The Company is generally entitled to a deduction equal to
the compensation taxable to the eligible director as ordinary income. Eligible
directors may be subject to backup withholding requirements for federal income
tax.
Share Awards. The Directors' Plan also provides for the annual award of
shares of Common Stock to each eligible director ("Director Share Awards").
The number of shares so awarded will be the number of whole share that has a
fair market value most nearly equal to $8,500 (i.e., 50.0% of the annual
retainer fee otherwise payable to the director). No more than 20,000 shares
will be awarded as Director Share Awards during the term of the Directors'
Plan. See "--Compensation of Directors." Such shares will vest immediately
upon grant and will be nonforfeitable. Director Share Awards will be made to
each Founding Director on the date that the registration statement relating to
the Offering is declared effective by the Commission and to each Non-Founding
Director on the date of the meeting of the Company's stockholders at which the
Non-Founding Director is first elected to the Board. Thereafter, Director
Share Awards will be made at the first meeting of the Board of Directors
following the annual meeting of the Company's stockholders.
Amendment and Termination. The Directors' Plan provides that the Board may
amend or terminate the Plan, but the terms of the Plan relating to the amount,
price and timing of awards under the Plan may not be amended more than once
every six months other than to comport with changes in the Code, or the rules
and regulations thereunder. An amendment will not become effective without
stockholder approval if the amendment materially (i) increases the number of
shares that may be issued under the Directors' Plan, (ii) changes the
eligibility requirements, or (iii) increases the benefits that may be provided
under the Directors' Plan. No options may be granted nor Director Shares
Awards made under the Directors' Plan after December 31, 2006.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provision which eliminates such liability to the
maximum extent permitted by the MGCL.
The Charter of the Company obligates it, to the maximum extent permitted by
Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to any person (or the estate of
any person) who is or was a party to, or is threatened to be made a party to,
any threatened, pending or completed action, suit or proceeding whether or not
by or in the right of the Company, and whether civil,
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criminal, administrative, investigative or otherwise, by reason of the fact
that such person is or was a director or officer of the Company, or is or was
serving at the request of the Company as a director, officer, trustee,
partner, member, agent or employee of another corporation, partnership,
limited liability company, association, joint venture, trust or other
enterprise. The Charter also permits the Company to indemnify and advance
expenses to any person who served a predecessor of the Company in any of the
capacities described above and to any employee or agent of the Company or a
predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (a) the act
or omission of the director or officer was material to the matter giving rise
to the proceeding and (i) was committed in bad faith or (ii) was the result of
active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services, or (c)
in the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. In addition, the MGCL requires the Company, as a
condition to advancing expenses, to obtain (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company as authorized by the
Bylaws and (b) a written statement by or on his behalf to repay the amount
paid or reimbursed by the Company if it shall ultimately be determined that
the standard of conduct was not met.
INDEMNIFICATION AGREEMENTS
The Company will enter into indemnification agreements with each of its
executive officers and directors. The indemnification agreements will require,
among other matters, that the Company indemnify its executive officers and
directors to the fullest extent permitted by law and advance to the executive
officers and directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. Under the
agreements, the Company must also indemnify and advance all expenses incurred
by executive officers and directors seeking to enforce their rights under the
indemnification agreements and may cover executive officers and directors
under the Company's directors' and officers' liability insurance. Although the
form of indemnification agreement offers substantially the same scope of
coverage afforded by law, it provides greater assurance to directors and
executive officers that indemnification will be available, because, as a
contract, it cannot be modified unilaterally in the future by the Board of
Directors or the stockholders to eliminate the rights it provides.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
RELATIONSHIPS AMONG OFFICERS AND DIRECTORS
Mr. Jorns is an executive officer, director and securityholder of each of
the Company, the Lessee, AGHI and the Beverage Corporations. Mr. Wiles is an
executive officer and stockholder of the Company and is an executive officer,
director and securityholder of each of the Lessee and AGHI. Mr. Barr is an
executive officer and stockholder of the Company, an executive officer and
securityholder of the Lessee 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 INTERESTS IN CERTAIN OF THE INITIAL HOTELS
One or more of Messrs. Jorns, Wiles and Barr and their respective affiliates
own equity interests or contract rights relating to certain of the Initial
Hotels. Such persons and affiliates will receive an aggregate of 251,134
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OP Units in exchange for such interests in these Initial Hotels. Upon exercise
of their rights to exchange such OP Units (which rights are not exercisable
until one year after the closing of the Offering), such persons and entities
may receive cash in the amount of approximately $5.0 million based on the
Offering Price or, at the Company's option, an aggregate of 251,134 shares of
Common Stock. See "Partnership Agreement--Exchange Rights." In addition, the
Operating Partnership will reimburse AGHI for approximately $900,000 in direct
out-of-pocket expenses incurred in connection with the acquisition of the
Initial Hotels. Also, the Operating Partnership will repay approximately $3.75
million of indebtedness guaranteed by AGHI. For a discussion of the
consideration to be received by Messrs. Jorns, Wiles and Barr and their
affiliates in connection with the Operating Partnership's acquisition of the
Initial Hotels and the formation of the Company, see "Formation Transactions."
SHARED SERVICES AND OFFICE SPACE AGREEMENT
Effective upon completion of the Offering, the Company will enter into a
sublease and services agreement with AGHI pursuant to which AGHI will provide
the Company with office space and limited support personnel for the Company's
headquarters at 3860 West Northwest Highway, Dallas, Texas 75220 for an annual
fee of approximately $103,000.
OPTIONS TO PURCHASE AND RIGHTS OF FIRST REFUSAL
Pursuant to the Option Agreements, the Company will have the option and
right of first refusal to acquire AGHI's (i) 50.0% partnership interest in the
Boise, Idaho Option Hotel, and (ii) 16.7% partnership interest in the Durham,
North Carolina Option Hotel. The Option Agreements provide that for a period
of two years after the opening of each such hotel, the Company will have the
right to purchase AGHI's interests in each such hotel at a price equal to
AGHI's percentage interest in such hotel times 110% of the cost of developing
such hotel (including mortgage debt) for the first year; during the second
year of such option, the purchase price will be increased by any percentage
increase in the CPI. The purchase price will be payable (i) by taking title to
AGHI's interest in such hotels subject to a pro rata portion of the applicable
owning partnership's debt and (ii) by paying the balance of such purchase
price in cash or OP Units, at the option of AGHI. AGHI may sell its interests
in the Option Hotels free and clear of these options prior to the expiration
of the two-year option period, provided that it gives notice to the Company
and extends to the Company a right of first refusal to acquire such interests
on the same terms as that of the proposed sale. The exercise of the option or
right of first refusal may require approval of the partners in the
partnerships which own the Option Hotels that are not affiliated with AGHI,
including the approval by such partners of a Participating Lease relating to
such Option Hotels. AGHI will not seek such approval until after the Company
has exercised its option or right of first refusal, and there can be no
assurance that such approval will be granted.
EMPLOYMENT AGREEMENTS AND STOCK INCENTIVE PLANS
The Company will enter into an employment agreement with Mr. Jorns, pursuant
to which Mr. Jorns will serve as Chairman, 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, the Company will enter
into employment agreements with Messrs. Wiles, Barr and Valentine, pursuant to
which Mr. Wiles will serve as Executive Vice President, Mr. Barr will serve as
Executive Vice President and Chief Financial Officer and Mr. Valentine will
serve 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. In addition to base salary, each such executive officer is entitled
under his employment agreement to receive annual performance-based
compensation as determined by the Compensation Committee. Upon termination of
such employment agreements 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 will be 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 Code. In addition,
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such employment agreements provide for the grant of options to Messrs. Jorns,
Wiles, Barr and Valentine to purchase up to 225,000, 75,000, 40,000 and 20,000
shares of Common Stock, respectively, which will become exercisable in four
equal annual installments, commencing on the date of the grant. The employment
agreements also provide for the grant of stock awards to Messrs. Jorns, Wiles,
Barr and Valentine with respect to 30,000, 10,000, 6,000 and 4,000 shares of
restricted Common Stock, respectively, which vest over a four-year period
commencing on the date of grant. See "Management--Stock Incentive Plans--The
1996 Plan."
PURCHASE OF PERSONAL PROPERTY
In order for the Company to qualify as a REIT, the Operating Partnership
will sell certain personal property relating to certain of the Initial Hotels
to the Lessee for $315,000, which amount will be paid by issuing the FF&E Note
to the Operating Partnership. The FF&E Note is recourse to the Lessee and
bears interest at the rate of 10.0% per annum and requires the payment of
quarterly installments of principal and interest of approximately $20,000 that
will fully amortize the FF&E Note over a five-year period.
THE PARTICIPATING LEASES
The Company and the Lessee will enter into the Participating Leases, each
with a term of twelve years, relating to the Initial Hotels. The Company
anticipates that a similar Participating Lease will be entered into with
respect to any additional hotel properties acquired by the Company in the
future. See "The Initial Hotels--The Participating Leases." Pursuant to the
terms of the Participating Leases, the Lessee is required to pay the greater
of Base Rent or Percentage Rent and certain other additional charges and is
entitled to all profits from the operation of the Initial Hotels after the
payment of operating and other expenses. See "Selected Financial Information--
The Lessee." In addition, the Company will enter into a Lease Master Agreement
which will set forth the terms of the Lessee Pledge and certain other matters.
THE MANAGEMENT AGREEMENTS
The Lessee and AGHI will enter into the Management Agreements, each with a
term of twelve years, relating to the management of the Initial Hotels. The
Company anticipates that a similar Management Agreement will be entered into
with respect to any hotel properties leased by the Company to the Lessee in
the future. 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 the Lessee is subordinate to the
Lessee's obligations to the Company under the Participating Leases. See "The
Initial Hotels--The Management Agreements."
THE BEVERAGE CORPORATIONS
In order to facilitate compliance with state and local liquor laws and
regulations, in connection with the acquisition of the Initial Hotels, the
Lessee has agreed to sublease those areas of the Initial Hotels that comprise
the restaurant and other areas where alcoholic beverages are served to the
Beverage Corporations, eleven 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 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.
AGHI AND THE LESSEE
American General Hospitality, Inc.
AGHI, based in Dallas, Texas, was founded in 1981 by Mr. Jorns, the
Company's Chairman of the Board, Chief Executive Officer and President. AGHI
has experienced significant growth over the last five years as its management
portfolio increased from 39 hotels with more than 5,200 guest rooms under
management at December 31, 1990, to 74 hotels with more than 13,865 guest
rooms under management at March 31, 1996. For the twelve months ended March
31, 1996, the hotels managed by AGHI generated revenues in excess of $275
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million. According to Hotel & Motel Management, a leading hotel trade
publication, AGHI was the nation's fourth largest independent hotel management
company in 1995, based upon number of hotels under management. AGHI has a
national presence, with operating experience in 40 states, involving 212
different hotels. AGHI has developed six hotels from the ground up and is
currently developing two other hotels for which the Company has limited
purchase options. See "The Initial Hotels--Options to Purchase and Rights of
First Refusal." These hotels include four Hampton Inns, two Courtyards by
Marriott, one Holiday Inn, and one Embassy Suites. AGHI has in the past
acquired fifteen hotels, containing a total of 2,638 guest rooms, under
various franchises and affiliations, including Hilton, Courtyard by Marriott,
Embassy Suites, Holiday Inn, Hampton Inn, and Days Hotel as well as the
prestigious Small Luxury Hotels(R) affiliation. In addition, AGHI has been
involved in the repositioning and redevelopment of approximately 70 hotels
that operated under various national franchise brands. The operations of AGHI
are fully integrated with capabilities in all phases of acquisition,
development, and management of hotel properties. As of March 31, 1996, AGHI
had approximately 6,000 employees.
The Company believes that it will benefit significantly from the hotel
management experience of AGHI. AGHI will manage all of the Initial Hotels and
is expected to be retained by the Lessee as manager of any additional hotels
acquired by the Company and leased to the Lessee. Management expects that the
Company also will benefit from AGHI's significant historical operating
experience during various economic cycles.
AGHI has significant relationships with major hotel franchisors including
Hilton, Marriott, Wyndham Hotels, DoubleTree Hotels, Holiday Inn, Sheraton,
Promus Hotels(R), Radisson(R), the Choice Hotels family of brands and the HFS
Incorporated family of brands. The Company believes that these relationships
will enhance the Company's ability to evaluate hotel brand affiliations
without restrictive ties to any one franchisor's brands. Pursuant to the terms
of the Management Agreements, and for so long as AGHI is managing hotels for
the benefit of the Company, AGHI has agreed to limit its business activities
to managing and operating Company-owned hotels and hotels owned by third
parties. See "The Initial Hotels--The Management Agreements." Except for two
hotels currently under development, for which the Company has purchase options
on AGHI's interests in such hotels, and one hotel which is currently held for
sale, AGHI's activities will be limited to managing and operating Company-
owned hotels and hotels owned by third parties. See "The Initial Hotels--
Options to Purchase and Rights of First Refusal."
The Lessee will contract with AGHI to manage the Initial Hotels under an
incentive compensation structure (as described below). Messrs. Jorns and
Wiles, two executive officers of the Company, own collectively approximately
21.0% of AGHI. The remaining interests in AGHI are owned by Messrs. Sowell
(47.5%), Shaw and Shaw (collectively, 31.5%).
AGH Leasing, L.P.
The Company will lease each Initial Hotel to the Lessee pursuant to a
separate Participating Lease and, while not legally obligated to do so,
expects to lease additional hotels that may be acquired or developed by the
Company to the Lessee. Messrs. Jorns, Wiles and Barr, all executive officers
of the Company, own collectively approximately 23.0% of the Lessee. The
remaining interests in the Lessee are owned by Messrs. Sowell, Shaw and Shaw.
Each Participating Lease will have a term of twelve years, subject to earlier
termination upon the occurrence of certain events. Under the Participating
Leases, the Lessee will be obligated to make fixed monthly Base Rent payments
to the Company and quarterly Participating Rent payments to the Company. See
"The Initial Hotels--The Participating Leases--Lessee Capitalization; Lessee
Pledge."
The Lessee is also required to provide to the Company monthly financial and
operating information about each of the Initial Hotels, quarterly unaudited
and annual audited financial statements of the Lessee, and any other
information material to the Lessee's continuing ability to perform its
obligations under the Participating Leases. The Company will include this
information in its periodic reports filed with the Securities and Exchange
Commission (the "Commission") under the Exchange Act.
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Certain Terms of the Participating Leases, the Management Agreements and
Certain Related Agreements
In an effort to align the interests of AGHI and the Lessee with the
interests of the Company's stockholders, the Participating Leases, the
Management Agreements and certain related agreements provide for the
following:
. the partners of the Lessee have agreed upon consummation of the Offering
to (i) initially capitalize the Lessee with $500,000 in cash and (ii)
pursuant to the Lessee Pledge, pledge 275,000 OP Units having a value of
approximately $5.5 million, based on the Offering Price, to the Company
to secure the Lessee's obligations under the Participating Leases; OP
Units subject to the Lessee Pledge may be released therefrom without
duplication (a) on a one-for-one basis as the Lessee acquires OP Units or
shares of Common Stock or (b) upon the contribution to the Lessee of cash
or an increase in undistributed earnings in an amount equal to the then
current market value of the OP Units released from the Lessee Pledge;
. until the Lessee's net worth equals the Lessee Distribution Restriction
(the greater of (i) $6.0 million and (ii) 17.5% of actual rent payments
from hotels leased to the Lessee during the preceding calendar year
(annualized for 1996), the Lessee will 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 the operations of the Lessee
while it is a limited partnership and except for distributions relating
to interest or dividends received by the Lessee from cash or securities
held by it) and will be required during this period, subject to
compliance with applicable securities laws, to use its cash flow
attributable to the Participating Leases (after establishing a reserve
for partner tax distributions) to purchase interests in the Company,
which interests may not be sold or transferred for a period of two years
after their acquisition (other than to partners in the Lessee if,
following such transfer, the Lessee Distribution Restriction is
satisfied);
. management fees paid to AGHI by the Lessee under the Management
Agreements will be performance based with a base fee equal to 1.5% of
gross revenues plus an incentive fee of up to 2.0% of gross revenues that
will be earned incrementally upon reaching certain gross revenue targets;
. base and incentive management fees payable by the Lessee to AGHI will be
subordinated to the Lessee's rent obligations to the Company under the
Participating Leases;
. monetary and certain other defaults by the Lessee under each
Participating Lease will result in a cross-default of all other
Participating Leases to which the Lessee is a party;
. Messrs. Jorns and Wiles, who are stockholders of AGHI and are also
executive officers of the Company, will agree to use 50% 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, additional interests in the Company during each of the twelve years
following the closing of the Offering;
. each Participating Lease provides that the failure on the part of the
Lessee to materially comply with the terms of a Participating Lease would
give the Company the right to terminate such lease, repossess the
applicable hotel and enforce the payment obligations under the lease;
. AGHI will establish bonus eligibility criteria for its officers and
employees that are keyed to the amount of incentive fees AGHI earns under
the Management Agreements; in addition, subject to applicable securities
laws limitations, 25.0% of such bonuses, if earned, will be paid by AGHI
to its senior executives in interests in the Company; and
. the Board of Directors will establish a Leasing Committee, consisting
entirely of Independent Directors, that will review not less frequently
than annually the Lessee's compliance with the terms of the Participating
Leases and will review and approve the terms of each new Participating
Lease between the Company and the Lessee.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock immediately following completion of the
Formation Transactions 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 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 or it exchanged his or its
OP Units for shares of Common Stock under certain circumstances.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS(1)
------------------------ --------------------- ----------
<S> <C> <C>
Kenneth E. Barr(2) .......................................... 24,090 *
Corporate Property Associates 4, a California Limited
Partnership(3).............................................. 430,451 5.64%
Corporate Property Associates 8, L.P.(4)..................... 497,646 6.46%
Kent R. Hance(5)............................................. 3,333 *
Steven D. Jorns(6) .......................................... 262,075 3.51%
H. Cabot Lodge III(5) ....................................... 3,333 *
James McCurry(5) ............................................ 3,333 *
James E. Sowell(7) .......................................... 538,724 6.96%
Russ C. Valentine(8) ........................................ 10,089 *
Bruce G. Wiles(9) ........................................... 84,189 1.15%
James R. Worms(5) ........................................... 3,333 *
Executive officers and directors as a group (8 persons) ..... 393,775 5.18%
</TABLE>
- --------
* 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
Agreement, OP Units are not exchangeable for shares of Common Stock until
the first anniversary date of the closing of the Offering.
(2) Includes options to purchase 8,000 shares of Common Stock at the Offering
Price, which will become exercisable upon the date of grant and 6,000
shares of restricted Common Stock that constitute stock awards. Includes
90 shares of Common Stock held by the Plan and attributable to Mr. Barr.
Includes 10,000 OP Units to be issued to Mr. Barr in the Formation
Transactions.
(3) The business address of Corporate Property Associates 4, a California
Limited Partnership is c/o W.P. Carey & Co., Inc., 50 Rockefeller Plaza,
New York, New York 10029.
(4) The business address of Corporate Property Associates 8, L.P. is c/o W.P.
Carey & Co., Inc., 50 Rockefeller Plaza, New York, New York 10029.
(5) Includes options to purchase 3,333 shares of Common Stock at the Offering
Price, which will become exercisable upon the date of grant.
(6) Includes options to purchase 45,000 shares of Common Stock at the Offering
Price, which will become exercisable upon the date of grant and 30,000
shares of restricted Common Stock that constitute stock awards. Includes
158,934 OP Units to be issued to Mr. Jorns in the Formation Transactions,
25,681 OP Units to be issued to Mr. Jorns' wife in the Formation
Transactions and 2,460 shares of Common Stock held by the Plan and
attributable to Mr. Jorns.
(7) The business address of Mr. Sowell is at The Jim Sowell Company, 3131
McKinney Avenue, Suite 200, Dallas, Texas 75204. Includes 538,724 OP Units
to be issued to Mr. Sowell in the Formation Transactions.
(8) Includes options to purchase 4,000 shares of Common Stock at the Offering
Price, which will become exercisable upon the date of grant and 4,000
shares of restricted Common Stock that constitute stock awards. Includes
2,089 shares of Common Stock held by the Plan and attributable to Mr.
Valentine.
(9) Includes options to purchase 15,000 shares of Common Stock at the Offering
Price, which will become exercisable upon the date of grant and 10,000
shares of restricted Common Stock that constitute stock awards. Includes
2,670 shares of Common Stock held by the Plan and attributable to Mr.
Wiles. Includes 56,519 OP Units to be issued to Mr. Wiles in the Formation
Transactions.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of (i) the stock of the Company and (ii)
certain provisions of Maryland law and of the Charter and Bylaws of the
Company is subject to and qualified in its entirety by reference to Maryland
law described herein, and to the Charter and Bylaws of the Company which are
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
GENERAL
Under its Charter, the Company will have the authority to issue 100,000,000
shares of Common Stock, $0.01 par value per share, and 20,000,000 shares of
Preferred Stock $0.01 par value per share. No shares of Preferred Stock are
outstanding or will be outstanding immediately after consummation of the
Offering. Under Maryland law, stockholders generally are not liable for a
corporation's debts or obligations.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable. Subject to the preferential rights of any other class
or series of stock, holders of shares of Common Stock are entitled to receive
dividends on such stock if, as and when authorized and declared by the Board
of Directors of the Company out of assets legally available therefor and to
share ratably in the assets of the Company legally available for distribution
to its stockholders in the event of its liquidation, dissolution or winding up
after payment of or adequate provision for all known debts and liabilities of
the Company.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of
directors and, except as provided with respect to any other class or series of
stock, the holders of such shares will possess the exclusive voting power.
There is no cumulative voting in the election of directors, which means that
the holders of a majority of the outstanding shares of Common Stock can elect
all of the directors then standing for election and the holders of the
remaining shares will not be able to elect any directors.
Holders of shares of Common Stock have no preference, conversion, exchange,
sinking fund, or redemption rights and have no preemptive rights to subscribe
for any securities of the Company. Shares of Common Stock will have equal
dividend, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be
cast on the matter) is set forth in the corporation's charter. The Charter
provides that, with the exception of certain amendments to the Charter, the
affirmative vote of holders of shares entitled to cast a majority of all votes
entitled to be cast on such matters will be sufficient to approve the
aforementioned transactions.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other classes or series of classes of stock and to
establish the number of shares in each class or series and to set the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
PREFERRED STOCK
The Charter authorizes the Board of Directors to classify any unissued
shares of Preferred Stock and to reclassify any previously classified but
unissued shares of any series, as authorized by the Board of Directors. Prior
to issuance of shares of each series, the Board is required by the MGCL and
the Charter of the Company to set, subject to the provisions of the Charter
regarding restriction on transfer of stock, the terms, preferences,
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conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each such series. Thus, the Board could authorize the issuance
of shares of Preferred Stock with terms and conditions which could have the
effect of delaying, deferring or preventing a transaction or a change in
control of the Company that might involve a premium price for holders of
Common Stock or otherwise be in their best interest. As of the date hereof, no
shares of Preferred Stock are outstanding and the Company has no present plans
to issue any Preferred Stock.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock
and to classify or reclassify unissued shares of Common Stock or Preferred
Stock and thereafter to cause the Company to issue such classified or
reclassified shares of stock will provide the Company with increased
flexibility in structuring possible future financings and acquisitions and in
meeting other needs which might arise. The additional classes or series of
Preferred Stock, as well as the Common Stock, will be available for issuance
without further action by the Company's stockholders, unless such action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which the Company's securities may be listed or traded.
Although the Board of Directors has no intention at the present time of doing
so, it could authorize the Company to issue a class or series that could,
depending upon the terms of such class or series, delay, defer or prevent a
transaction or a change of control of the Company that might involve a premium
price for holders of Common Stock or otherwise be in their best interest.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of stock.
Specifically, not more than 50.0% in value of the Company's outstanding shares
of stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year, and the Company must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of twelve months or during
a proportionate part of a shorter taxable year. Those two requirements do not
apply until after the first taxable year for which the Company makes an
election to be taxed as a REIT. See "Federal Income Tax Considerations--
Requirements for Qualification as a REIT." In addition, the Company must meet
certain requirements regarding the nature of its gross income in order to
qualify as a REIT. One such requirement is that at least 75.0% of the
Company's gross income for each calendar year must consist of rents from real
property and income from certain other real property investments. The rents
received by the Operating Partnership and the Subsidiary Partnerships from the
Lessee will not qualify as rents from real property, which could result in
loss of REIT status for the Company, if the Company owns, actually or
constructively, 10.0% or more of the ownership interests in the Lessee, within
the meaning of section 856(d)(2)(B) of the Code. See "Federal Income Tax
Considerations--Requirements for Qualification as a REIT--Income Tests."
Because the Board of Directors believes it is essential for the Company to
continue to qualify as a REIT, the Charter, subject to certain exceptions
described below, will provide pursuant to the Ownership Limitation that no
person may own, or be deemed to own by virtue of the attribution provisions of
the Code, more than 9.8% of either (i) the outstanding shares of any class of
Common Stock or (ii) the outstanding shares of any class or series of
Preferred Stock (subject to the Look-Through Ownership Limitation applicable
to certain stockholders, as described below). Any transfer of Common Stock or
Preferred Stock that would (i) result in any person owning, directly or
indirectly, Common Stock or Preferred Stock in excess of the Ownership
Limitation (or the Look-Through Ownership Limitation, if applicable), (ii)
result in Common Stock and Preferred Stock being owned by fewer than 100
persons (determined without reference to any rules or attribution), (iii)
result in the Company being "closely held" within the meaning of section
856(h) of the Code, or (iv) cause the Company to own, actually or
constructively, 9.9% or more of the ownership interests in a tenant of the
Company's, the Operating Partnership's or a Subsidiary Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code, will be void
ab initio, and the intended transferee will acquire no rights in such shares
of Common Stock or Preferred Stock.
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Certain types of entities, such as pension trusts qualifying under section
401(a) of the Code, mutual funds qualifying as regulated investment companies
under section 851 of the Code, and corporations, will be looked through for
purposes of the "closely held" test in section 856(h) of the Code. The Charter
will allow such an entity under the Look-Through Ownership Limitation to own
up to 15.0% of the shares of any class or series of the Company's stock,
provided that such ownership does not cause any beneficial owner of such
entity to exceed the Ownership Limitation or otherwise result in a violation
of the tests described in clauses (ii), (iii) and (iv) of the preceding
paragraph.
Subject to certain exceptions described below, any purported transfer of
Common Stock or Preferred Stock that would (i) result in any person owning,
directly or indirectly, shares of Common Stock or Preferred Stock in excess of
the Ownership Limitation (or the Look-Through Ownership Limitation, if
applicable), (ii) result in the shares of Common Stock and Preferred Stock
being owned by fewer than 100 persons (determined without reference to any
rules of attribution), (iii) result in the Company being "closely held" within
the meaning of section 856(h) of the Code, or (iv) cause the Company to own,
actually or constructively, 10.0% or more of the ownership interests in a
tenant of the Company's, the Operating Partnership's or a Subsidiary
Partnership's real property, within the meaning of section 856(d)(2)(B) of the
Code, will be designated as "Shares-in-Trust" and will be transferred
automatically to a trust (a "Trust"), effective on the day before the
purported transfer of such shares of Common Stock or Preferred Stock. The
record holder of the shares of Common Stock or Preferred Stock that are
designated as Shares-in-Trust (the "Prohibited Owner") will be required to
submit such number of shares of Common Stock or Preferred Stock to the Company
for registration in the name of the trustee of the Trust (the "Trustee"). The
Trustee will be designated by the Company but will not be affiliated with the
Company. The beneficiary of the Trust (the "Beneficiary") will be one or more
charitable organizations named by the Company.
Shares-in-Trust will remain issued and outstanding shares of Common Stock or
Preferred Stock and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Trustee will receive all
dividends and distributions on the Shares-in-Trust and will hold such
dividends or distributions in trust for the benefit of the Beneficiary. The
Trustee will vote all Shares-in-Trust. The Trustee will designate a permitted
transferee of the Shares-in-Trust, provided that the permitted transferee (i)
purchases such Shares-in-Trust for valuable consideration and (ii) acquires
such Shares-in-Trust without such acquisition resulting in another transfer to
another Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Trustee the amount of any dividends or distributions received by
the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares become
Shares-in-Trust. Any vote taken by a Prohibited Owner prior to the Company's
discovery that the Shares-in-Trust were held in trust will be rescinded as
void ab initio and recast by the Trustee, in its sole and absolute discretion;
provided, however, that if the Company has already taken irreversible
corporate action based on such vote, then the Trustee shall not have the
authority to rescind and recast such vote. The Prohibited Owner generally will
receive from the Trustee the lesser of (i) the price per share such Prohibited
Owner paid for the shares of Common Stock or Preferred Stock that were
designated as Shares-in-Trust (or, in the case of a gift or devise, the Market
Price (as defined below) per share on the date of such transfer) or (ii) the
price per share received by the Trustee from the sale of such Shares-in-Trust.
Any amounts received by the Trustee in excess of the amounts to be paid to the
Prohibited Owner will be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in
the case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. Subject to the Trustee's ability to
designate a permitted transferee, the Company will have the right to accept
such offer for a period of 90 days after the later of (i) the date of the
purported transfer which resulted in the creation of such Shares-in-Trust or
(ii) the date the Company determines in good faith that a transfer resulting
in such Shares-in-Trust occurred.
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"Market Price" on any date shall mean the average of the Closing Price for
the five consecutive Trading Days ending on such date. The "Closing Price" on
any date shall mean the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the NYSE or, if the shares of Common Stock or Preferred Stock are
not listed or admitted to trading on the NYSE, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the shares of Common Stock
or Preferred Stock are listed or admitted to trading or, if the shares of
Common Stock or Preferred Stock are not listed or admitted to trading on any
national securities exchange, the last quoted price, or if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal other
automated quotations system that may then be in use or, if the shares of
Common Stock or Preferred Stock are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the shares of Common Stock or Preferred Stock
selected by the Board of Directors. "Trading Day" shall mean a day on which
the principal national securities exchange on which the shares of Common Stock
or Preferred Stock are listed or admitted to trading is open for the
transaction of business or, if the shares of Common Stock or Preferred Stock
are not listed or admitted to trading on any national securities exchange,
shall mean any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
Any person who acquires or attempts to acquire Common Stock or Preferred
Stock in violation of the foregoing restrictions, or any person who owned
shares of Common Stock or Preferred Stock that were transferred to a Trust,
will be required (i) to give immediately written notice to the Company of such
event and (ii) to provide to the Company such other information as the Company
may request in order to determine the effect, if any, of such transfer on the
Company's status as a REIT.
All persons who own, directly or indirectly, more than 5.0% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common Stock or Preferred Stock must, within 30 days
after January 1 of each year, provide to the Company a written statement or
affidavit stating (i) the name and address of such direct or indirect owner,
(ii) the number of shares of Common Stock and Preferred Stock owned directly
or indirectly, and (iii) a description of how such shares are held. In
addition, each direct or indirect stockholder shall provide to the Company
such additional information as the Company may request in order to determine
the effect, if any, of such ownership the Company's status as a REIT and to
ensure compliance with the Ownership Limitation.
The Ownership Limitation or the Look-Through Ownership Limitation, as
applicable, generally will not apply to the acquisition of shares of Common
Stock or Preferred Stock by an underwriter that participates in a public
offering of such shares. In addition, the Board of Directors, upon such
conditions as the Board of Directors may direct, may exempt a person from the
Ownership Limitation or the Look-Through Ownership Limitation, as applicable,
under certain circumstances.
All certificates representing shares of Common Stock or Preferred Stock will
bear a legend referring to the restrictions described above.
The Ownership Limitation could have the effect of delaying, deferring or
preventing a takeover or other transaction in which holders of some, or a
majority, of shares of Common Stock might receive a premium from their shares
of Common Stock over the then prevailing market price or which such holders
might believe to be otherwise in their best interest.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S
CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and the
Company's Charter and Bylaws does not purport to be complete and is subject to
and qualified in its entirety by reference to Maryland law and the Company's
Charter and Bylaws, copies of which are exhibits to the Registration Statement
of which this Prospectus is a part. See "Additional Information."
NUMBER OF DIRECTORS; CLASSIFICATION OF THE BOARD OF DIRECTORS
The Charter and Bylaws will provide that the number of directors will
consist of not less than three nor more than fifteen persons, as determined by
the affirmative vote of a majority of the members of the entire Board of
Directors. At all times, a majority of the directors shall be Independent
Directors, except that upon the death, removal, incapacity or resignation of
an Independent Director, such requirement shall not be applicable for 60 days.
Upon the effective date of the Registration Statement of which this Prospectus
is a part, there will be five directors, four of whom will be Independent
Directors. The holders of Common Stock shall be entitled to vote on the
election or removal of directors, with each share entitled to one vote. Any
vacancy will be filled, at any regular meeting or at any special meeting
called for that purpose, by a majority of the remaining directors, except that
a vacancy resulting from an increase in the number of directors must be filled
by a majority of the entire Board of Directors.
Pursuant to the Charter, effective subsequent to the Closing, the Board of
Directors will be divided into three classes of directors. The initial terms
of the first, second and third classes will expire in 1997, 1998 and 1999,
respectively. As the term of each class expires, directors in that class will
be elected by the stockholders of the Company for a term of three years and
until their successors are duly elected and qualify. Classification of the
Board of Directors is intended to assure the continuity and stability of the
Company's business strategies and policies as determined by the Board of
Directors. Because holders of Common Stock will have no right to cumulative
voting in the election of directors, at each annual meeting of stockholders,
the holders of a majority of the shares of Common Stock will be able to elect
all of the successors of the class of directors whose terms expire at that
meeting.
The classified board provision could have the effect of making the
replacement of incumbent directors more time consuming and difficult, which
could delay, defer, discourage or prevent an attempt by a third party to
obtain control of the Company or other transaction, even though such an
attempt or other transaction might be beneficial to the Company and its
stockholders. At least two annual meetings of stockholders, instead of one,
will generally be required to effect a change in a majority of the Board of
Directors. Thus, the classified board provision could increase the likelihood
that incumbent directors will retain their positions. See "Risk Factors--
Potential Anti-Takeover Effect of Certain Provisions of Maryland Law and of
the Company's Charter and Bylaws."
REMOVAL; FILLING VACANCIES
The Bylaws provide that, unless the Board of Directors otherwise determines,
any vacancies will be filled by the affirmative vote of a majority of the
remaining directors, though less than a quorum. Any directors so elected shall
hold office until the next annual meeting of stockholders. The Charter
provides that directors may be removed, with or without cause, only by the
affirmative vote of the holders of at least 75.0% of votes entitled to be cast
in the election of the directors. This provision, when coupled with the
provision of the Bylaws authorizing the Board of Directors to fill vacant
directorships, could temporarily prevent any stockholder from enlarging the
Board of Directors and filling the new directorships with such shareholder's
own nominees.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting
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from (a) actual receipt of an improper benefit or profit in money, property or
services or (b) active and deliberate dishonesty established by a final
judgment as being material to the cause of action. The Charter of the Company
contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
The Charter obligates the Company, to the maximum extent permitted by
Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to any person (or the estate of
any person) who is or was a party to, or is threatened to be made a party to,
and threatened, pending or completed action, suit or proceeding whether or not
by or in the right of the Company, and whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director or officer of the Company, or is or was serving at
the request of the Company as a director, officer, trustee, partner, member,
agent or employee of another corporation, partnership, limited liability
company, association, joint venture, trust or other enterprise. The Charter
also permits the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities described above
and to any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a Maryland corporation (unless its charter provides
otherwise, which the Company's Charter does not) to indemnify a director or
officer who has been successful, on the merits or otherwise, in the defense of
any proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a Maryland corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In addition, the MGCL requires the Company,
as a condition to advancing expenses, to obtain (a) a written affirmation by
the director or officer of his good faith belief that he has met the standard
of conduct necessary for indemnification by the Company as authorized by the
Bylaws and (b) a written statement by or on his behalf to repay the amount
paid or reimbursed by the Company if it shall ultimately be determined that
the standard of conduct was not met. Indemnification under the provisions of
the MGCL is not deemed exclusive of any other rights, by indemnification or
otherwise, to which an officer or director may be entitled under the Company's
Charter or Bylaws, or under resolutions of stockholders or directors, contract
or otherwise. It is the position of the Commission that indemnification of
directors and officers for liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14 of the
Securities Act.
The Company also intends to purchase and maintain insurance on behalf of all
of its directors and executive officers against liability asserted against or
incurred by them in their official capacities with the Company, whether or not
the Company is required or has the power to indemnify them against the same
liability.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10.0% or more of the voting
power of such corporation's shares or an affiliate of such corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10.0% or more of the voting power of the then-outstanding
voting shares of such corporation (an "Interested Shareholder") or an
affiliate thereof are prohibited for five years after the most recent date on
which the Interested Shareholder became an Interested Shareholder. Thereafter,
any such business combination must be recommended by the board of directors of
such corporation and approved by the affirmative vote of at least (a) 80.0% of
the votes entitled to be cast by holders of outstanding voting shares of such
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corporation and (b) two-thirds of the votes entitled to be cast by holders of
voting shares of such corporation other than shares held by the Interested
Shareholder with whom (or with whose affiliate) the business combination is to
be effected, unless, among other conditions, the corporation's stockholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by
the Interested Shareholder for its shares. These provisions of the MGCL do not
apply, however, to business combinations that are approved or exempted by the
board of directors of the corporation prior to the time that the Interested
Shareholder becomes an Interested Shareholder. Pursuant to the statute, the
Charter contains an exemption from these provisions of the MGCL for any
business combination with certain officers, directors and Primary Contributors
of the Company, including Messrs. Jorns, Wiles, Barr, Sowell, Shaw and Shaw,
and all present or future affiliates or associates of, or any other person
acting in concert or as a group with, any of the foregoing persons and any
other business combination which may arise in connection with the Formation
Transactions generally. As a result, Messrs. Jorns, Wiles, Barr, Sowell, Shaw
and Shaw and any such associate, affiliate or other person may be able to
enter into a business combination with the Company, which may not be in the
best interest of the stockholders, without compliance by the Company with
super-majority vote requirements or other provisions of the statute.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares owned by the acquiror, by officers or by directors
who are employees of the corporation. "Control Shares" are voting shares
which, if aggregated with all other such shares previously acquired by the
acquiror, or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors
within one of the following ranges of voting power: (i) one-fifth or more but
less than one-third, (ii) one-third or more but less than a majority, or (iii)
a majority or more of all voting power. Control Shares do not include shares
the acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
control share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of dissenters' rights do not apply in the context
of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange, if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws
of the corporation.
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The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's Common Stock or Preferred Stock. There can be no assurance that such
provision will not be amended or eliminated at any time in the future.
AMENDMENT TO THE CHARTER
The Charter of the Company may be amended by the affirmative vote of holders
of shares entitled to cast a majority of all votes entitled to be cast on such
an amendment; provided, however, (i) no term or provision of the Charter may
be added, amended or repealed in any respect that would, in the determination
of the Board of Directors, cause the Company not to qualify as a REIT under
the Code, (ii) certain provisions of the Charter, including provisions
relating to the classification of directors, the removal of directors,
Independent Directors, preemptive rights of holders of stock and the
indemnification and limitation of liability of officers and directors may not
be amended or repealed and (iii) provisions imposing cumulative voting in the
election of directors may not be added to the Charter, unless, in each such
case, in addition to any vote of the holders of the Preferred Stock required
by the terms of any then outstanding Preferred Stock, such action is approved
by the affirmative vote of the holders of not less than two-thirds of all the
votes entitled to be cast on the matter.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
the holders of not less than a majority of all of the votes entitled to be
cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual meeting
of stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(i) pursuant to the Company's notice of the meeting, (ii) by the Board of
Directors or (iii) by a stockholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and
(b) with respect to special meetings of stockholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of stockholders and nominations of persons for election to the Board of
Directors may be made only (i) pursuant to the Company's notice of the
meeting, (ii) by the Board of Directors or (iii) provided that the Board of
Directors has determined that directors shall be elected at such meeting, by a
stockholder who is entitled to vote at the meeting and has complied with the
advance notice provisions set forth in the Bylaws.
MEETINGS OF STOCKHOLDERS
The Company's Bylaws provide that annual meetings of stockholders shall be
held on a date and at the time set by the Board of Directors during the month
of May each year (commencing in May 1997). Special meetings of the
stockholders may be called by (i) the President of the Company, (ii) the Chief
Executive Officer or (iii) the Board of Directors. Under the MGCL and the
Bylaws of the Company, special meetings must be called by the Secretary of the
Company upon the written request of the holders of shares entitled to cast not
less than a majority of all votes entitled to be cast at the meeting.
OPERATIONS
The Company is generally prohibited by the Charter from holding any assets
or engaging in any activity that would cause the Company to fail to qualify as
a REIT.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER
AND BYLAWS
The business combination provisions and, if the applicable provision in the
Bylaws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of the Charter on classification of the Board of Directors and
removal of directors and the advance notice provisions of the Bylaws could
delay, defer or prevent
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a transaction or a change in control of the Company that might involve a
premium price for holders of Common Stock or otherwise be in their best
interest.
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's policies with respect to
investment, financing, conflicts of interest and certain other activities. The
policies with respect to these activities have been determined by the Board of
Directors of the Company and may be amended or revised from time to time at
the discretion of the Board of Directors without a vote of the stockholders of
the Company, except that (i) changes in certain policies with respect to
conflicts of interest must be consistent with legal requirements and (ii)
certain policies with respect to competition are imposed pursuant to contracts
that cannot be amended without the consent of all parties thereto.
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate
In addition to the Initial Hotels, the Company intends to acquire equity
interests in hotels and related properties throughout the United States and,
on a limited basis, elsewhere in North America. Additional acquisitions could
be made directly or by the Operating Partnership or other entities controlled
by the Company, if any exist. The Company's investment objective is to
maximize current returns to stockholders through increases in Cash Available
for Distribution and to increase long-term returns to stockholders through
appreciation in the value of the Common Stock. The Company intends to achieve
these objectives by participating in increased profits from the Initial Hotels
pursuant to the Participating Leases and by the selective acquisition and
development of hotel properties.
Although the Company presently anticipates that additional investments in
hotel properties will be made through the Operating Partnership, additional
investments may be made directly by the Company or other entities controlled
by the Company, if any exist. Such investments may be financed, in whole or in
part, with excess cash flow, borrowings or subsequent issuances of shares of
Common Stock or other securities issued by the Company or by entities
controlled by the Company.
Investments in Other Entities
The Company also may participate with other entities in property ownership,
through joint ventures or other types of co-ownership. Equity investments may
be subject to existing mortgage financing and other indebtedness that may have
priority over the equity interests in the Company.
Investments in Real Estate Mortgages and Securities of Other Issuers
While the Company will emphasize equity hotel investments, it may, in its
discretion, invest in mortgage and other real estate interests, including
securities of REITs and other issuers. Subject to compliance with applicable
REIT asset test requirements (see "Federal Income Tax Considerations--
Requirements for Qualification as a REIT--Asset Tests"), the Company will have
no limit on the amount or percentage of assets represented by one investment
or investment type. The Company does not presently intend to invest in
securities of REITs or other issuers. The Company also does not presently
intend to trade or underwrite securities or to make investments for the
purpose of exercising control over other issuers. The Company may invest in
participating or convertible mortgages if it concludes that by doing so it may
benefit from the cash flow or any appreciation in the value of the subject
property. Such mortgages are similar to equity participations, because they
permit the lender to either participate in increasing revenues from the
property or convert some or all of the mortgage to equity.
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FINANCING
The Company intends to make additional investments in hotel properties and
may incur indebtedness to make such investments or to meet the distribution
requirements imposed by the REIT provisions of the Code, to the extent that
cash flow from the Company's investments and working capital is insufficient
to fund such investments or distributions.
To ensure that the Company has sufficient liquidity to conduct its
operations, including making investments in additional hotel properties and
funding its anticipated distribution obligations and financing costs, the
Company has obtained a commitment for the $100 million Line of Credit. The
Company may seek to increase the size of the Line of Credit or to arrange
other borrowing to fund investments in additional hotel properties or for
other purposes. The Line of Credit will be secured by first mortgage liens on
eleven of the Initial Hotels and, in certain circumstances, a mortgage lien on
subsequently acquired hotels. Upon completion of the Offering, the Company
will have approximately $19.4 million of outstanding fixed rate indebtedness.
The Company intends to limit consolidated indebtedness (measured at the time
the debt is incurred) to no more than 45.0% of the Company's investment in
hotels (valued at cost on a consolidated basis, except for those hotels
identified in the Company's financial statements that have a predecessor
carryover cost basis that will be valued at fair market value as of the
closing of the Offering, and after giving effect to the Company's use of
proceeds from any indebtedness).
Borrowings may be incurred through the Operating Partnership or the Company.
Indebtedness incurred by the Company may be in the form of bank borrowings,
secured and unsecured, and publicly and privately placed debt instruments.
Indebtedness incurred by the Operating Partnership may be in the form of
purchase money obligations to the sellers of properties, publicly or privately
placed debt instruments, financing from banks, institutional investors or
other lenders, any of which indebtedness may be unsecured or may be secured by
mortgages or other interests in the property owned by the Operating
Partnership. Such indebtedness may be recourse to all or any part of the
property of the Company or the Operating Partnership, or may be limited to the
particular property to which the indebtedness relates. The proceeds from any
borrowings by the Company or the Operating Partnership may be used for the
payment of distributions or dividends, working capital, to refinance existing
indebtedness or to finance acquisitions, expansions, additions or renovations
of hotel properties. See "Federal Income Tax Considerations--Requirements for
Qualification as a REIT--Annual Distribution Requirements."
If the Board of Directors determines to raise additional equity capital, the
Board will have the authority, without stockholder approval, to issue
additional shares of Common Stock or Preferred Shares in any manner (and on
such terms and for such consideration) as it deems appropriate, including in
exchange for property. Existing stockholders have no preemptive right to
purchase shares issued in any such offering, and any such issuance might cause
a dilution of a stockholder's investment in the Company.
The Company may make investments other than as previously described,
although it does not currently intend to do so. See "Federal Income Tax
Considerations--Requirements for Qualification as a REIT--Asset Tests."
CONFLICT OF INTEREST POLICIES
The Company will adopt certain policies and enter into certain agreements
designed to minimize potential conflicts of interest. The Company's Board of
Directors is subject to certain provisions of Maryland law, which are designed
to eliminate or minimize certain potential conflicts of interest. However,
there can be no assurance that these policies will always be successful in
eliminating the influence of such conflicts, and if they are not successful,
decisions could be made that might fail to reflect fully the interests of all
stockholders.
Charter and Bylaw Provisions
The Company's Charter, with limited exceptions, requires that a majority of
the Company's Board of Directors be comprised of persons who are not officers
or employees of the Company, affiliates of officers or
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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 Charter
provides that such provisions relating to Independent Directors may not be
amended, altered, changed or repealed without the affirmative vote of all of
the Independent Directors and the affirmative vote of the holders of not less
than two-thirds of the votes entitled to be cast on such a matter. In
addition, the Company's Bylaws will provide that any action pertaining to any
transaction in which the Company is purchasing, selling, leasing or mortgaging
any real estate asset, making a joint venture investment or engaging in any
other transaction in which an advisor, director or officer of the Company, any
affiliated lessee or affiliated contract manager of any property of the
Company or any affiliate of the foregoing, has any direct or indirect interest
other than as a result of such person's status as a director, officer or
stockholder of the Company, must be approved by the affirmative vote of a
majority of the Independent Directors even if the Independent Directors
constitute less than a quorum.
The Operating Partnership
A conflict of interest may arise between the Company, as a general and
limited partner of the Operating Partnership, and the other Limited Partners
of the Operating Partnership, which may include affiliates of AGHI and the
Lessee, due to the differing potential tax liability to the Company and the
other Limited Partners from the subsequent sale of certain Initial Hotels by
the Operating Partnership resulting from the differing tax bases of the
Company and such affiliates in such hotels. In an effort to address this and
other potential conflicts of interest, the Company's Bylaws will provide that
the Company's decision with respect to the subsequent sale of an Initial Hotel
purchased from a Primary Contributor or their affiliates must be made by the
Independent Directors. The Partnership Agreement of the Operating Partnership
gives AGH GP, as general partner of the Operating Partnership, full, complete
and exclusive discretion in managing and controlling the business of the
Operating Partnership and in making all decisions affecting the business and
assets of the Operating Partnership.
Options to Purchase and Rights of First Refusal
Pursuant to the Option Agreements, the Company will have an option and right
of first refusal to acquire the Option Hotels. The Independent Directors will
determine whether the Company should exercise its right to acquire either
Option Hotel under the Option Agreements. See "Certain Relationships and
Transactions--Options to Purchase and Rights of First Refusal."
Provisions of the MGCL
Pursuant to the MGCL (the jurisdiction under which the Company is
incorporated), each director of the Company is required to discharge his
duties in good faith, in a manner he reasonably believes to be in the best
interest of the Company and with the care that an ordinarily prudent person in
a like position would exercise under similar circumstances. In addition, under
the MGCL, a contract or other transaction between the Company and a director
or between the Company and any other corporation or other entity in which a
director of the Company is a director or has a material financial interest is
not void or voidable solely on the grounds of such interest, the presence of
the director at the meeting at which the contract or transaction is approved
or the director's vote in favor thereof if (a) the transaction or contract is
approved or ratified, after disclosure of the common directorship or interest,
by the affirmative vote of a majority of disinterested directors, even if the
disinterested directors constitute less than a quorum, or by a majority of the
votes cast by disinterested stockholders, or (b) the transaction or contract
is fair and reasonable to the Company.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has the authority to offer shares of stock or other securities
and to repurchase or otherwise reacquire its shares or any other securities
and may engage in such activities in the future. As described under "Shares
Available for Future Sale," the Company may (but is not obligated to) issue
shares of Common Stock to holders of OP Units upon exercise of the Exchange
Rights (as defined below). The Company has not issued
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shares of Common Stock, interests or any other securities to date, except in
connection with the formation of the Company. The Company has not engaged in
trading, underwriting or agency distribution or sale of securities of other
issuers, nor has the Company invested in the securities of other issuers other
than the Operating Partnership for the purpose of exercising control over such
issuers. The Company has not made any loans to third parties, although it
expects to make certain loans to the Lessee (see "Formation Transactions"),
and it may in the future make loans to third parties, including, without
limitation, to joint ventures in which it participates. The Company intends to
make investments in such a way that it will not be treated as an investment
company under the Investment Company Act of 1940, as amended.
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves in amounts that the Board
of Directors determines to be adequate to meet normal contingencies in
connection with the operation of the Company's business and investments.
SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the Offering and the Formation Transactions,
7,205,518 shares of Common Stock will be issued and outstanding, 2,511,106
shares of Common Stock will be reserved for potential issuance upon exchange
of 2,511,106 OP Units and an additional 1,000,000 shares of Common Stock will
be reserved for grants of options and stock awards to officers and directors
of the Company pursuant to the 1996 Plan and the Directors' Plan (the "Company
Options"). All of the Common Stock issued in the Offering will be freely
tradeable by persons, other than affiliates of the Company, without
restriction under the Securities Act, subject to certain limitations on
ownership to be set forth in the Charter. See "Description of Capital Stock--
Restrictions on Transfer." The 155,518 shares of Common Stock to be issued in
the Formation Transactions, the 2,511,106 shares of Common Stock available for
issuance upon exchange of OP Units issued in connection with the Formation
Transactions, and the 50,000 shares of restricted Common Stock granted to the
Company's executive officers as Stock Awards that will vest over a four-year
period and the Company Options (collectively, "Restricted Shares") will be
"restricted" securities under the meaning of Rule 144 under the Securities Act
and may be sold only pursuant to an effective registration statement under the
Securities Act or an applicable exemption, including an exemption under Rule
144 under the Securities Act.
In general, under Rule 144 as currently in effect, if two years have elapsed
since the later of the date of acquisition of Restricted Shares from the
Company or the date of acquisition of Restricted Shares from any "affiliate"
of the Company, as that term is defined under the Securities Act, the acquiror
or subsequent holder is entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of 1.0% of
the then outstanding Common Stock or the average weekly trading volume of
Common Stock on all exchanges and reported through the automated quotation
system of a registered securities association during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain restrictions on the manner of
sales, notice requirements and the availability of current public information
about the Company. If three years have elapsed since the date of acquisition
of Restricted Shares from the Company or from an "affiliate" of the Company,
and the acquiror or subsequent holder thereof is deemed not to have been an
affiliate of the Company at any time during the 90 days preceding a sale, such
person would be entitled to sell such Common Stock in the public market under
Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
Certain holders of Common Stock and OP Units issued in connection with the
Formation Transactions have agreed with the Underwriters not to sell, offer or
contract to sell, grant any option for the sale of, or otherwise dispose of or
transfer any Common Stock or OP Units or any securities convertible into or
exchangeable or exercisable for Common Stock or OP Units, for one year after
the date of this Prospectus, without the prior written consent of Smith Barney
Inc., as the representative of the Underwriters, and the Company. The Company
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has agreed to file a registration statement with the Commission with respect
to sales of Common Stock received upon exchange of OP Units within 90 days
after the expiration of the one-year period following completion of this
Offering. The Company will be obligated to maintain the effectiveness of such
registration statement until a date to be agreed upon or until such time as
all of the shares registered pursuant to such registration statement (i) have
been disposed of pursuant to such registration statement, (ii) have been
otherwise distributed pursuant to Rule 144, or (iii) have been otherwise
transferred in a transaction resulting in the transferee receiving Common
Stock no longer deemed to be "restricted securities." The existence of such
agreements by the Company may adversely affect the terms upon which the
Company can obtain additional equity financing in the future.
Prior to the date of this Prospectus, there has been no public market for
the Common Stock. Trading of the Shares of Common Stock on the NYSE is
expected to commence following the completion of the Offering. No prediction
can be made as to the effect, if any, that future market sales of Restricted
Shares or the availability of such Restricted Shares for sale will have on the
market price of the Common Stock prevailing from time to time. Nevertheless,
sales of substantial amounts of Restricted Shares in the public market (or the
perception that such sales could occur) might adversely affect prevailing
market prices for the Common Stock. See "Risk Factors--No Prior Market for
Common Stock."
PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, and the descriptions of
certain provisions thereof set forth elsewhere in this Prospectus, is
qualified in its entirety by reference to the Partnership Agreement, which has
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
MANAGEMENT
The Operating Partnership has been organized as a Delaware limited
partnership pursuant to the terms of the partnership agreement that will
include AGH GP, as general partner, AGH LP, as an initial limited partner, and
certain of the Primary Contributions and other persons unaffiliated with the
Primary Contributors, as additional limited partners (the "Partnership
Agreement"). Pursuant to the Partnership Agreement, AGH GP, as the sole
general partner of the Operating Partnership (the "General Partner"), will
have full, exclusive and complete responsibility and discretion in the
management and control of the Operating Partnership, and the Limited Partners
in their capacity as such will have no authority to transact business for, or
participate in the management activities or decisions of, the Operating
Partnership. However, any amendment to the Partnership Agreement, other than
amendments that (i) add to the obligations of the General Partners, (ii)
reflect the admission or withdrawal of partners, (iii) set forth the rights or
preferences of additional partnership interests issued by the Operating
Partnership, (iv) reflect a change that does not adversely affect Limited
Partners, and (v) are necessary to satisfy legal requirements, requires the
consent of Limited Partners holding more than 50.0% of the OP Units held by
such Limited Partners. The consent of each adversely affected partner is
required for any amendment that would affect a Limited Partner's liability or
right to receive distributions or that would dissolve the Operating
Partnership prior to December 31, 2046 (other than as a result of certain
mergers or consolidations).
TRANSFERABILITY OF INTERESTS
Subject to limited exceptions, AGH GP and AGH LP may not voluntarily
withdraw from the Operating Partnership or transfer or assign their interests
in the Operating Partnership unless the transaction in which such withdrawal
or transfer occurs results in the Limited Partners' receiving property in an
amount equal to the amount they would have received had they exercised their
Exchange Rights immediately prior to such transaction, or unless the
successors to AGH GP and AGH LP contribute substantially all of their assets
to the Operating Partnership in return for an interest in the Operating
Partnership. With certain exceptions, the Limited Partners may transfer their
OP Units, in whole or in part, without the consent of the General Partner.
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CAPITAL CONTRIBUTION
The Company, through AGH GP and AGH LP, will contribute to the Operating
Partnership the net proceeds of the Offering, in consideration of which AGH GP
will receive an approximate 1.0% general partnership interest and AGH LP will
receive an approximate 73.2% limited partnership interest in the Operating
Partnership. The Partnership Agreement provides that if the Operating
Partnership requires additional funds at any time or from time to time in
excess of funds available to the Operating Partnership from borrowing or
capital contributions, the Company may borrow such funds from a financial
institution or other lender and lend such funds to the Operating Partnership
on the same terms and conditions as are applicable to the Company's borrowing
of such funds. Under the Partnership Agreement, the Company generally is
obligated to contribute, through AGH GP and AGH LP, the proceeds of any stock
offering as additional capital to the Operating Partnership. Moreover, the
Company is authorized, through AGH GP and AGH LP, to cause the Operating
Partnership to issue partnership interests for less than fair market value if
the Company has concluded in good faith that such issuance is in the best
interests of the Company and the Operating Partnership. If the Company so
contributes additional capital to the Operating Partnership, AGH GP and AGH LP
will receive additional OP Units, and their percentage interests in the
Operating Partnership will be increased on a proportionate basis based upon
the amount of such additional capital contributions and the value of the
Operating Partnership at the time of such contributions. Conversely, the
percentage interests of the Limited Partners, other than AGH LP, will be
decreased on a proportionate basis in the event of additional capital
contributions by the Company.
EXCHANGE RIGHTS
Pursuant to the Exchange Rights Agreement among the Company, the Operating
Partnership and the Limited Partners other than AGH LP (the "Exchange
Agreement"), such Limited Partners will receive rights (the "Exchange Rights")
that will enable them to cause the Operating Partnership to exchange each OP
Unit for cash equal to the value of a share of Common Stock (or, at the
Company's election, the Company may purchase each OP Unit offered for exchange
for one share of Common Stock). The Company may not satisfy a Limited
Partner's Exchange Right by delivery of Common Stock, if and to the extent
that the delivery of Common Stock upon exercise of such rights would (i) be
prohibited under the Charter, (ii) otherwise jeopardize the REIT status of the
Company, or (iii) cause the acquisition of shares of Common Stock by such
exchanging Limited Partner to be "integrated" with any other distribution of
shares of Common Stock for purposes of complying with the Securities Act. The
Exchange Rights may be exercised at any time after one year following the
closing of the Offering, provided that a Limited Partner may not exercise the
Exchange Rights for less than 1,000 OP Units or, if such Limited Partner holds
less than 1,000 OP Units, for all of the OP Units held by such Limited
Partner. Prior to the expiration of such one-year period, the Exchange Rights
may be exercised (but only for cash) by a lender to whom any OP Units may have
been pledged, provided that such pledge was permissible in light of the one-
year lock-up agreements described in "Shares Available for Future Sale." The
aggregate number of shares of Common Stock initially issuable upon exercise of
the Exchange Rights will be 2,511,106. The number of shares of Common Stock
issuable upon exercise of the Exchange Rights will be adjusted upon the
occurrence of share splits, mergers, consolidations or similar pro rata share
transactions, which otherwise would have the effect of diluting the ownership
interests of the Limited Partners or the stockholders of the Company. See
"Shares Available for Future Sale."
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement among the Company and the
Limited Partners other than AGH LP (the "Registration Rights Agreement"), the
Limited Partners have, or will have, certain rights to require the
registration for resale of the shares of Common Stock held by them or received
by them upon exchange of their OP Units. Such rights include the right to
include such shares in a registration statement that the Company intends to
file during the 1997 calendar year. The Company is required to bear the costs
of such registration statements exclusive of underwriting discounts,
commissions and certain other costs attributable to, and to be borne by, the
selling stockholders.
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OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT, to avoid any federal income or excise tax
liability imposed under the Code and to ensure that the Operating Partnership
will not be classified as a "publicly traded partnership" for purposes of
section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Operating Partnership, the Operating Partnership will pay all
administrative costs and expenses of the Company, AGH GP and AGH LP (the
"Company Expenses"), and the Company Expenses will be treated as expenses of
the Operating Partnership. The Company Expenses generally will include (i) all
expenses relating to the formation of the Company and the Operating
Partnership, (ii) all expenses relating to the public offering and
registration of securities by the Company, (iii) all expenses associated with
the preparation and filing of any periodic reports by the Company under
federal, state or local laws or regulations, (iv) all expenses associated with
compliance by the Company, AGH GP and AGH LP with laws, rules and regulations
promulgated by any regulatory body and (v) all other operating or
administrative costs of AGH GP incurred in the ordinary course of its business
on behalf of the Operating Partnership. The Company Expenses, however, will
not include any administrative and operating costs and expenses incurred by
the Company that are attributable to hotel properties or partnership interests
in a Subsidiary Partnership that are owned by the Company directly rather than
through the Operating Partnership. The Company will not own any of the Initial
Hotels directly.
DISTRIBUTIONS AND ALLOCATIONS
The Partnership Agreement provides that the Operating Partnership will
distribute cash from operations (including net sale or refinancing proceeds,
but excluding net proceeds from the sale of the Operating Partnership's
property in connection with the liquidation of the Operating Partnership) on a
quarterly (or, at the election of the General Partner, more frequent) basis,
in amounts determined by the General Partner in its sole discretion, to the
partners in accordance with their respective percentage interests in the
Operating Partnership. Upon liquidation of the Operating Partnership, after
payment of, or adequate provision for, debts and obligations of the Operating
Partnership, including any partner loans, any remaining assets of the
Operating Partnership will be distributed to all partners with positive
capital accounts in accordance with their respective positive capital account
balances.
Profit and loss of the Operating Partnership for each fiscal year of the
Operating Partnership generally will be allocated among the partners in
accordance with their respective interests in the Operating Partnership.
Taxable income and loss will be allocated in the same manner, subject to
compliance with the provisions of Code sections 704(b) and 704(c) and Treasury
Regulations promulgated thereunder.
TERM
The Operating Partnership will continue until December 31, 2046, or until
sooner dissolved upon (i) the withdrawal of the General Partner (unless a
majority of remaining partners elect to continue the business of the Operating
Partnership), (ii) the election by the General Partner to dissolve the
Operating Partnership (which election, prior to December 31, 2046, requires
the consent of a majority of the Limited Partners other than AGH LP), (iii)
the entry of a decree of judicial dissolution of the Operating Partnership,
(iv) the sale of all or substantially all the assets and properties of the
Operating Partnership, or (v) the bankruptcy or insolvency of AGH GP, unless
all of the remaining partners elect to continue the business of the Operating
Partnership.
TAX MATTERS
Pursuant to the Partnership Agreement, the General Partner will be the tax
matters partner of the Operating Partnership and, as such, will have authority
to handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
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FEDERAL INCOME TAX CONSIDERATIONS
The Company intends to operate in such a manner so as to meet the Code
requirements for qualification as a REIT for federal income tax purposes.
However, no assurance can be given that such requirements will be met or that
the Company will be so qualified at any time. Based on various assumptions
relating to the organization and operation of the Company and the Operating
Partnership and factual representations made by the Company and the Operating
Partnership as to certain factual matters, including matters related to the
organization and operation of the Company, the Operating Partnership and the
Subsidiary Partnerships, in the opinion of Counsel, Battle Fowler LLP, the
Company will qualify to be taxed as a REIT under the Code commencing with its
taxable year ending December 31, 1996 and the Operating Partnership and the
Subsidiary Partnerships will be treated as partnerships for federal income tax
purposes. Counsel will not review the Company's operating results and no
assurance can be given that the Company's actual operating results will meet
the REIT requirements on a continuing basis.
The opinions described herein represent Counsel's best legal judgment as to
the most likely outcome of an issue if the matter were litigated. Opinions of
counsel have no binding effect or official status of any kind, and in the
absence of a ruling from the IRS, there can be no assurance that the IRS will
not challenge the conclusion or propriety of any of Counsel's opinions. The
Company does not intend to apply for a ruling from the IRS that it qualifies
as a REIT.
The following summary includes a discussion of the material federal income
tax considerations associated with an investment in the Common Stock being
sold in the Offering. The summary should not be construed as tax advice. The
provisions governing treatment as a REIT are highly technical and complex, and
this summary is qualified in its entirety by the applicable Code provisions,
the rules and regulations promulgated thereunder and administrative and
judicial interpretations thereof. Moreover, this summary does not deal with
all tax aspects that might be relevant to a particular prospective stockholder
in light of his personal circumstances and it does not deal with particular
types of stockholders that are subject to special treatment under the Code,
such as tax-exempt organizations, insurance companies, financial institutions
or broker-dealers, and (with the exception of the general discussion below)
foreign corporations and persons who are not citizens or residents of the
United States.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND SALE OF COMMON STOCK, OF
THE COMPANY'S ELECTION TO BE TAXED AS A REIT AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
REQUIREMENTS FOR QUALIFICATION AS A REIT
In General. Under the Code, a trust, corporation or unincorporated
association meeting certain requirements (see "--Structural Requirements") may
elect to be treated as a REIT for purposes of federal income taxation. If a
valid election is made, then, subject to certain conditions, the Company's
income which is distributed to its stockholders will be taxed to such
stockholders without being subject to tax at the Company level. This
substantially eliminates the "double taxation" (taxation at both the corporate
and stockholder levels) that typically results from the use of corporate
investment vehicles. However, the Company will be taxed at regular corporate
rates on any of its income that is not distributed to the stockholders. (See
"--Taxation of the Company.") Once made, the election to be taxed as a REIT
continues in effect until voluntarily revoked or automatically terminated by
the Company's failure to qualify as a REIT for a taxable year. If the
Company's election to be treated as a REIT is terminated automatically or is
voluntarily revoked, the Company will not be eligible to elect such status
until the fifth taxable year after the first taxable year for which the
Company's election was terminated. However, in the event such election is
terminated automatically, the four-year prohibition on a subsequent election
to be taxed as a REIT is not applicable if (i) the Company did not willfully
fail to file a timely return with respect to the termination taxable year,
(ii) the inclusion of any incorrect information in such return was not due to
fraud with intent to evade tax, and (iii) the Company establishes that its
failure to meet the requirements was due to reasonable cause and not to
willful neglect.
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The Company will make an election to be treated as a REIT commencing with
its taxable year ending December 31, 1996.
Structural Requirements. To be eligible to be taxed as a REIT, the Company
must satisfy certain structural and organizational requirements. Among the
requirements are the following: (i) the shares of Common Stock must be
transferable, (ii) the shares of Common Stock must be held by 100 or more
persons during at least 335 days of a taxable year of twelve months (or during
a proportionate part of a taxable year of less than twelve months) (the "100-
person requirement"), and (iii) no more than 50% of the value of the
outstanding shares of Common Stock may be owned, directly or indirectly, by
five or fewer individuals at any time during the last half of each taxable
year (the "five or fewer" requirement). The requirements of (ii) and (iii) are
not applicable to the first taxable year for which the Company makes an
election to be treated as a REIT. However, the Company anticipates that it
will issue a sufficient amount of Common Stock with sufficient diversity of
ownership to satisfy requirements (ii) and (iii). The Company expects, and
intends to take all necessary measures within its control to ensure, that the
beneficial ownership of the Company will at all times be held by 100 or more
persons. In addition, the Company's Charter contains certain restrictions on
the ownership and transfer of the Company's stock which are designed to help
ensure that the Company will be able to satisfy the "five or fewer"
requirement. If the Company were to fail to satisfy the "five or fewer"
requirement, the Company's status as a REIT would terminate, and the Company
would not be able to prevent such termination. See "--Failure to Qualify as a
REIT" and "Description of Capital Stock--Restrictions on Transfer."
If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary,"
that subsidiary is disregarded for federal income tax purposes, and all
assets, liabilities and items of income, deduction and credit of the
subsidiary are treated as assets, liabilities and such items of the REIT
itself. A "qualified REIT subsidiary" is a corporation all of the stock of
which has been owned by the REIT from the commencement of such corporation's
existence. After the completion of the Offering, the Company will have two
wholly owned subsidiary corporations, AGH GP and AGH LP. AGH GP and AGH LP
will be formed as "qualified REIT subsidiaries." The Company also may have
additional corporate subsidiaries in the future.
Income Tests. In order to qualify and to continue to qualify as a REIT, the
Company must satisfy three income tests for each taxable year. First, at least
75% of the Company's annual gross income (excluding annual gross income from
certain sales of property held primarily for sale) must be derived directly or
indirectly from investments relating to real property or mortgages on real
property or certain temporary investments. Second, at least 95% of the
Company's annual gross income (excluding gross income from certain sales of
property held primarily for sale in the ordinary course of business) must be
derived directly or indirectly from any of the sources qualifying for the 75%
test and from dividends, interest, and gain from the sale or disposition of
stock or securities. Third, subject to certain exceptions in the year in which
the Company is liquidated, (i) short-term gains from sales of stock or
securities, (ii) gains from sales of property (other than foreclosure
property) held primarily for sale to customers in the ordinary course of
business and (iii) gains from the sale or other taxable disposition of real
property (including interests in real property and mortgages on real property)
held for less than four years (other than from involuntary conversions and
foreclosure property) must represent in the aggregate less than 30% of the
Company's annual gross income. In applying these tests, because the Company is
a partner in the Operating Partnership, which is in turn a partner, either
directly or indirectly, in the Subsidiary Partnerships, the Company will be
treated as realizing its proportionate share of the income and loss of these
respective partnerships, as well as the character of such income or loss, and
other partnership items, as if the Company owned its proportionate share of
the assets owned by these partnerships directly.
Substantially all of the income received by the Company is expected to be
rental income from the Rents. In order to qualify as "rents from real
property" for purposes of satisfying the 75% and 95% gross income tests,
several conditions must be satisfied. First, the amount of rent must not be
based in whole or in part on the income or profits of any person, although
rents generally will qualify if they are based on a fixed percentage of
receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" if the Company or an owner of 10% or more of the
Company, directly or constructively, owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property
leased in connection with a lease of real property is greater than 15% of the
total rent received under the lease, the portion of rent attributable to such
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personal property will not qualify as "rents from real property." Finally, the
Company generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an "independent
contractor" from whom the Company derives no income. However, the "independent
contractor" requirement does not apply to the extent the services rendered by
the Company are customarily furnished or rendered in connection with the
rental of the real property (i.e., services which are not considered rendered
to the occupant of the property). Pursuant to the Participating Leases, the
Lessee will lease from the Operating Partnership the land, buildings,
improvements, furnishings, and equipment comprising the Initial Hotels for a
term of twelve years. The Participating Leases provide that the Lessee will be
obligated to pay to the Operating Partnership (i) the greater of Base Rent or
Participating Rent and (ii) Additional Charges. Participating Rent is
calculated by multiplying fixed percentages by various revenue categories for
each of the Initial Hotels. Generally, both Base Rent and the thresholds in
the Participating Rent formulas will be adjusted for inflation. Base Rent
accrues and is required to be paid monthly. Participating Rent is payable
quarterly, with a yearly adjustment based on actual results.
In order for Base Rent, Participating Rent, and Additional Charges to
constitute "rents from real property," the Participating Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Participating Leases are true leases depends on
an analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including: (i) the
intent of the parties, (ii) the form of the agreement, (iii) the degree of
control over the property that is retained by the property owner (e.g.,
whether the lessee has substantial control over the operation of the property
or whether the lessee was required simply to use its best efforts to perform
its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the
risk of damage to the property) or the potential for economic gain (e.g.,
appreciation) with respect to the property.
In addition, Code section 7701(e) provides that a contract that purports to
be a service contract (or a partnership agreement) is treated instead as a
lease of property if the contract is properly treated as such, taking into
account all relevant factors, including whether or not: (i) the service
recipient is in physical possession of the property, (ii) the service
recipient controls the property, (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of
the useful life of the property, the recipient shares the risk that the
property will decline in value, the recipient shares in any appreciation in
the value of the property, the recipient shares in increases in the property's
operating costs, or the recipient bears the risk of damage to or loss of the
property), (iv) the service provider does not bear any risk of substantially
diminished receipts or substantially increased expenditures if there is
nonperformance under the contract, (v) the service provider does not use the
property concurrently to provide significant services to entities related to
the service recipient, and (vi) the total contract price does not
substantially exceed the rental value of the property for the contract period.
Since the determination of whether a service contract should be treated as a
lease is inherently factual, the presence or absence of any single factor may
not be dispositive in every case.
Battle Fowler LLP is of the opinion that the Participating Leases will be
treated as true leases for federal income tax purposes. Such opinion is based,
in part, on the following facts: (i) the Operating Partnership or a Subsidiary
Partnership, as applicable, and the Lessee intend for their relationship to be
that of a lessor and lessee and such relationship will be documented by lease
agreements, (ii) the Lessee will have the right to exclusive possession and
use and quiet enjoyment of the Initial Hotels during the term of the
Participating Leases, (iii) the Lessee will bear the cost of, and be
responsible for, day-to-day maintenance and repair of the Initial Hotels and
generally will control how the Initial Hotels are operated and maintained,
(iv) the Lessee will bear all of the costs and expenses of operating the
Initial Hotels (including the cost of any inventory used in their operation)
during the term of the Participating Leases (other than real estate and
personal property taxes, casualty insurance and capital improvements
(determined in accordance with generally accepted accounting principles)), (v)
the Lessee will benefit from any savings in the costs of operating the Initial
Hotels during the term of the
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Participating Leases, (vi) the Lessee will indemnify the Company against all
liabilities imposed upon or asserted against the Company during the term of
the Participating Leases by reason of, among other things, (A) accident,
injury to or death of persons, or loss of or damage to property occurring at
the Initial Hotels or (B) the Lessee's use, management, maintenance or repair
of the Initial Hotels, (vii) the Lessee is obligated to pay substantial fixed
rent for the period of use of the Initial Hotels, and (viii) the Lessee stands
to incur substantial losses (or reap substantial gains) depending on how
successfully it operates the Initial Hotels.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Participating Leases that discuss whether
such leases constitute true leases for federal income tax purposes. Therefore,
the opinion of Battle Fowler LLP with respect to the relationship between the
Operating Partnership or a Subsidiary Partnership, as applicable, and the
Lessee is based upon all of the facts and circumstances and upon rulings and
judicial decisions involving situations that are considered to be analogous.
Opinions of counsel are not binding upon the IRS or any court, and there can
be no complete assurance that the IRS will not assert successfully a contrary
position. If the Participating Leases are recharacterized as service contracts
or partnership agreements, rather than true leases, part or all of the
payments that the Operating Partnership and the Subsidiary Partnerships
receive from the Lessee would not be considered rent or would not otherwise
satisfy the various requirements for qualification as "rents from real
property." In that case, the Company likely would not be able to satisfy
either the 75% or 95% gross income tests and, as a result, would lose its REIT
status.
As noted above, the Rents attributable to personal property leased in
connection with the lease of the real property comprising an Initial Hotel
must not be greater than 15% of the Rents received under the Participating
Lease. The Rents attributable to the personal property in an Initial Hotel is
the amount that bears the same ratio to total rent for the taxable year as the
average of the adjusted bases of the personal property in the Initial Hotel at
the beginning and at the end of the taxable year bears to the average of the
aggregate adjusted bases of both the real and personal property comprising the
Initial Hotel at the beginning and at the end of such taxable year (the
"Adjusted Basis Ratio"). With respect to each Initial Hotel (or interest
therein) that the Operating Partnership acquires in exchange for OP Units, the
initial adjusted bases of both the real and personal property comprising such
hotel generally will be the same as the adjusted bases of such property in the
hands of the previous owner. With respect to each Initial Hotel (or interest
therein) that the Operating Partnership acquires for cash, the aggregate
initial adjusted bases of the real and personal property generally will be
allocated among real and personal property based on relative fair market
values. The Company has obtained appraisals of the personal property for each
Initial Hotel that the Operating Partnership will acquire for cash. The
Participating Leases provide that the Adjusted Basis Ratio for each Initial
Hotel shall not exceed 15%. The Participating Leases further provide that the
Lessee will cooperate in good faith and use its best efforts to prevent the
Adjusted Basis Ratio for any Initial Hotel from exceeding 15%, which
cooperation includes the purchase by Lessee at fair market value of enough
personal property at such Initial Hotel so that the Adjusted Basis Ratio for
such Initial Hotel is less than 15%. In the event that the amount of personal
property relating to certain of the Initial Hotels will result in an Adjusted
Basis Ratio in excess of 15% and therefore would cause a portion of the Rents
received attributable to such Initial Hotels to not qualify as rents from real
property, the Operating Partnership will sell a portion of such personal
property relating to such Initial Hotels to the Lessee in exchange for the
FF&E Note. In addition, the Participating Leases provide that if future
renovations and refurbishments to an Initial Hotel would cause the Adjusted
Basis Ratio for such Initial Hotel to exceed 15%, the Operating Partnership
and/or a Subsidiary Partnership, if applicable, has the right to sell as much
personal property to the Lessee as necessary so that the Adjusted Basis Ratio
does not exceed 15% for such Initial Hotel. The interest income derived from
the FF&E Note will be qualifying income for the 95% gross income test but not
for the 75% gross income test. Finally, amounts in the Company's reserve for
capital expenditures may not be expended to acquire additional personal
property for an Initial Hotel to the extent that such acquisition would cause
the Adjusted Basis Ratio for that Initial Hotel to exceed 15%. The Company
does not expect the Adjusted Basis Ratio for any Initial Hotel to exceed 15%
and therefore expects that the portion of rents received attributable to
personal property will be received attributable to personal property will be
treated as rents from real property. However, there can be no
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assurance that the IRS would not assert that the personal property acquired by
the Operating Partnership or a Subsidiary Partnership had a value in excess of
the appraised value, or that a court would not uphold such assertion. If such
a challenge were successfully asserted, a portion of the rents received under
the Participating Leases would not qualify as rents from real property.
However, the Company does not expect such an amount, if any, when combined
with any other nonqualifying income for the 95% or 75% gross income tests, to
exceed 5% of the Company's annual gross income, which would cause the Company
to lose its status as a REIT.
As noted earlier, in order to be treated as "rents from real property," the
Participating Rent must not be based in whole or in part on the income or
profits of any person. The Participating Rent, however, will qualify as "rents
from real property" if it is based on percentages of receipts or sales and the
percentages (i) are fixed at the time the Participating Leases are entered
into, (ii) are not renegotiated during the term of the Participating Leases in
a manner that has the effect of basing Participating Rent on income or
profits, and (iii) conform with normal business practice. More generally, the
Participating Rent will not qualify as "rents from real property" if,
considering the Participating Leases and all the surrounding circumstances,
the arrangement does not conform with normal business practice, but is in
reality used as a means of basing the Participating Rent on income or profits.
Since the Participating Rent is based on fixed percentages of the gross
revenues from the Initial Hotels that are established in the Participating
Leases, and the Company has represented that the percentages (i) will not be
renegotiated during the terms of the Participating Leases in a manner that has
the effect of basing the Participating Rent on income or profits and (ii)
conform with normal business practice, the Participating Rent should not be
considered based in whole or in part on the income or profits of any person.
Furthermore, the Company has represented that, with respect to other hotel
properties that it acquires in the future, if any, it will not charge rent for
any property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a fixed percentage of gross
revenues, as described above).
As noted above, rent received from a Related Party Tenant does not qualify
as "rents from real property." Thus, the Company must not own, actually or
constructively, 10% or more of the Lessee. Applicable constructive ownership
rules generally provide that, if 10% or more in value of the stock of the
Company is owned, directly or indirectly, by or for any person, the Company is
considered as owning the stock owned, directly or indirectly, by or for such
person. The Limited Partners of the Operating Partnership may acquire Common
Stock (at the Company's option) by exercising their Exchange Rights. In
addition, during the period of the Lessee Distribution Restriction, the Lessee
will be required, subject to compliance with applicable securities laws, to
purchase annually Common Stock on the open market or, if any such purchases
would violate the ownership limitation in the Company's Charter, at the option
of the Operating Partnership, OP Units from the Operating Partnership, in an
amount equal to the Lessee's cash flow attributable to the Participating
Leases for the preceding fiscal year (after establishing a reserve for partner
tax distributions). In addition, Messrs. Jorns and Wiles are required to use
50% of the dividends received by them from AGHI that are attributable to
AGHI's earnings from the management of hotels owned by the Company to purchase
annually in the open market shares of Common Stock. The Exchange Agreement
provides that the Company may not satisfy an exchanging Limited Partner's
Exchange Right by delivery of Common Stock, if and to the extent the delivery
of Common Stock upon the exercise of such rights would cause the Company to
own, actually or constructively, 10% or more of the ownership interest in a
tenant of the Company's, the Operating Partnership's or a Subsidiary
Partnership's real property, within the meaning of section 856(d)(2)(B) of the
Code. The Charter likewise will prohibit a shareholder of the Company from
owning Common Stock that would cause the Company to own, actually or
constructively, 10% or more of the ownership interests in a tenant of the
Company's, the Operating Partnership's or a Subsidiary Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code. Thus, the
Company should never own, actually or constructively, 10% of more of the
Lessee. However, because the Code's constructive ownership rules for purposes
of the Related Party Tenant rules are broad and it is not possible to monitor
continually direct and indirect transfers of Common Stock, no absolute
assurance can be given that such transfers or other events of which the
Company has no knowledge will not cause the Company to own constructively 10%
or more of the Lessee at some future date.
A fourth requirement noted above for qualification of the Rents as "rents
from real property" is that the Company cannot furnish or render noncustomary
services to the tenants of the Initial Hotels, or manage or
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operate the Initial Hotels, other than through an independent contractor who
is adequately compensated and from whom the Company itself does not derive or
receive any income. Provided that the Participating Leases are respected as
true leases, the Company should satisfy this requirement, because AGHI,
pursuant to the Management Agreements, will be performing services to such
tenants for the Lessee, which will lease the Initial Hotels from the Operating
Partnership. Neither the Company, the Operating Partnership nor any Subsidiary
Partnership will furnish or provide any services to a tenant, and none of such
entities will contract with any other person to provide any such services. The
Company has represented that if the Company decides to render noncustomary
services to tenants in the future, it will do so through an independent
contractor from which it will not receive any income.
If a portion of the Rents from a particular hotel property does not qualify
as "rents from real property" because the amount attributable to personal
property exceeds 15% of the total Rents for a taxable year, the portion of the
Rents that is attributable to personal property will not be qualifying income
for purposes of either the 75% or 95% gross income tests. A portion of the
Rent paid to the Company by the Lessee will be allocable to the Franchise
Licenses. Appraisals obtained by the Company indicate that the Franchise
Licenses represent less than 1.0% of the total value of the Company's assets.
Because the Company does not expect the total amount of Rents attributable to
personal property plus any other non-qualifying income it receives (including
any amounts attributable to the Franchise Licenses) to exceed 5% of its annual
gross income, the Company's REIT status should not be affected. If, however,
the Rents do not qualify as "rents from real property" because either (i) the
Participating Rent is considered based on income or profits of the Lessee,
(ii) the Company owns, actually or constructively, 10% or more of the Lessee,
or (iii) the Company furnishes noncustomary services to the tenants of the
Initial Hotels, or manages or operates the Initial Hotels, other than through
a qualifying independent contractor, none of the Rents would qualify as "rents
from real property." In that case, the Company likely would lose its REIT
status because it would be unable to satisfy either the 75% or 95% gross
income tests.
In addition to the Rents, the Lessee is required to pay to the Operating
Partnership Additional Charges. To the extent that Additional Charges
represent either (i) reimbursements of amounts that the Lessee is obligated to
pay to third parties or (ii) penalties for nonpayment or late payment of such
amounts, Additional Changes should qualify as "rents from real property." To
the extent, however, that Additional Charges represent interest that is
accrued on the late payment of the Rents or Additional Charges, Additional
Charges would not qualify as "rents from real property," but instead would be
treated as interest that qualifies for the 95% gross income test.
Based on the foregoing, the Rents and the Additional Charges should qualify
as "rents from real property" for purposes of the 75% and 95% gross income
tests, except to the extent that the Additional Charges represent interest
that is accrued on the late payment of the Rents or the Additional Charges
(which will be qualifying gross income for the 95% test but not the 75% test).
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends
in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales. Furthermore, interest from a loan that is based on the
residual cash proceeds from sale of the property securing the loan will be
treated as gain from the sale of the secured property.
It is possible that, from time to time, the Company, the Operating
Partnership or a Subsidiary Partnership will enter into hedging transactions
with respect to one or more of its assets or liabilities. Any such hedging
transactions could take a variety of forms. If the Company, the Operating
Partnership or a Subsidiary Partnership enters into an interest rate swap or
cap contract to hedge any variable rate indebtedness incurred to acquire or
carry real estate assets, any periodic income or gain from the disposition of
such contract should be qualifying income for purposes of the 95% gross income
test, but not for the 75% gross income test. Furthermore, any such contract
would be considered a "security" for purposes of applying the 30% gross income
test. To the extent that the Company, the Operating Partnership or a
Subsidiary Partnership hedges with other types of financial
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instruments or in other situations, it may not be entirely clear how the
income from those transactions will be treated for purposes of the various
income tests that apply to REITs under the Code. The Company intends to
structure any hedging transactions in a manner that does not jeopardize its
status as a REIT.
If the sum of the income realized by the Company (whether directly or
through its interest in the Operating Partnership or the Subsidiary
Partnerships) which does not satisfy the requirements of the 75% and the 95%
gross income tests (collectively, "Non-Qualifying Income"), exceeds 5% of the
Company's gross income for any taxable year, the Company's status as a REIT
would be jeopardized. The Company has represented that the amount of its Non-
Qualifying Income will not exceed 5% of the Company's annual gross income for
any taxable year.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may still qualify as a REIT for such year if
the Company's failure to meet such tests was due to reasonable cause and not
to willful neglect, the Company attaches a schedule of the sources of its
income to its return, and any incorrect information on the schedule was not
supplied fraudulently with the intent to evade tax. It is not possible to
specify the circumstances under which the Company may be entitled to the
benefit of these relief provisions. Even if these relief provisions apply, a
100% tax is imposed on the net income attributable to the greater of the
amount by which the Company failed the 75% test or the 95% test. Failure to
comply with the 30% gross income test is not excusable; therefore, if the
Company fails to meet the requirements of the 30% gross income test, its
status as a REIT automatically terminates regardless of the reason for such
failure.
Asset Tests. At the close of each quarter of its taxable year, the Company
also must satisfy two tests relating to the nature and diversification of its
assets. First, at least 75% of the value of the Company's total assets must be
represented by real estate assets (including its allocable share of real
estate assets held by the Operating Partnership and by any partnerships in
which the Operating Partnership or a qualified REIT subsidiary owns an
interest, stock or debt instruments held for not more than one year purchased
with the proceeds of an issuance of stock or long-term (at least five years)
debt of the Company), cash, cash items and government securities. Second, no
more than 25% of the Company's total assets may be represented by securities
other than those that can satisfy the 75% asset test described in the
preceding sentence. Of the investments included in the 25% asset class, the
value of any one issuer's securities (excluding shares in qualified REIT
subsidiaries such as AGH GP and AGH LP or another REIT and excluding
partnership interests such as those in the Operating Partnership and in any
Subsidiary Partnerships) owned by the Company may not exceed 5% of the value
of the Company's total assets, and the Company may not own more than 10% of
any one issuer's outstanding voting securities (excluding securities of a
qualified REIT subsidiary or another REIT and excluding partnership
interests). The Company has represented that, as of the date of the Offering,
(i) at least 75% of the value of its total assets will be represented by real
estate assets, cash and cash items (including receivables), and government
securities and (ii) it will not own any securities that do not satisfy the 75%
asset requirement. In addition, the Company has represented that it will not
acquire or dispose, or cause the Operating Partnership or a Subsidiary
Partnership to acquire or dispose, of assets in the future in a way that would
cause it to violate either asset requirement. The Company may form additional
qualified REIT subsidiaries in order to operate hotels in Texas. See "--Other
Tax Considerations--State and Local Taxes."
Annual Distribution Requirements. In order to qualify as a REIT, the Company
must distribute to the holders of shares of Common Stock an amount at least
equal to (A) the sum of 95% of (i) the Company's "real estate investment trust
taxable income" (computed without regard to the deduction for dividends paid
and excluding any net capital gain) plus (ii) the excess of the net income, if
any, from foreclosure property over the tax on such income, minus (B) the
excess of the sum of certain items of non-cash income (income attributable to
leveled stepped rents, original issue discount on purchase money debt, or a
like-kind exchange that is later determined to be taxable over 5% of the
amount determined under clause (i) above). Such distributions must be paid in
the taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year and if
paid on or before the first regular distribution date after such declaration.
The amount distributed must not be preferential--i.e., each holder of shares
of Common Stock must
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receive the same distribution per share. A REIT may have more than one class
of stock, as long as distributions within each class are pro rata and non-
preferential. Such distributions are taxable to holders of Common Stock (other
than tax-exempt entities or nontaxable persons, as discussed below) in the
year in which paid, even though such distributions reduce the Company's
taxable income for the year in which declared. To the extent that the Company
does not distribute all of its net capital gain or distributes at least 95%,
but less than 100%, of its "real estate investment trust taxable income," it
will be subject to tax thereon at regular corporate tax rates. Finally, as
discussed below, the Company may be subject to an excise tax if it fails to
meet certain other distribution requirements.
The Company expects, and intends to take measures within its control, to
make quarterly distributions to the holders of shares of Common Stock in an
amount sufficient to satisfy the requirements of the annual distribution test.
In this regard, the Partnership Agreement authorizes AGH GP, as general
partner, to take such steps as are necessary to distribute to the partners of
the Operating Partnership an amount sufficient to permit the Company to meet
the annual distribution requirements. However, it is possible that the
Company, from time to time, may not have sufficient cash or other liquid
assets to meet the 95% distribution requirement, or to distribute such greater
amount as may be necessary to avoid income and excise taxation, due to timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company, or if the amount
of nondeductible expenses, such as principal amortization or capital
expenditures exceeds the amount of noncash deductions, such as depreciation.
In the event that such timing differences occur, the Company may find it
necessary to cause the Operating Partnership to arrange for borrowings or
liquidate some of its investments in order to meet the annual distribution
requirement, or attempt to declare a consent dividend, which is a hypothetical
distribution to holders of shares of Common Stock out of the earnings and
profits of the Company. The effect of such a consent dividend (which, in
conjunction with dividends actually paid, must not be preferential to those
holders who agree to such treatment) would be that such holders would be
treated for federal income tax purposes as if they had received such amount in
cash and they then had immediately contributed such amount back to the Company
as additional paid-in capital. This would result in taxable income to those
holders without the receipt of any actual cash distribution but would also
increase their tax basis in their shares of Common Stock by the amount of the
taxable income recognized.
If the Company fails to meet the 95% distribution test due to an adjustment
to the Company's income by reason of a judicial decision or by agreement with
the IRS, the Company may pay a "deficiency dividend" to holders of shares of
Common Stock in the taxable year of the adjustment, which dividend would
relate back to the year being adjusted. In such case, the Company also would
be required to pay interest plus a penalty to the IRS. However, a deficiency
dividend cannot be used to meet the 95% distribution test if the failure to
meet such test was due to the Company's failure to distribute sufficient
amounts to the holders of shares of Common Stock.
In addition, if the IRS successfully challenged the Company's deduction of
all or a portion of the salary and bonus it pays to officers who are also
holders of shares of Common Stock, such payments could be recharacterized as
dividend distributions to such employees in their capacity as stockholders. If
such distributions were viewed as preferential distributions, they would not
count toward the 95% distribution test.
FAILURE TO QUALIFY AS A REIT
The Company's treatment as a REIT for federal income tax purposes will be
terminated automatically if the Company fails to meet the requirements
described above and any available relief provisions do not apply. In such
event, the Company will be subject to tax (including any applicable minimum
tax) on its taxable income at regular corporate rates, and distributions to
holders of shares of Common Stock will not be deductible by the Company. All
distributions to holders of shares of Common Stock will be taxable as ordinary
income to the extent of current and accumulated earnings and profits of the
Company and distributions in excess thereof will be treated first as a tax
free return of capital (to the extent of a holder's tax basis in his shares of
Common Stock) and then as gain realized from the sale of shares of Common
Stock. Corporate stockholders will be eligible for the dividends received
deduction to the extent that distributions are made out of earnings and
profits. As noted
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above, the Company will not be eligible to elect REIT status again until the
beginning of the fifth taxable year after the year during which the Company's
qualification was terminated, unless the Company meets certain relief
requirements. Failure to qualify for even one year could result in the Company
incurring substantial indebtedness (to the extent borrowings are feasible) or
liquidating substantial investments in order to pay the resulting corporate
income taxes.
TAXATION OF THE COMPANY
In General. For any taxable year in which the Company qualifies as a REIT,
it will generally not be subject to federal income tax on that portion of its
REIT taxable income which is distributed to stockholders (except income or
gain with respect to foreclosure property, which will be taxed at the highest
corporate rate--currently 35%). If the Company were to fail to qualify as a
REIT, it would be taxed at rates applicable to corporations on all its income,
whether or not distributed to holders of shares of Common Stock. Even if it
qualifies as a REIT, the Company will be taxed on the portion of its REIT
taxable income which it does not distribute to the holders of shares of Common
Stock, such as taxable income retained as reserves.
100 Percent Tax. The Company will be subject to a 100% tax on (i) the
greater of the net income attributable to the amount by which it fails the 75%
income test or the 95% income test; and (ii) any net income derived from a
"prohibited transaction" (i.e., the sale of "dealer" property by the Company).
The imposition of any such tax on the Company would reduce the amount of cash
available for distribution to holders of shares of Common Stock.
A "dealer" is one who holds property primarily for sale to customers in the
ordinary course of its trade or business. All inventory required in the
operation of the Initial Hotels will be owned by the Lessee under the terms of
the Participating Leases. Accordingly, the Company believes no asset owned by
the Company, the Operating Partnership or a Subsidiary Partnership is held for
sale to customers and that a sale of any such asset will not be in the
ordinary course of business of the Company, the Operating Partnership or a
Subsidiary Partnership. Whether property is held "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those
related to a particular property. Nevertheless, the Company will attempt to
comply with the terms of safe harbor provisions in the Code prescribing when
asset sales will not be characterized as prohibited transactions. Complete
assurance cannot be given, however, that the Company can comply with the safe
harbor provisions of the Code or avoid owning property that may be
characterized as property held primarily for sale to customers in the ordinary
course of a trade or business. Because a determination of "dealer status" is
necessarily dependent upon facts which will occur in the future, Counsel
cannot render an opinion on this issue.
Tax on Net Income from Foreclosure Property. The Company will be subject to
a tax at the highest rate applicable to corporations (currently 35%) on any
"net income from foreclosure property." "Foreclosure property" is property
acquired by the Company as a result of a foreclosure proceeding or by
otherwise reducing such property to ownership by agreement or process of law.
"Net income from foreclosure property" is the gross income derived during the
taxable year from foreclosure property, less applicable deductions, but only
to the extent such income does not qualify under the 75% income test and 95%
income test. As a result of the rules with respect to foreclosure property, if
the Lessee defaults on its obligations under a Participating Lease for an
Initial Hotel, the Company terminates the Participating Lease, and the Company
is unable to find a replacement lessee for such Initial Hotel within 90 days
of such foreclosure, gross income from hotel operations conducted by the
Company from such Initial Hotel would cease to qualify for the 75% and 95%
gross income tests and, thus, the Company would fail to qualify as a REIT.
However, although it is unclear under the Code, if the hotel operations were
conducted by an independent contractor, it may be possible for the Initial
Hotel to cease to be foreclosure property two years after such foreclosure,
(which period could be extended an additional four years).
Alternative Minimum Tax. The Company will be subject to the alternative
minimum tax on items of tax preference allocable to it. Code Section 59(d)
authorizes the Treasury to issue regulations allocating items of tax
preference between a REIT and its stockholders. Such regulations have not yet
been issued; however, the Company does not anticipate any significant items of
tax preference.
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Excise Tax. In addition to the tax on any undistributed income, the Company
would also be subject to a 4% excise tax on the amount if any by which (i) the
sum of (A) 85% of its REIT taxable income for a calendar year, (B) 95% of any
net capital gain for such year and (C) any undistributed amounts (for purpose
of avoiding this excise tax) from prior years, exceeds (ii) the amount
actually distributed by the Company to holders of shares of Common Stock
during the calendar year (or declared as a dividend during the calendar year,
if distributed during the following January) as ordinary income dividends. The
imposition of any excise tax on the Company would reduce the amount of cash
available for distribution to holders of shares of Common Stock. The Company
intends to take all necessary measures within its control to avoid imposition
of the excise tax.
Tax on Built-In Gain of Certain Assets. If a C corporation elects to be
taxed as a REIT, or if assets of a C corporation are transferred to a REIT in
a transaction in which the REIT has a carryover basis in the assets acquired,
such C corporation generally will be treated as if it sold all of its assets
to such REIT at their respective fair market values and liquidated immediately
thereafter, recognizing and paying tax on all gain. However, under such
circumstances under present law, the REIT is permitted to make an election
under which the C corporation will not recognize gain and instead the REIT
will be required to recognize gain and pay any tax thereon only if it disposes
of such assets during the subsequent 10-year period (the "10-Year Rule"). The
Company intends to make the appropriate election to obtain the above-described
tax consequences. Thus, if the Company acquires any asset from a C corporation
as a result of a merger or other nontaxable exchange, and the Company
recognizes gain on the disposition of such asset during the 10-year period
following acquisition of the asset, then such gain will be subject to tax at
the highest regular corporate rate to the extent the Built-In Gain (the excess
of (a) the fair market value of such asset as of the date of acquisition over
(b) the Company's adjusted basis in such asset as of such date) on the sale of
such asset exceeds any Built-In Loss arising from the disposition during the
same taxable year of any other assets acquired in the same transaction, where
Built-In Loss equals the excess of (x) the Company's adjusted basis in such
other assets as of the date of acquisition over (y) the fair market value of
such other assets as of such date.
It should be noted that President Clinton has proposed that the 10-Year Rule
be repealed, and the Treasury Department has stated that it would recommend to
Congress that such repeal be effective for C corporations electing REIT status
or for carryover basis transactions for taxable years beginning on or after
January 1, 1997.
TAXATION OF STOCKHOLDERS
TAXABLE U.S. STOCKHOLDERS
Dividend Income. Distributions from the Company (other than distributions
designated as capital gains dividends) will be taxable to holders of shares of
Common Stock which are not tax-exempt entities as ordinary income to the
extent of the current or accumulated earnings and profits of the Company.
Distributions from the Company which are designated (by notice to stockholders
within 30 days after the close of the Company's tax year or with its annual
report) as capital gains dividends by the Company will be taxed as long-term
capital gains to taxable holders of shares of Common Stock to the extent that
they do not exceed the Company's actual net capital gain for the taxable year.
Holders of shares of Common Stock that are corporations may be required to
treat up to 20% of any such capital gains dividends as ordinary income. Such
distributions, whether characterized as ordinary income or as capital gain,
are not eligible for the 70% dividends received deduction for corporations
(which President Clinton has proposed be decreased to 50%, effective for
dividends received or accrued after January 31, 1996).
Distributions from the Company to holders which are not designated as
capital gains dividends and which are in excess of the Company's current or
accumulated earnings and profits are treated as a return of capital to such
holders and reduce the tax basis of a holder's shares of Common Stock (but not
below zero). Any such distribution in excess of the tax basis is taxable to
any such holder that is not a tax-exempt entity as a gain realized from the
sale of the shares of Common Stock, taxable as described below.
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The declaration by the Company of a consent dividend would result in taxable
income to consenting holders of shares of Common Stock (other than tax-exempt
entities) without any corresponding cash distributions. See "--Requirements
for Qualification as a REIT--Annual Distribution Requirements."
Portfolio Income. Dividends paid to holders of shares of Common Stock will
be treated as portfolio income. Such income therefore will not be subject to
reduction by losses from passive activities (i.e., any interest in a rental
activity or in a trade or business in which the holder does not materially
participate, such as certain interests held as a limited partner) of any
holder who is subject to the passive activity loss rules. Such distributions
will, however, be considered investment income which may be offset by certain
investment expense deductions.
No Flow-Through of Losses. Holders of shares of Common Stock will not be
permitted to deduct any net operating losses or capital losses of the Company.
Sale of Shares. A holder of shares of Common Stock who sells shares will
recognize taxable gain or loss equal to the difference between (i) the amount
of cash and the fair market value of any property received on such sale or
other disposition and (ii) the holder's adjusted basis in such shares. Gain or
loss recognized by a holder of shares of Common Stock who is not a dealer in
securities and whose shares have been held for more than one year will
generally be taxable as long-term capital gain or loss.
Back-up Withholding. Distributions from the Company will ordinarily not be
subject to withholding of federal income taxes, except as discussed under
"Foreign Stockholders." Withholding of income tax at a rate of 31% may be
required, however, by reason of a failure of a holder of shares of Common
Stock to supply the Company or its agent with the holder's taxpayer
identification number. Such "backup" withholding also may apply to a holder of
shares of Common Stock who is otherwise exempt from backup withholding
(including a nonresident alien of the United States and, generally, a foreign
entity) if such holder fails to properly document his status as an exempt
recipient of distributions. Each holder will therefore be asked to provide and
certify his correct taxpayer identification number or to certify that he is an
exempt recipient.
TAX-EXEMPT STOCKHOLDERS
Non-taxability of Dividend Income. In general, a holder of shares of Common
Stock which is a tax-exempt entity will not be subject to tax on distributions
from the Company. The IRS has ruled that amounts distributed as dividends by a
qualified REIT do not constitute unrelated business taxable income ("UBTI")
when received by certain tax-exempt entities. Thus, distributions paid to a
holder of shares of Common Stock which is a tax-exempt entity and gain on the
sale of shares of Common Stock by a tax-exempt entity (other than those tax-
exempt entities described below) will not be treated as UBTI, even if the
Company incurs indebtedness in connection with the acquisition of real
property (through its percentage ownership of the Operating Partnership and
the Subsidiary Partnerships) provided that the tax-exempt entity has not
financed the acquisition of its shares of Common Stock of the Company.
For tax-exempt entities which are social clubs, voluntary employee
beneficiary associations, supplemental unemployment benefit trusts, and
qualified group legal services plans exempt from federal income taxation under
Code Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income
from an investment in the Company will constitute UBTI unless the organization
is able to properly deduct amounts set aside or placed in reserve for certain
purposes so as to offset the UBTI generated by its investment in the Company.
Such prospective investors should consult their own tax advisors concerning
these "set aside" and reserve requirements.
In the case of a "qualified trust" (generally, a pension or profit-sharing
trust) holding shares in a REIT, the beneficiaries of such a trust are treated
as holding shares in the REIT in proportion to their actuarial interests in
the qualified trust, instead of treating the qualified trust as a single
individual (the "look through exception"). A qualified trust that holds more
than 10% of the shares of a REIT is required to treat a percentage of REIT
dividends as UBTI if the REIT incurs debt to acquire or improve real property.
This rule applies, however, only
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if (i) the qualification of the REIT depends upon the application of the "look
through" exception (described above) to the restriction on REIT shareholdings
by five or fewer individuals, including qualified trusts (see "Description of
Capital Stock--Restrictions on Transfer"), and (ii) the REIT is "predominantly
held" by qualified trusts, i.e., if either (x) a single qualified trust held
more than 25% by value of the interests in the REIT or (y) one or more
qualified trusts, each owning more than 10% by value, held in the aggregate
more than 50% of the interests in the REIT. The percentage of any dividend
paid (or treated as paid) to such a qualified trust that is treated as UBTI is
equal to the amount of modified gross income (gross income less directly
connected expenses) from the unrelated trade or business of the REIT (treating
the REIT as if it were a qualified trust), divided by the total modified gross
income of the REIT. A de minimis exception applies where the percentage is
less than 5%. Because the Company expects the shares of Common Stock to be
widely held, this new provision should not result in UBTI to any tax-exempt
entity.
FOREIGN STOCKHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships, foreign estates
and foreign trusts (collectively, "Foreign Investors") are complex, and no
attempt will be made herein to provide more than a summary of such rules.
Prospective Foreign Investors should consult their own tax advisors to
determine the impact of federal, state and local income tax laws on an
investment in the shares of Common Stock, including any reporting
requirements, as well as the tax treatment of such an investment under their
home country laws.
Foreign Investors which are not engaged in the conduct of a business in the
United States and who purchase shares of Common Stock will generally not be
considered as engaged in the conduct of a trade or business in the United
States by reason of ownership of such shares. The taxation of distributions by
the Company to Foreign Investors will depend upon whether such distributions
are attributable to operating income or are attributable to sales or exchanges
by the Company of its United States Real Property Interests ("USRPIs"). USRPIs
are generally direct interests in real property located in the United States
and interests in domestic corporations in which the fair market value of its
USRPIs exceeds a certain percentage.
The Company anticipates that a substantial portion of the distributions to
holders of shares of Common Stock will be attributable to receipt of Rent by
the Company. To the extent that such distributions do not exceed the current
or accumulated earnings and profits of the Company, they will be treated as
dividends and will be subject to a withholding tax equal to 30% of the gross
amount of the dividend, which tax will be withheld and remitted to the IRS by
the Company. Such 30% rate may be reduced by United States income tax treaties
in effect with the country of residence of the Foreign Investor; however, a
Foreign Investor must furnish a completed IRS Form 1001 to the Company to
secure such a reduction. Distributions in excess of the Company's earnings and
profits will be treated as a nontaxable return of capital to a Foreign
Investor to the extent of the basis of his shares of Common Stock, and any
excess amount will be treated as an amount received in exchange for the sale
of his shares of Common Stock and treated under the rules described below for
the sale of Common Stock.
Distributions which are attributable to net capital gains realized from the
disposition of USRPIs (i.e., the Initial Hotels) by the Company will be taxed
as though the Foreign Investors were engaged in a trade or business in the
United States and the distributions were gains effectively connected with such
trade or business. Thus, a Foreign Investor would be entitled to offset its
gross income by allowable deductions and would pay tax on the resulting
taxable income at the graduated rates applicable to United States citizens or
residents. For both individuals and corporations, the Company must withhold a
tax equal to 35% of all dividends that could be designated by the Company as
capital gain dividends. To the extent that such withholding exceeds the actual
tax owed by the Foreign Investor, a Foreign Investor may claim a refund from
the IRS.
The Company or any nominee (e.g., a broker holding shares in street name)
may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to
determine whether withholding is required on gains realized from the
disposition of USRPIs. A domestic person (a "nominee") who holds shares of
Common Stock on
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behalf of a Foreign Investor will bear the burden of withholding, provided
that the Company has properly designated the appropriate portion of a
distribution as a capital gain dividend.
It is anticipated that the shares owned directly or indirectly by Foreign
Investors will be less than 50% in value of the shares of Common Stock and
therefore the Company will be a "domestically controlled REIT." Accordingly,
shares of Common Stock held by Foreign Investors in the United States will not
be considered USRPIs and gains on sales of such shares will not be taxed to
such Foreign Investors as long as the seller is not otherwise considered to be
engaged in a trade or business in the United States. (The same rule applies to
gains attributable to distributions in excess of the Foreign Investor's cost
for its shares, discussed above.) Similarly, a foreign corporation not
otherwise subject to United States tax which distributes shares of Common
Stock to its stockholders will not be taxed under this rule.
The IRS is authorized to impose annual reporting requirements on certain
United States and foreign persons directly holding USRPIs. The required
reports are in addition to any necessary income tax returns, and do not
displace existing reporting requirements imposed on Foreign Investors by the
Agricultural Foreign Investment Disclosure Act of 1978 and the International
Investment Survey Act of 1976. As of the date of this Prospectus, the IRS has
not exercised its authority to impose reporting under this provision.
Furthermore, because shares in a domestically controlled REIT do not
constitute a USRPI, such reporting requirements are not expected to apply to a
Foreign Investor in the Company. However, the Company is required to file an
information return with the IRS setting forth the name, address and taxpayer
identification number of the payee of distributions from the Company (whether
the payee is a nominee or is the actual beneficial owner).
STATEMENT OF STOCK OWNERSHIP
The Company is required to demand annual written statements from the record
holders of designated percentages of its shares of Common Stock disclosing the
actual owners of the shares of Common Stock. The Company must also maintain,
within the Internal Revenue District in which it is required to file its
federal income tax return, permanent records showing the information it has
received as to the actual ownership of such shares of Common Stock and a list
of those persons failing or refusing to comply with such demand.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable solely to the Company's investment in the Operating
Partnership and the Subsidiary Partnerships. The discussion does not cover
state or local tax laws or any federal tax laws other than income tax laws.
Classification as a Partnership. A substantial portion the Company's real
estate investments will be made through the Subsidiary Partnerships, certain
of which will hold interests in other partnerships. In general, partnerships
are "pass-through" entities which are not subject to federal income tax.
Instead, partners are allocated their proportionate shares of the items of
income, gain, loss, deduction and credit of a partnership, and are subject to
tax thereon, without regard to whether the partners receive cash distributions
from the partnership. The Company will be entitled to include in its REIT
taxable income its distributive share of the income of any partnership
(including the Operating Partnership) in which it has an interest and to
deduct its distributive share of the losses of any partnership (including the
Operating Partnership) in which it has an interest only if each such
partnership is classified for federal income tax purposes as a partnership
rather than as an association taxable as a corporation.
An organization formed as a partnership will be treated as a partnership for
federal income tax purposes rather than as a corporation only if it has no
more than two of the following four corporate characteristics: continuity of
life, centralization of management, limited liability and free transferability
of interests. However, a "publicly traded partnership" (i.e., a partnership in
which interests are traded on an established securities market or are readily
tradable on a secondary market or the substantial equivalent thereof) will be
treated as a corporation unless at least 90% of the gross income of such
partnership, for each taxable year the partnership is a publicly
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traded partnership, consists of "qualifying income." "Qualifying income"
includes income from real property rents, gain from the sale or other
disposition of real property, interest and dividends.
The IRS has issued final regulations providing limited safe harbors from the
definition of a publicly traded partnership. Pursuant to one of those safe
harbors (the "Private Placement Exclusion"), interests in a partnership will
not be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (i) all of the partnership interests are issued in a
transaction that is not required to be registered under the Securities Act and
(ii) the partnership does not have more than 100 partners at any time during
the taxable year (taking into account as a partner each person who indirectly
owns an interest in the partnership through a partnership, grantor trust, or S
corporation (a "flow-through entity"), but only if (a) substantially all the
value of the beneficial owner's interest in the flow-through entity is
attributable to the flow-through entity's interest (direct or indirect) in the
partnership, and (b) a principal purpose of the use of the tiered arrangement
is to permit the partnership to satisfy the 100-partner limitation).
All of the partnership interests in the Operating Partnership and the
Subsidiary Partnerships will be issued in transactions that are not required
to be registered under the Securities Act. In addition, upon the closing of
the Offering, in the aggregate, the Operating Partnership and the Subsidiary
Partnerships will not have more than 100 partners (even taking into account
indirect ownership of such partnerships through partnerships, grantor trusts,
and S corporations). Thus, the Operating Partnership and each Subsidiary
Partnership should satisfy the Private Placement Exclusion.
None of the Operating Partnership and the Subsidiary Partnerships has
requested and none intends to request, a ruling from the IRS that it will be
classified as a partnership for federal income tax purposes. Instead, at the
closing of the Offering, Battle Fowler LLP will deliver its opinion that,
based on the provisions of the partnership agreement of the Operating
Partnership and each Subsidiary Partnership, certain factual assumptions, and
certain representations described in the opinion, the Operating Partnership
and each Subsidiary Partnership will not possess more than two corporate
characteristics and thus will be treated for federal income tax purposes as a
partnership and not as an association taxable as a corporation or as a
publicly traded partnership. Unlike a tax ruling, an opinion of counsel is not
binding upon the IRS, and no assurance can be given that the IRS will not
challenge the status of the Operating Partnership and each Subsidiary
Partnership as a partnership for federal income tax purposes. If such
challenge were sustained by a court, the Operating Partnership and each
Subsidiary Partnership would be treated as a corporation for federal income
tax purposes, as described below. In addition, the opinion of Battle Fowler
LLP is based on existing law, which is to a great extent the result of
administrative and judicial interpretation. No assurance can be given that
administrative or judicial changes would not modify the conclusions expressed
in the opinion.
If for any reason any of the partnerships in which the Company has an
interest were taxable as a corporation rather than as a partnership for
federal income tax purposes, the Company would not be able to satisfy the
asset requirements for REIT status. See "--Requirements for Qualification as a
REIT--Asset Tests." In addition, any change in the partnership status of such
entities for tax purposes might be treated as a taxable event in which case
the Company might incur a tax liability without any related cash distribution.
See "--Income Taxation of the Operating Partnership and Its Partners--Basis in
Operating Partnership Interest." Further, items of income and deduction of
such partnerships would not pass through to its partners (including the
Company), and such partners would be treated as stockholders for tax purposes.
The partnerships in which the Company has an interest would be required to pay
income tax at corporate tax rates on their net income, and distributions to
their partners would constitute dividends that would not be deductible in
computing the relevant entities' taxable income.
Under a regulatory "anti-abuse" rule (the "Anti-Abuse Rule"), the IRS may
(i) recast a transaction involving the use of a partnership to reflect the
underlying economic arrangement under the partnership provisions of the Code
(the "Partnership Provisions"), or (ii) prevent the use of a partnership to
circumvent the intended purpose of a Code provision. The Anti-Abuse Rule
contains an example in which a corporation that elects to be treated as a REIT
contributes substantially all of the proceeds from a public offering to a
partnership
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in exchange for a general partnership interest. The example concludes that the
use of the partnership is not inconsistent with the intent of the Partnership
Provisions and, thus, cannot be recast by the IRS. However, the Exchange
Rights do not conform in all respects to the redemption rights contained in
the foregoing example. Moreover, the Anti-Abuse Rule is extraordinarily broad
in scope and is applied based on an analysis of all of the facts and
circumstances. As a result, there can be no assurance that the IRS will not
attempt to apply the Anti-Abuse Rule to the Company. If the conditions of the
Anti-Abuse Rule are met, the IRS is authorized to take appropriate enforcement
action, including disregarding the Operating Partnership for federal income
tax purposes or treating one or more of the partners as nonpartners. Any such
action potentially could jeopardize the Company's status as a REIT.
INCOME TAXATION OF THE OPERATING PARTNERSHIP AND ITS PARTNERS
Operating Partnership Allocations. As noted above, the Company must include
in its REIT taxable income its distributive share of the income and losses of
any partnership in which it has any interest. Although the provisions of a
partnership agreement generally will determine the allocation of income and
losses among partners, such allocations will be disregarded for tax purposes
under Section 704(b) of the Code if they do not have "substantial economic
effect" or otherwise do not comply with the provisions of Section 704(b) of
the Code and Treasury Regulations.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners in respect of such item. The allocations of taxable income and loss
of partnerships in which the Company has an interest are intended to comply
with the requirements of Section 704(b) of the Code and Treasury Regulations.
Tax Allocations in Respect of Contributed Properties. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal
income tax purposes in a manner such that the contributing partner benefits
from, or is charged with, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of such
unrealized gain or unrealized loss generally is equal to the difference
between the fair market value of the contributed property and the adjusted tax
basis of such property at the time of contribution (the "Book-Tax
Difference").
The Treasury Department has issued final and temporary regulations under
Section 704(c) of the Code (the "Regulations") which give partnerships great
flexibility in ensuring that a partner contributing property to a partnership
receives the tax burdens and benefits of any precontribution gain or loss
attributable to the contributed property. The Regulations permit partnerships
to use any "reasonable method" of accounting for Book-Tax Differences. The
Regulations specifically describe three reasonable methods, including (i) the
"traditional method" under current law, (ii) the traditional method with the
use of "curative allocations" which would permit distortions caused by a Book-
Tax Difference to be rectified on an annual basis and (iii) the "remedial
allocation method" which is similar to the traditional method with "curative
allocations." The Partnership Agreement permits AGH GP, as general partner, to
select one of these methods to account for Book-Tax Differences in connection
with the contribution of the Initial Hotels and the limited partnership
interests in the Subsidiary Partnerships to the Operating Partnership in
exchange for OP Units.
Basis in Operating Partnership Interest. The Company's adjusted tax basis in
each of the partnerships in which it has an interest generally (i) will be
equal to the amount of cash and the basis of any other property contributed to
such partnership by the Company, (ii) will be increased by (a) its allocable
share of such partnership's income and (b) its allocable share of any
indebtedness of such partnership and (iii) will be reduced, but not below
zero, by the Company's allocable share of (a) such partnership's loss and (b)
the amount of cash and the fair market value of any property distributed to
the Company, and by constructive distributions resulting from a reduction in
the Company's share of indebtedness of such partnership.
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If the Company's allocable share of the loss (or portion thereof) of any
partnership in which it has an interest would reduce the adjusted tax basis of
the Company's partnership interest in such partnership below zero, the
recognition of such loss will be deferred until such time as the recognition
of such loss (or portion thereof) would not reduce the Company's adjusted tax
basis below zero. To the extent that distributions from a partnership to the
Company, or any decrease in the Company's share of the nonrecourse
indebtedness of a partnership (each such decrease being considered a
constructive cash distribution to the partners), would reduce the Company's
adjusted tax basis below zero, such distributions (including such constructive
distributions) would constitute taxable income to the Company. Such
distributions and constructive distributions normally would be characterized
as long-term capital gain if the Company's interest in such partnership has
been held for longer than the long-term capital gain holding period (currently
one year).
Depreciation Deductions Available to the Operating Partnership. Certain
assets owned by the Operating Partnership consist of property contributed to
it by its partners. In general, when property is contributed in a tax-free
transaction under Section 721 of the Code, the transferee-partnership is
treated in the same manner as the contributing partner for purposes of
computing depreciation. The effect of this rule is to continue the historic
basis, placed in service dates and depreciation methods with respect to
property contributed to a partnership. This general rule would apply for any
properties the Operating Partnership acquires by reason of the deemed
termination for tax purposes of any of the Subsidiary Partnerships or to the
extent that the Operating Partnership receives an adjustment under Section
743(b) of the Code by reason of the acquisition of any interests in a
Subsidiary Partnership that did not terminate for tax purposes.
As described above (see "--Income Taxation of the Operating Partnership and
Its Partners--Tax Allocations in Respect of Contributed Properties"), the
Treasury Department has recently issued Regulations which give partnerships
flexibility in ensuring that a partner contributing property to a partnership
receives the tax benefits and burdens of any precontribution gain or loss
attributable to the contributed property.
As described previously, AGH GP, as general partner, may select any
permissible method to account for Book-Tax Differences in connection with the
contribution of the Initial Hotels and the limited partnership interests in
the Subsidiary Partnerships to the Operating Partnership in exchange for OP
Units. The use of certain of these methods may result in the Company being
allocated lower depreciation deductions than if a different method were used.
The resulting higher taxable income and earnings and profits of the Company,
as determined for federal income tax purposes, should decrease the portion of
distributions by the Company which may be treated as a return of capital. See
"--Requirements for Qualification as a REIT--Annual Distribution
Requirements." The Company may adopt a different method to account for Book-
Tax Differences for property contributed to the Operating Partnership or a
Subsidiary Partnership after the Formation Transactions.
OTHER TAX CONSIDERATIONS
State and Local Taxes. The tax treatment of the Company and holders of
shares of Common Stock in states having taxing jurisdiction over them may
differ from the federal income tax treatment. Accordingly, only a very limited
discussion of state taxation of the Company, the shares of Common Stock or the
holders of shares of Common Stock is provided herein, and no representation is
made as to the tax status of the Company (other than with respect to the Texas
franchise tax, as discussed below), the shares of Common Stock or the holders
of shares of Common Stock in such states. However, holders of shares of Common
Stock should note that certain states impose a withholding obligation on
partnerships carrying on a trade or business in a state having partners who
are not resident in such state. The Partnership Agreement contains a provision
which permits the Operating Partnership to withhold a portion of a non-
resident partner's distribution (e.g., a distribution to the Company) and to
pay such withheld amount to the taxing state as agent for the non-resident
partner. Most (but not all) states follow the Code in their taxation of REITs.
In such states, the Company should generally not be liable for tax and should
be able to file a claim for refund and obtain any withheld amount from the
taxing state. However, due to the time value of money, the requirement of the
Operating Partnership to withhold on distributions to the Company will reduce
the yield on an investment in shares of Common Stock. Each holder of
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shares of Common Stock should consult his own tax advisor as to the status of
the shares of Common Stock under the respective state tax laws applicable to
him.
In particular, Texas imposes a franchise tax upon corporations that do
business in Texas. The Company will be organized as a Maryland corporation and
anticipates that it will have an office in Texas. AGH LP will be organized as
a Nevada corporation and anticipates that it will not have any contacts with
Texas other than ownership of its limited partnership interest in the
Operating Partnership. The Operating Partnership will be registered in Texas
as a foreign limited partnership qualified to transact business in Texas.
The Texas franchise tax is imposed on a corporation doing business in Texas
with respect to the corporation's net "taxable capital" (generally, financial
accounting net worth, with certain adjustments) and its net "taxable earned
surplus" (generally, a corporation's federal taxable income, with certain
adjustments) apportioned to Texas. A corporation's taxable capital and taxable
earned surplus are apportioned to Texas based on a fraction, the numerator of
which is the corporation's gross receipts from business transacted in Texas,
and the denominator of which is the corporation's gross receipts from its
entire business, with the amount and timing of such gross receipts being
generally determined in accordance with generally accepted accounting
principles (in the case of "taxable capital") and the Code (in the case of
taxable earned surplus). For purposes of determining the source of gross
receipts, dividends and interest received by a corporation are generally
apportioned based upon the state of incorporation of a corporate payor or a
corporate debtor, respectively. A similar rule applies to receipts by a
corporation from a limited liability company. Thus, interest and dividends
received by a corporation from another corporation or distributions and
interest received by a corporation from a limited liability company will not
be treated as gross receipts from business transacted in Texas unless the
payor is incorporated or organized, respectively, in Texas. To calculate the
tax on net taxable capital, receipts reflecting the corporation's share of net
profits from a partnership are apportioned to Texas if the partnership's
principal place of business (the location of its day-to-day operations) is in
Texas; however, if the corporation's share of the gross receipts from the
partnership is treated as revenue of the corporation under generally accepted
accounting principles, then the receipts of the partnership are apportioned
based on normal apportionment rules as if the receipts were received directly
by the corporation. For purposes of the tax on net taxable earned surplus,
receipts are apportioned as though the corporation directly received the
receipts from the underlying activities of the partnership. The franchise tax
on "net taxable capital" ("taxable capital" apportioned to Texas) is imposed
at the rate of .25% of a corporation's net taxable capital. The franchise tax
rate on "net taxable earned surplus" ("taxable earned surplus" apportioned to
Texas) is 4.5%. The Texas franchise tax is generally equal to the greater of
the tax on "net taxable capital" and the tax on "net taxable earned surplus."
The Texas franchise tax is not applied on a consolidated group basis. In
addition, with respect to REITs organized as corporations, the Comptroller of
Public Accounts (the "Comptroller") has taken the position administratively
that the tax on net taxable earned surplus is determined based upon the income
of such corporation prior to reduction for the dividends-paid deduction
available to REITs. Any Texas franchise tax that the Company is required to
pay will reduce the Cash Available for Distribution by the Company to its
stockholders.
The Comptroller has issued a rule providing that a corporation is not
considered to be doing business in Texas for purposes of the Texas franchise
tax imposed on net taxable capital solely by virtue of its ownership of an
interest as a limited partner in a limited partnership that does business in
Texas. The same rule provides, however, that a corporation is considered to be
doing business in Texas if it owns an interest as a general partner in a
partnership that does business in Texas. A parallel rule for purposes of the
tax on net taxable earned surplus, by negative implication, incorporates the
taxable capital nexus standards, including the limited partner exception. The
Comptroller has verified these results in private determinations. The
Comptroller also has expressed informally its view that a corporation is not
considered to be doing business in Texas for Texas franchise tax purposes
merely because the corporation owns stock in another corporation that does
business in Texas.
In accordance with these pronouncements by the Comptroller, AGH GP will be
treated as doing business in Texas because it will be the general partner of
the Operating Partnership, and the Operating Partnership will be doing
business in Texas. Accordingly, AGH GP will be subject to the Texas franchise
tax. The Company will be treated as doing business in Texas because it will
have an office in Texas. Accordingly, the Company will be
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subject to the Texas franchise tax. However, the Company anticipates that its
only source of gross receipts for Texas franchise tax purposes will be
dividends from its two wholly owned qualified REIT subsidiaries, AGH GP and
AGH LP, which are both Nevada corporations. Since dividends are sourced to the
state of incorporation of a corporate payor for gross receipts apportionment
purposes (although dividends received from another member of a consolidated
group are not taken into account as a gross receipt or earned surplus for
purposes of computing the franchise tax on net taxable earned surplus), the
Company does not anticipate that any significant portion of its "taxable
capital" or "taxable earned surplus" will be apportioned to Texas. As a
result, the Company's Texas franchise tax liability is not expected to be
substantial. Further, based on the pronouncements by the Comptroller, AGH LP
will not be treated as doing business in Texas merely as a result of its
status as a limited partner of the Operating Partnership. As long as AGH LP is
not otherwise doing business in Texas, AGH LP should not be subject to the
Texas franchise tax. Finally, two limited liability companies that have been
formed to be general partners of the Subsidiary Partnerships likewise will be
subject to the Texas franchise tax under the foregoing rules because they are
treated like corporations for Texas franchise tax purposes and they have
taxable nexus with Texas by virtue of being general partners in two Subsidiary
Partnerships that own real property in Texas. However, since these limited
liability companies only own 1.0% general partnership interests, the Texas
franchise tax due from these entities will not be substantial. Two other
limited liability companies have been formed, one of which will own a hotel
located outside of Texas and the other of which will be the general partner in
a limited partnership owning a hotel located outside of Texas. Thus, while
these limited liability companies will be conducting activities that will
create taxable nexus with Texas, these companies will generate all of their
gross receipts from non-Texas sources and thus will not be required to pay a
material amount of Texas franchise tax.
There can be no assurance that the Comptroller will agree that AGH LP is not
or, in the future, will not be doing business in Texas for Texas franchise tax
purposes. First, the Comptroller could revoke the pronouncements described
above and contend that the activities of AGH LP will constitute the doing of
business in Texas. Second, the Comptroller could contend that (i) some
activity of AGH LP other than its ownership of a limited partnership interest
in the Operating Partnership will constitute the doing of business in Texas,
despite the avoidance of contacts with the State of Texas, or (ii) in light of
the overall structure of the Company, AGH LP and AGH GP, the pronouncements
otherwise are inapplicable. The Company intends to seek a private
determination from the Comptroller that verifies the foregoing Texas franchise
tax consequences of this structure.
The Operating Partnership and the Subsidiary Partnerships (other than the
Subsidiary Partnership organized as a limited liability company) will not be
subject to the Texas franchise tax under the laws in existence as of the date
of this Prospectus. There can be no assurance, however, that the Texas
legislature, which will not meet again in regular session until 1997, will not
in the future expand the scope of the Texas franchise tax to apply to limited
partnerships such as the Operating Partnership and the Subsidiary Partnerships
organized as limited partnerships under state law.
Coopers & Lybrand L.L.P., special tax consultant to the Company ("Special
Tax Consultant"), has reviewed the discussion in this section with respect to
Texas franchise tax matters and is of the opinion that it accurately
summarizes the Texas franchise tax matters expressly described herein. The
Special Tax Consultant expresses no opinion on any other federal or state tax
considerations affecting the Company or a holder of Common Stock, including,
but not limited to, other Texas franchise tax matters not specifically
discussed above.
Possible Legislative or Other Actions Affecting Tax Consequences; Possible
Adverse Tax Legislation. Prospective stockholders should recognize that the
present federal income tax treatment of an investment in the Company may be
modified by legislative, judicial or administrative action at any time and
that any such action may affect investments and commitments previously made.
The rules dealing with federal income taxation are constantly under
legislative and administrative review, resulting in revisions of regulations
and revised interpretations of established concepts as well as statutory
changes. Revisions in federal tax laws and interpretations thereof could
adversely affect the tax consequences of an investment in the Company.
Current Texas franchise tax law applies only to corporations and limited
liability companies. Thus, partnerships engaged in business in Texas,
including the Subsidiary Partnerships that own property in Texas,
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presently fall outside the jurisdiction of the Texas franchise tax. The
corporate general partners in those partnerships, however, are subject to
Texas franchise tax. It is expected that Texas legislators and/or the
Comptroller will propose or recommend, as the case may be, statutory
amendments to expand the application of the Texas franchise tax to include
certain non-corporate businesses, specifically including partnerships, in the
franchise tax base. It cannot be predicted whether such proposals will be
adopted by the legislature. If such proposals are enacted, Subsidiary
Partnerships that own property in Texas would be subjected to the then
applicable Texas franchise tax.
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UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement, dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
the number of shares of Common Stock set forth opposite the name of such
Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Smith Barney Inc. ....................................................
Prudential Securities Incorporated....................................
Legg Mason Wood Walker, Incorporated..................................
The Robinson-Humphrey Company, Inc. ..................................
---------
Total............................................................... 7,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to the
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the Underwriters' over-allotment
option described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Prudential Securities
Incorporated, Legg Mason Wood Walker, Incorporated and The Robinson-Humphrey
Company, Inc. are acting as representatives (the "Representatives"), propose
to offer part of the shares directly to the public at the public offering
price set forth on the cover page of this Prospectus and to offer part of the
shares to certain dealers at a price which represents a concession not in
excess of $ per share under the public offering price. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $
per share to certain other dealers. After the initial public offering, the
public offering price, concessions and reallowances to dealers may be changed
by the Underwriters. The Representatives have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 1,050,000 additional
shares of Common Stock at the price to the public set forth on the cover page
of this Prospectus minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, in connection with the Offering.
The Company will pay an advisory fee equal to 0.75% of the gross proceeds of
the Offering (including any exercise of the Underwriters' over-allotment
option) to Smith Barney Inc. for advisory services in connection with the
evaluation, analysis and structuring of the Company's formation and the
Offering.
The Company and its officers and directors have agreed that, for a period of
one year from the date of this Prospectus, they will not, without the prior
written consent of Smith Barney Inc., sell, offer to sell, solicit an offer to
buy, contract to sell, grant any option to purchase or otherwise transfer or
dispose ("Transfer") of any shares of Common Stock or any other securities
convertible into, or exercisable or exchangeable for, shares of Common Stock.
Messrs. Sowell, Shaw and Shaw have agreed that, for a period of one year from
the date of this Prospectus, they will not, without the prior written consent
of Smith Barney Inc., Transfer any OP Units or any shares of Common Stock
issuable upon exchange of such OP Units.
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Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price for the shares of Common Stock
included in the Offering will be determined by negotiation between the Company
and the Representatives. Among the factors considered in making such
determination are the history of and prospects for the Company's business and
the industry in which it competes, an assessment of the Company's management,
the prospects for growth of the Company's revenues and earnings, the current
state of the economy in the United States and the current level of economic
activity in the industry in which the Company competes and in related or
comparable industries, and currently prevailing conditions in the securities
markets, including current market valuations of the publicly traded companies
which the Company and the Representatives believe to be comparable to the
Company. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering or at or above the initial public offering price.
At the request of the Company, the Underwriters have reserved up to 350,000
shares of Common Stock for sale at the public offering price to certain
employees of the Company, their business affiliates and related parties who
have expressed an interest in purchasing shares. Such purchases will be made
under the same terms and conditions as will be initially offered by the
Underwriters in the public offering.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities that may be incurred in connection with the Offering,
including liabilities under the Securities Act.
The Common Stock has been approved for listing on the NYSE, subject to
official notice of issuance, under the symbol "AGT." In order to meet one of
the requirements for listing the Common Stock on the NYSE, the Underwriters
have undertaken to sell lots of 100 or more shares to a minimum of 2,000
beneficial holders.
EXPERTS
The Consolidated Balance Sheet of American General Hospitality Corporation
as of April 12, 1996; the Balance Sheet of AGH Leasing, L.P. as of May 29,
1996; the Combined Financial Statements of the AGH Predecessor Hotels as of
December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995 and the related financial statement schedule and the
Combined Financial Statements of the AGH Acquisition Hotels as of December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995 and the related financial statement schedule included in this Prospectus
have been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their reports thereon included elsewhere herein and in the
Registration Statement. Such Balance Sheets, Combined Financial Statements and
financial statement schedules are included in reliance upon such reports given
on their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Battle Fowler LLP, New York, New York. In addition,
the description of federal income tax consequences contained in the section of
the Prospectus entitled "Federal Income Tax Considerations" is based on the
opinion of Battle Fowler LLP, New York, New York. The description of Texas
franchise tax matters contained in the section of the Prospectus entitled
"Federal Income Tax Considerations-Other Tax Considerations," is based on the
opinion of Coopers & Lybrand L.L.P., Dallas, Texas. Calhoun & Stacy P.L.L.C.,
Dallas, Texas has also advised the Company on certain matters relating to the
acquisition of the Initial Hotels. The validity of the shares of Common Stock
offered hereby will be passed upon for the Underwriters by Hunton & Williams.
Battle Fowler LLP and Hunton & Williams will rely on Ballard Spahr Andrews &
Ingersoll, Baltimore, Maryland as to certain matters of Maryland law.
The Company will be required to file reports and other information with the
Commission pursuant to the Exchange Act in addition to any other legal or NYSE
requirements. The Company intends to furnish its stockholders with annual
reports containing consolidated financial statements audited by its
independent certified
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public accountants and with quarterly reports containing unaudited condensed
consolidated financial statements for each of the first three quarters of each
fiscal year.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 (of which this Prospectus is a part) under the Securities Act with
respect to the securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain portions
of which have been omitted as permitted by the rules and regulations of the
Securities and Exchange Commission. Statements contained in this Prospectus as
to the content of any contract or other document are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference and the exhibits
and schedules hereto. For further information regarding the Company and the
shares of Common Stock offered hereby, reference is hereby made to the
Registration Statement and such exhibits and schedules.
The Registration Statement and the exhibits and schedules forming a part
thereof filed by the Company with the Commission can be inspected and copies
obtained from the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of such materials can be obtained by mail from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms have
the meanings set forth below for the purposes of this Prospectus.
"1996 Plan" means the American General Hospitality Corporation 1996
Incentive Plan.
"ACMs" means asbestos-containing materials.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"Additional Charges" means certain amounts of money, including interest
accrued on any late payments or charges, that the Lessee will be obligated to
pay to the Company in addition to Base Rent or Participating Rent, pursuant to
the Participating Leases.
"Adjusted Basis Ratio" means, for each Initial Hotel, the ratio that the
average of the adjusted bases of the personal property in the Initial Hotel at
the beginning and at the end of a taxable year bears to the average of the
aggregate adjusted bases of both the real and personal property comprising the
Initial Hotel at the beginning and at the end of a taxable year.
"ADR" means average daily room rate.
"AGH Acquisition Hotels" means the following nine Initial Hotels that will
be acquired primarily from persons unaffiliated with AGHI: the Holiday Inn
Dallas DFW Airport South, Hilton Hotel-Toledo, Holiday Inn New Orleans
International Airport, Holiday Inn Park Center Plaza, Holiday Inn Select-
Madison, Holiday Inn Mission Valley, Le Baron Airport Hotel, Days Inn Ocean
City, and Fred Harvey Albuquerque Airport Hotel.
"AGH GP" means AGH GP, Inc., a Nevada corporation and wholly owned
subsidiary of the Company, which will be the sole general partner of the
Operating Partnership.
"AGH LP" means AGH LP, Inc., a Nevada corporation and wholly owned
subsidiary of the Company, which will be a Limited Partner of the Operating
Partnership.
"AGH Predecessor Hotels" means the following four Initial Hotels that will
be acquired primarily from partnerships controlled by shareholders of AGHI:
the Holiday Inn Dallas DFW Airport West, Courtyard by Marriott-Meadowlands,
Hotel Maison de Ville, and the Hampton Inn Richmond Airport.
"AGHI" means American General Hospitality, Inc., which will operate the
Initial Hotels pursuant to the Management Agreements, and certain of its
affiliates.
"Anti-Abuse Rule" means the regulations issued by the United States Treasury
Department under the Partnership Provisions that would authorize the IRS, in
certain "abusive" transactions involving partnerships, to disregard the form
of a transaction and recast it for federal tax purposes as it deems
appropriate.
"Base Rent" means the fixed obligation of the Lessee to pay a sum certain in
weekly rent under each of the Participating Leases.
"Beverage Corporations" means those corporations wholly owned by Steven D.
Jorns that will sublease from the Lessee the portion of eleven of the Initial
Hotels that sell alcoholic beverages.
"Beverage Subleases" means those subleases between the Lessee and the
Beverage Corporations relating to the sublease of the areas at the Initial
Hotels where alcoholic beverages are sold.
"Board of Directors" means the Board of Directors of the Company.
"Bylaws" means the Bylaws of the Company.
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"Cash Available for Distribution" means Funds From Operations adjusted for
certain non-cash items, less reserves for capital expenditures.
"Charter"means the charter of the Company filed for record with the State
Department of Assessments and Taxation of Maryland, as may be amended from
time to time.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the shares of Common Stock, $0.01 par value per share,
of the Company.
"Company" means American General Hospitality Corporation, a Maryland
corporation, which was incorporated on April 12, 1996, together with AGH GP,
AGH LP, and the Operating Partnership, and any subsidiaries thereof.
"Company Expenses" means all administrative costs and expenses of the
Company, AGH GP, and AGH LP.
"Comptroller" means the office of the Texas State Comptroller of Public
Accounts.
"Counsel" means Battle Fowler LLP.
"CPI" means the United States Consumer Price Index, All Urban Consumers,
U.S. City Average, All Items (1982 - 84 = 100).
"DFW South Loan" means the non-recourse mortgage on Holiday Inn Dallas DFW
Airport South in the outstanding principal amount as of March 31, 1996 of
approximately $14.2 million.
"Director Share Awards" means the annual award of shares of Common Stock to
each eligible director under the Directors' Plan.
"Directors' Plan" means the American General Hospitality Corporation Non-
Employee Directors' Incentive Plan.
"ESAs" means phase I environmental site assessments.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agreement" means that Exchange Rights Agreement among the Company,
the Operating Partnership and the Limited Partners, other than AGH LP, other
persons or parties thereto.
"Exchange Rights" means, pursuant to the Partnership Agreement, the rights
of the Limited Partners, other than AGH LP, to cause the Operating Partnership
to exchange each OP Unit in exchange for cash or, at the Company's election,
shares of Common Stock.
"F&B" means food and beverage.
"FF&E" means furniture, fixtures and equipment.
"FF&E Note" means collectively the one or more five-year amortizing recourse
promissory notes in the aggregate principal amount of $315,000 issued by the
Lessee to the Operating Partnership in connection with the sale by the
Operating Partnership of certain personal property relating to certain of the
Initial Hotels.
"Foreign Investors" means nonresident alien individuals, foreign
corporations, foreign partnerships and foreign trusts and estates.
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"Formation Transactions" means the principal transactions in connection with
the formation of the Company and the acquisition of the Initial Hotels.
"Franchise Licenses" means those franchise licenses relating to the
franchised Initial Hotels.
"Funds From Operations" means income (loss) before minority interest
(computed in accordance with generally accepted accounting principles),
excluding gains (losses) from debt restructuring and sales of property, plus
real estate related depreciation and amortization (excluding amortization of
financing costs), and after adjustments for unconsolidated partnerships and
joint ventures.
"General Partner" means AGH GP, Inc., a Nevada corporation.
"Independent Directors" means a director of the Company who is not an
officer or employee of the Company, any affiliate of an officer or employee or
any affiliate of any advisor to the Company under an advisory agreement, any
lessee of any property of the Company, any subsidiary of the Company or any
partnership which is an affiliate of, the Company.
"Initial Hotels" means the thirteen hotels that the Company will own upon
the completion of the Offering.
"IRS" means the U.S. Internal Revenue Service.
"ISOs" means incentive stock options.
"Lease Master Agreement" means the agreement between the Operating
Partnership and the Lessee which will set forth the terms of the Lessee's
required capitalization and certain other matters.
"Lessee" means AGH Leasing, L.P., which will lease the Initial Hotels from
the Operating Partnership pursuant to the Participating Leases.
"Limited Partners" means the limited partners of the Operating Partnership.
"Line of Credit" means the $100 million line of credit for which the Company
has obtained a commitment.
"Lock-up Period" means the one-year period after the effective date of this
Prospectus.
"Look-Through Ownership Limitation" means the ownership of as much as 15.0%
of any class of the Company's stock by mutual funds and certain other
entities.
"Management Agreements" means the agreements between AGHI and the Lessee to
operate the Initial Hotels.
"MGCL" means the Maryland General Corporation Law, as may be amended from
time to time.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the offering which is the subject of the Prospectus.
"Offering Price" means the mid-point of the price range set forth on the
cover page of this Prospectus of $20.00 per share.
"OP Units" means units of limited partnership interest in the Operating
Partnership.
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"Operating Partnership" means American General Hospitality Operating
Partnership, L.P., a limited partnership organized under the laws of Delaware.
Unless the context requires otherwise, Operating Partnership includes any
subsidiaries of the Operating Partnership.
"Option Hotels" means the Courtyard by Marriott currently under development
in Boise, Idaho and the Courtyard by Marriott currently under development in
Durham, North Carolina.
"Ownership Limitation" means the ownership of more than 9.9% of any class of
the Company's outstanding stock by any person.
"Participating Leases" means the operating leases between the Lessee and the
Operating Partnership pursuant to which the Lessee will lease the Initial
Hotels from the Operating Partnership.
"Participating Rent" means rent based on percentages of room revenue, food
and beverage revenue and telephone and other revenue payable by the Lessee
pursuant to the Participating Leases.
"Partnership Agreement" means the partnership agreement relating to the
Operating Partnership.
"Partnership Provisions" means the partnership provisions of the Code.
"PCBs" means polychlorinated biphenyls.
"Plan" means AGHI's Retirement Savings Plan.
"Preferred Stock" means the shares of Preferred Stock, $0.01 par value per
share, of the Company.
"Primary Contributors" means Steven D. Jorns, Bruce G. Wiles, Kenneth E.
Barr, James E. Sowell, Lewis W. Shaw II, and Kenneth W. Shaw (who are the
principals of AGHI and/or the Lessee) and where applicable includes their
respective controlled affiliates and associates (including spouses).
"Registration Rights Agreement" means the Registration Rights Agreement
among the Company and the Limited Partners other than AGH LP and the Plan.
"REIT" means real estate investment trust as defined in Section 856 of the
Code.
"Related Party Tenant" under the Code means, the Company or an owner of
10.0% or more of the Company, which directly or constructively, owns 10.0% or
more of a tenant.
"Rents" means, collectively, Base Rent and Participating Rent.
"REVPAR" means average total revenue per available room and is determined by
dividing room revenue by available rooms for the applicable period.
"Secaucus Loans" means the two promissory notes secured by a non-recourse
mortgage on the Courtyard by Marriott-Meadowlands hotel that were in the
outstanding principal amount as of March 31, 1996 of approximately $4.6
million and $508,500, respectively, and which will remain outstanding after
the Offering and the acquisition of the Courtyard by Marriott-Meadowlands by
the Company.
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary Partnerships" means one or more subsidiary partnerships, joint
ventures and limited liability companies through which the Operating
Partnership owns Initial Hotels.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
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"UBTI" means unrelated business taxable income.
"Underwriters" means the underwriters named in the Prospectus relating to the
Offering.
"Weighted Average Daily Room Rate" means the total guest room revenue derived
from all of the Initial Hotels divided by the total number of guest rooms sold
at all of the Initial Hotels.
"Weighted Average Occupancy" means the total number of guest rooms sold at
all of the Initial Hotels divided by the total number of guest rooms available
at all of the Initial Hotels.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
American General Hospitality Corporation
Statements of Estimated Revenues Less Expenses for the Year Ended
December 31, 1995, the Twelve Months Ended March 31, 1996 and the Three
Months Ended March 31, 1996 (unaudited)................................ F-2
Pro Forma Consolidated Balance Sheet as of March 31, 1996 (unaudited)... F-6
Report of Independent Accountants....................................... F-11
Balance Sheet as of April 12, 1996 (date of inception).................. F-12
Notes to Balance Sheet.................................................. F-13
AGH Leasing, L.P.
Pro Forma Balance Sheet as of May 29, 1996 (unaudited).................. F-15
Report of Independent Accountants....................................... F-16
Balance Sheet as of May 29, 1996 (date of inception).................... F-17
Notes to Balance Sheet.................................................. F-18
Initial Hotels and Lessee
Pro Forma Combined Statements of Operations for the Year Ended December
31, 1995, the Twelve Months Ended March 31, 1996 and the Three Months
Ended March 31, 1996 (unaudited)....................................... F-19
Notes to Combined Statements of Operations.............................. F-22
AGH Predecessor Hotels
Report of Independent Accountants....................................... F-24
Combined Balance Sheets as of December 30, 1994, December 29, 1995
(audited) and March 31, 1996 (unaudited)............................... F-25
Combined Statements of Operations for the Period from December 30, 1993
through December 31, 1993, the Years Ended December 30, 1994 and
December 29, 1995 (audited) and the Three Months Ended March 31, 1995
and 1996 (unaudited)................................................... F-26
Combined Statements of Equity for the Period from December 30, 1993
through December 31, 1993, the Years Ended December 30, 1994 and
December 29, 1995 (audited) and the Three Months Ended March 31, 1996
(unaudited)............................................................ F-27
Combined Statements of Cash Flows for the Period from December 30, 1993
through December 31, 1993, the Years Ended December 30, 1994 and
December 29, 1995 (audited) and the Three Months Ended March 31, 1995
and 1996 (unaudited)................................................... F-28
Notes to Combined Financial Statements.................................. F-29
Schedule III--Real Estate and Accumulated Depreciation.................. F-34
AGH Acquisition Hotels
Report of Independent Accountants....................................... F-35
Combined Balance Sheets as of December 31, 1994 and 1995 (audited) and
March 31, 1996 (unaudited)............................................. F-36
Combined Statements of Operations for each of the Three Years in the
Period Ended December 31, 1995 (audited) and the Three Months Ended
March 31, 1995 and 1996 (unaudited).................................... F-37
Combined Statements of Equity for each of the Three Years in the Period
Ended December 31, 1995 (audited) and the Three Months Ended March 31,
1996 (unaudited)....................................................... F-38
Combined Statements of Cash Flows for each of the Three Years in the
Period Ended December 31, 1995 (audited) and the Three Months Ended
March 31, 1995 and 1996 (unaudited).................................... F-39
Notes to Combined Financial Statements.................................. F-40
Schedule III--Real Estate and Accumulated Depreciation.................. F-46
</TABLE>
F-1
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
STATEMENTS OF ESTIMATED REVENUES LESS EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995, THE TWELVE MONTHS ENDED MARCH 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
The following unaudited Statements of Estimated Revenues Less Expenses of
the Company for the year ended December 31, 1995, the twelve months ended
March 31, 1996, and the three months ended March 31, 1996 are presented as if
the consummation of the Formation Transactions and the application of the net
proceeds of the Offering as set forth under the caption "Use of Proceeds" had
occurred on January 1, 1995 and all of the Initial Hotels had been leased
pursuant to the Participating Leases. Such estimated information is based in
part upon the Combined Statements of Operations of the AGH Predecessor Hotels
(unaudited financial information for the Holiday Inn Dallas DFW Airport West
hotel for the period prior to its acquisition in June 1995 was obtained from
the prior owners), the AGH Acquisition Hotels and the Pro Forma Combined
Statements of Operations of the Initial Hotels and Lessee. Such information
should be read in conjunction with the Financial Statements included in this
Prospectus. In management's opinion, all adjustments necessary to reflect the
effects of the Formation Transactions and the Offering have been made.
The following unaudited Statements of Estimated Revenues Less Expenses are
not necessarily indicative of what the results of operations of the Company
would have been assuming such transactions had been completed on January 1,
1995, nor does it purport to represent the results of operations for future
periods.
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Estimated Revenues Less
Expenses Data:
Participating Lease
revenue (A)............. $24,775,142 $25,902,292 $6,527,908
Interest income (B)...... 31,500 31,500 7,875
----------- ----------- ----------
Total revenue............ 24,806,642 25,933,792 6,535,783
----------- ----------- ----------
Depreciation (C)......... 7,404,235 6,551,936 1,485,233
Amortization (D)......... 646,660 646,660 161,665
Real estate and personal
property taxes and
property insurance (E).. 2,165,073 2,165,073 541,268
General and
administrative (F)...... 1,130,000 1,130,000 282,500
Ground lease expense
(E)..................... 881,217 902,196 193,156
Amortization of unearned
officers' compensation
(G)..................... 100,000 100,000 25,000
Interest expense (H)..... 1,244,637 1,633,962 408,491
----------- ----------- ----------
Total expenses......... 13,571,822 13,129,827 3,097,313
----------- ----------- ----------
Estimated revenues less
expenses before minority
interest.................. 11,234,820 12,803,965 3,438,470
Minority interest (I)...... 2,898,584 3,303,423 887,125
----------- ----------- ----------
Estimated revenues less
expenses applicable to
common shareholders....... $ 8,336,236 $ 9,500,542 $2,551,345
=========== =========== ==========
Estimated revenues less
expenses per common
share..................... $ 1.16 $ 1.32 $ 0.35
=========== =========== ==========
Weighted average number of
shares of Common Stock
outstanding............... 7,205,518 7,205,518 7,205,518
=========== =========== ==========
</TABLE>
See Notes to Statements of Estimated Revenues Less Expenses.
F-2
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO STATEMENTS OF ESTIMATED REVENUES LESS EXPENSES
(A) Represents 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 pro forma
revenues of the Initial Hotels. The departmental revenue thresholds in certain
of the Participating Lease formulas adjust in the future beginning January 1,
1997. See "The Initial Hotels--The Participating Leases."
The Participating Lease revenue is comprised of the following:
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Base rent..................... $15,392,000 $15,392,000 $3,848,000
Excess of Participating Rent
over Base Rent............... 9,383,142 10,510,292 2,679,908
----------- ----------- ----------
Total Participating Lease
revenue.................... $24,775,142 $25,902,292 $6,527,908
=========== =========== ==========
</TABLE>
(B) Represents interest income on the advance to Lessee for the purchase of
certain furniture, fixtures and equipment from the Company ($315,000). The
advance to Lessee is due over five years and bears interest at 10% per annum.
(C) Represents depreciation on the Initial Hotels. Estimated depreciation is
computed based upon estimated useful lives of 39 years for buildings and
improvements and 5 years for furniture, fixtures and equipment. These
estimated useful lives are based on management's knowledge of the properties
and the hotel industry in general.
The AGH Predecessor Hotels estimated depreciation expense is computed as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Historical depreciation
expense....................... $2,409,211 $1,661,334 $ 288,688
Holiday Inn Dallas DFW Airport
West depreciation expense for
the period prior to
acquisition................... 208,844 104,422
Estimated depreciation expense
for increase in basis of the
Hotel Maison de Ville and
closing costs on the AGH
Predecessor Hotels............ 20,232 20,232 5,058
---------- ---------- ----------
$2,638,287 $1,785,988 $ 293,746
========== ========== ==========
</TABLE>
Additionally, the estimated depreciation expense for the AGH Acquisition
Hotels includes an annual depreciation on furniture, fixtures and equipment of
$1,312,120 and on buildings and improvements of $3,453,828.
F-3
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO STATEMENTS OF ESTIMATED REVENUES LESS EXPENSES--(CONTINUED)
At March 31, 1996, the Company's pro forma investment in hotel properties,
at cost, consists of the following:
<TABLE>
<CAPTION>
AGH AGH
PREDECESSOR ACQUISITION
HOTELS HOTELS TOTAL
----------- ------------ ------------
<S> <C> <C> <C>
Land..................................... $ 1,496,515 $ 11,311,000 $ 12,807,515
Building and improvements................ 19,293,233 134,699,284 153,992,517
Furniture, fixtures and equipment........ 2,847,464 6,560,598 9,408,062
----------- ------------ ------------
$23,637,212 $152,570,882 $176,208,094
=========== ============ ============
</TABLE>
(D) Represents amortization of expected deferred loan costs related to the
Line of Credit and amortization of franchise transfer costs. Deferred loan
costs of $2,350,000 are amortized utilizing a method which approximates the
interest method over four years which is the anticipated term of the Line of
Credit. Franchise transfer costs of $591,600 are amortized over the term of
the related franchise agreements which approximates 10 years.
(E) Represents amounts to be paid by the Operating Partnership. Such amounts
were derived from the historical amounts paid with respect to the Initial
Hotels adjusted for the Holiday Inn Dallas DFW Airport West hotel inclusion
for the full year and probable real estate and personal property tax
increases. Four AGH Acquisition Hotels (Holiday Inn Park Plaza, LeBaron
Airport Hotel, Holiday Inn Mission Valley and Hilton Hotel- Toledo) are
located in states which require tax reassessments based primarily on the price
as specified in a sale to an unrelated third party. The estimated adjustment
column below is based on the purchase price multiplied by the applicable tax
rates less the amounts included in the historical financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------
HISTORICAL
-----------------------
AGH AGH
PREDECESSOR ACQUISITION ESTIMATED
HOTELS HOTELS ADJUSTMENTS COMBINED
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Real estate and personal
property taxes................. $344,036 $1,222,750 $287,318 $1,854,104
Property insurance.............. 45,919 258,508 6,542 310,969
-------- ---------- -------- ----------
Total real estate and personal
property taxes and
insurance.................... $389,955 $1,481,258 $293,860 $2,165,073
======== ========== ======== ==========
Ground lease expense............ $334,024 $ 547,193 $ 881,217
======== ========== ==========
<CAPTION>
TWELVE MONTHS ENDED MARCH 31, 1996
----------------------------------------------
HISTORICAL
-----------------------
AGH AGH
PREDECESSOR ACQUISITION ESTIMATED
HOTELS HOTELS ADJUSTMENTS COMBINED
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Real estate and personal
property taxes................. $389,919 $1,201,152 $263,033 $1,854,104
Property insurance.............. 48,981 255,031 6,957 310,969
-------- ---------- -------- ----------
Total real estate and personal
property taxes and
insurance.................... $438,900 $1,456,183 $269,990 $2,165,073
======== ========== ======== ==========
Ground lease expense............ $327,711 $ 574,485 $ 902,196
======== ========== ==========
</TABLE>
F-4
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO STATEMENTS OF ESTIMATED REVENUES LESS EXPENSES--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
---------------------------------------------
HISTORICAL
-----------------------
AGH AGH
PREDECESSOR ACQUISITION ESTIMATED
HOTELS HOTELS ADJUSTMENTS COMBINED
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Real estate and personal property
taxes........................... $101,461 $315,363 $46,702 $ 463,526
Property insurance............... 12,677 57,594 7,471 77,742
-------- -------- ------- ---------
Total real estate and personal
property taxes and insurance.. $114,138 $372,957 $54,173 $ 541,268
======== ======== ======= =========
Ground lease expense............. $ 43,812 $149,344 $ 193,156
======== ======== =========
</TABLE>
(F) Represents general and administrative expenses to be paid by the
Operating Partnership. These amounts are based on historical general and
administrative expenses as well as probable 1996 expenses:
<TABLE>
<S> <C>
Salaries and wages............................................ $ 561,000
Professional fees............................................. 125,000
Directors' and officers' insurance............................ 90,000
Allocated rent, supplies and other............................ 103,000
Other operating expenses...................................... 251,000
----------
$1,130,000
==========
</TABLE>
(G) Represents amortization of unearned officers' compensation represented
by an aggregate of 50,000 shares of restricted Common Stock issuable to
executive officers which shares vest 10% at the date of grant (5,000 shares at
$20.00 per share).
(H) Represents interest expense on the following debt:
(1) Debt assumed by the Operating Partnership of approximately $14.2
million in connection with the acquisition of the Holiday Inn Dallas DFW
Airport South hotel. Principal payments are based on a 20 year amortization
and interest is due monthly. The debt matures on February 1, 2011 and bears
interest at a fixed rate of 8.75%.
(2) Two notes assumed by the Operating Partnership totalling
approximately $5.3 million collateralized by the Courtyard by Marriott-
Meadowlands. Principal payments on the debt instruments are based on a 25
year and 5 year amortization, respectively, and interest is due monthly.
The debt matures on December 1, 2000 and January 1, 2001, respectively, and
bears interest at fixed rates of 7.5% and 7.89%, respectively.
(I) Calculated as approximately 25.8% of income before minority interest.
F-5
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
The following Pro Forma Consolidated Balance Sheet is presented as if the
consummation of the Formation Transactions and the application of the net
proceeds of the Offering as set forth under the caption "Use of Proceeds" had
occurred on March 31, 1996. The pro forma adjustments have been marked with a
number to identify the correlating debits and credits. Such pro forma
information is based in part upon the combined balance sheets of the AGH
Predecessor Hotels and the AGH Acquisition Hotels. Such information should be
read in conjunction with the Financial Statements included in this Prospectus.
In management's opinion, all adjustments necessary to reflect the effects of
the Formation Transactions and the Offering have been made.
The following Pro Forma Consolidated Balance Sheet is not necessarily
indicative of what the financial position of the Company would have been
assuming such transactions had been completed on March 31, 1996, nor does it
purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
AGH
AGH PREDECESSOR ACQUISITION PRO FORMA
HOTELS(A) HOTELS(B) ADJUSTMENTS PRO FORMA
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Investment in hotel
properties, net........ $ 22,848,146 $ 66,595,969 $ 86,763,979 (C) $176,208,094
Cash and cash
equivalents............ 1,240,272 7,625,737 (8,859,012)(D) 6,997
Accounts receivable,
net.................... 392,552 2,521,992 (2,914,544)(E)
Deferred expenses, net.. 375,912 520,636 2,045,052 (F) 2,941,600
Other assets............ 258,122 1,253,608 (1,511,730)(E)
Advances to Lessee...... 315,000 (G) 315,000
------------ ------------ ------------ ------------
Total assets........ $ 25,115,004 $ 78,517,942 $ 75,838,745 $179,471,691
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt.................... $19,972,015 $54,390,363 $(55,010,139)(H) $ 19,352,239
Accounts payable, trade,
accrued expenses and
other liabilities...... 944,683 6,823,690 (6,018,373)(I) 1,750,000
Minority interest in
Operating Partnership.. 40,859,319 (J) 40,859,319
------------ ------------ ------------ ------------
Total liabilities... 20,916,698 61,214,053 (20,169,193) 61,961,558
------------ ------------ ------------ ------------
Stockholders' equity:
Preferred stock.......
Common stock.......... 72,055 (K) 72,055
Additional paid-in
capital.............. 118,438,078 (L) 118,438,078
Unearned officers'
compensation......... (1,000,000)(M) (1,000,000)
Retained earnings..... 4,198,306 17,303,889 (21,502,195)(N)
------------ ------------ ------------ ------------
Total stockholders'
equity............. 4,198,306 17,303,889 96,007,938 117,510,133
------------ ------------ ------------ ------------
Total liabilities
and stockholders'
equity............. $ 25,115,004 $ 78,517,942 $ 75,838,745 $179,471,691
============ ============ ============ ============
</TABLE>
See Notes to Pro Forma Consolidated Balance Sheet.
F-6
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Reflects the AGH Predecessor Hotels' historical combined balance sheet
at March 31, 1996.
(B) Reflects the AGH Acquisition Hotels' historical combined balance sheet
at March 31, 1996.
(C) Increase represents the following:
Purchase of the following AGH Acquisition Hotels, including estimated
closing costs (the purchase of the AGH Acquisition Hotels included only the
land, building and improvements and furniture, fixtures and equipment):
<TABLE>
<S> <C>
Purchase of AGH Acquisition Hotels, including closing
costs:
Holiday Inn Dallas DFW Airport South................. $ 25,256,000
Holiday Inn Park Center Plaza ....................... 12,970,200
Fred Harvey Albuquerque Airport Hotel................ 9,490,300
Holiday Inn Select-Madison........................... 21,581,300
Holiday Inn New Orleans International Airport........ 26,033,200
Holiday Inn Mission Valley........................... 19,632,500
Le Baron Airport Hotel............................... 19,737,500
Hilton Hotel-Toledo.................................. 10,308,082
Days Inn Ocean City.................................. 7,636,800
Sale of certain furniture, fixtures and equipment to
Lessee.............................................. (315,000)
Purchase of furniture, fixtures and equipment
previously under operating leases................... 240,000
Remove historical cost basis of the AGH Acquisition
Hotels................................................ (66,595,969)
------------
Total increase in the AGH Acquisition Hotels......... 85,974,913
------------
Purchase of AGH Predecessor Hotels, including estimated
closing costs:
Basis increase resulting from the cash purchase of an
interest in the Hotel Maison de Ville............... 288,466
Real estate closing and other costs related to the
acquisition of the AGH Predecessor Hotels........... 500,600
------------
Total increase in the AGH Predecessor Hotels......... 789,066
------------
Total pro forma adjustment........................... $ 86,763,979 (1)
============
</TABLE>
The net book value of the investment in hotel properties of the AGH
Acquisition Hotels at March 31, 1996 was $66,595,969. The aggregate
consideration paid for the AGH Acquisition Hotels to third party sellers is
$152,645,882, including estimated closing costs of $1,269,100 (excludes the
$315,000 sale of certain furniture, fixtures and equipment to the Lessee and
the $240,000 purchase of furniture, fixtures and equipment previously under
operating leases described above).
The allocation of the AGH Acquisition Hotels' purchase price to the assets
acquired consists of the following (inclusive of the $315,000 sale and
$240,000 purchase of furniture, fixtures and equipment described above):
<TABLE>
<S> <C>
Land........................................................ $ 11,311,000
Building and improvements................................... 134,699,284
Furniture, fixtures and equipment........................... 6,560,598
------------
$152,570,882
============
</TABLE>
F-7
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
The acquisitions of the AGH Acquisition Hotels have been accounted for as
"purchases." The interests of the Primary Contributors and other minority
partners receiving OP Units in exchange for their interests in the AGH
Predecessor Hotels have been recorded at their historical cost basis. The
Primary Contributors received 1,157,673 OP Units for their interests in the
AGH Predecessor Hotels and certain other assets. Certain unaffiliated partners
received $288,466 cash for their interests in the AGH Predecessor Hotels,
which has been accounted for as a "purchase," resulting in an increase in the
Company's basis in the hotel.
The estimated cost of approximately (i) $24.6 million of planned renovations
and refurbishments at the seven Initial Hotels the Company plans to convert to
leading franchise brands in order to reposition such hotels for future growth
and (ii) $2.6 million of planned improvements that the Company expects to make
at five other Initial Hotels which will be made over the next twelve months is
not included in the Pro Forma Consolidated Balance Sheet. The capital
improvements are anticipated to be allocated to furniture, fixtures and
equipment (30%) and buildings and improvements (70%), which will be
depreciated over 5 years and 39 years, respectively. This depreciation is not
included in the Statements of Estimated Revenues Less Expenses.
(D) Net decrease represents the following:
<TABLE>
<S> <C> <C> <C> <C>
AGH PREDECESSOR AGH ACQUISITION
HOTELS HOTELS OFFERING TOTAL
--------------- --------------- ------------ ------------
Gross proceeds of the
Offering............... $140,000,000 $140,000,000 (2)
Underwriters' discount.. (8,750,000) (8,750,000)(2)
Other expected expenses
of the Offering........ (4,122,000) (4,122,000)(2)
Payments to acquire the
Initial Hotels
including closing
costs.................. $ (789,066) $ (90,254,825) (91,043,891)(1)
Payment to purchase
furniture, fixtures and
equipment previously
under operating
leases................. (240,000) (240,000)(1)
Payment of AGH
Predecessor Hotels'
historical debt........ (14,825,570) (14,825,570)(3)
Payment of prepayment
penalties on debt of
the AGH Predecessor
Hotels................. (733,879) (733,879)(4)
Payment of AGH
Acquisition Hotels debt
assumed................ (19,086,063) (19,086,063)(1)
Payment of anticipated
loan costs related to
the Line of Credit..... (600,000) (600,000)(5)
Payment of franchise
transfer costs......... (591,600) (591,600)(6)
Cash and cash
equivalents not being
purchased.............. (1,240,272) (7,625,737) (8,866,009)(7)
--------------- --------------- ------------ ------------
$ (17,588,787) $ (117,206,625) $125,936,400 $ (8,859,012)
=============== =============== ============ ============
</TABLE>
F-8
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
(E) Decrease reflects the following assets which are not being purchased by
the Company:
<TABLE>
<CAPTION>
AGH AGH
PREDECESSOR ACQUISITION
HOTELS HOTELS TOTAL
----------- ----------- ------------
<S> <C> <C> <C>
Accounts receivable, net............. $(392,552) $(2,521,992) $ (2,914,544)
Other assets......................... (258,122) (1,253,608) (1,511,730)
--------- ----------- ------------
$(650,674) $(3,775,600) $ (4,426,274)(7)
========= =========== ============
</TABLE>
(F) Net increase represents the following:
<TABLE>
<S> <C>
Deferred loan costs related to debt of the AGH
Predecessor Hotels which will be repaid with a portion
of the proceeds of the Offering........................ $ (375,912)(7)
Deferred loan costs related to debt of the AGH
Acquisition Hotels which will not be assumed by the
Company................................................ (520,636)(7)
Deferred loan costs related to the Line of Credit....... 2,350,000 (5)
Franchise transfer costs................................ 591,600 (6)
------------
$ 2,045,052
============
Deferred loan costs related to the Line of Credit consist of attorney fees,
appraisal costs, surveys, etc. to be paid from the proceeds of the Offering
($600,000), fees payable upon initial borrowings under the Line of Credit
($1,250,000), an unused line fee payable at the end of the year ($250,000) and
a fee payable at the date the Company exercises its option to extend the term
of the Line of Credit ($250,000).
(G) Increase represents advances for the purchase of furniture, fixtures and
equipment from the Company after the purchase of the AGH Acquisition Hotels
($315,000).(1) The advances bear interest at 10% and are due over five years.
(H) Decrease reflects the following:
Payment of AGH Predecessor Hotels' debt................. $(14,825,570)(3)
Payment of AGH Acquisition Hotels' debt................. (19,086,063)(1)
Debt of the AGH Acquisition Hotels not assumed.......... (21,098,506)(1)
------------
$(55,010,139)
============
(I) Net increase reflects the following:
Accounts payable, trade, accrued expenses and other
liabilities which are not being purchased by the
Company:
AGH Predecessor Hotels................................ $ (944,683)(7)
AGH Acquisition Hotels................................ (6,823,690)(7)
Line of credit fees payable............................. 1,750,000 (5)
------------
$ (6,018,373)
============
</TABLE>
(J) Represents the recognition of minority interest in the Operating
Partnership that will not be owned by the Company (25.8%).(1)
(K) Represents the $0.01 par value of the Common Stock.(8)
F-9
<PAGE>
(L) Represents the following proposed transactions:
<TABLE>
<S> <C>
Gross proceeds of the Offering......................... $140,000,000 (2)
Underwriters' discount and other estimated expenses of
the Offering.......................................... (12,872,000)(2)
Par value of Common Stock.............................. (72,055)(8)
Prepayment penalties on debt of the AGH Predecessor
Hotels ............................................... (733,879)(4)
Unearned officers' compensation........................ 1,000,000 (9)
Reclassification of retained earnings of the AGH
Predecessor Hotels to additional paid-in capital...... 4,198,306 (1)
Net assets of the AGH Predecessor Hotels which are not
being purchased by the Company........................ (1,322,175)(7)
Net assets of the AGH Acquisition Hotels which are not
being purchased by the Company........................ (5,098,283)(7)
Minority interest in Operating Partnership............. (6,661,836)(1)
------------
$118,438,078
============
</TABLE>
(M) Represents the value of common shares issued to officers ($1,000,000)
which vest 10% in the first year.(9)
(N) Represents reclassification of retained earnings of the AGH Predecessor
Hotels to Common Stock and the elimination of historical retained earnings of
the AGH Acquisition Hotels.(1)
F-10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
American General Hospitality Corporation
We have audited the accompanying balance sheet of American General
Hospitality Corporation as of April 12, 1996 (date of inception). This balance
sheet is the responsibility of the Company's management. Our responsibility is
to express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of American General Hospitality
Corporation as of April 12, 1996 in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
April 12, 1996
F-11
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
BALANCE SHEET
APRIL 12, 1996
ASSETS
<TABLE>
<S> <C>
Cash.................................................................... $100
----
$100
====
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
Commitments and contingencies
Preferred stock, $.01 par value per share, 20,000,000 shares autho-
rized, no shares issued or outstanding...............................
Common stock, $.01 par value per share, 100,000,000 shares authorized,
100 shares issued and outstanding.................................... $100
====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-12
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO BALANCE SHEET
1. ORGANIZATION AND PROPOSED INITIAL PUBLIC OFFERING
Organization--American General Hospitality Corporation (the "Company") was
formed on April 12, 1996 as a Maryland corporation which intends to qualify as
a real estate investment trust ("REIT"). The Company has been formed to
acquire equity interests in 13 hotels (the "Initial Hotels"). Four of the
Initial Hotels (the "AGH Predecessor Hotels") will be acquired primarily from
limited partnerships controlled by the shareholders of American General
Hospitality, Inc. (the "AGHI Affiliates"). The remaining nine Initial Hotels
(the "AGH Acquisition Hotels") will be acquired primarily from parties
unaffiliated with the Company through contracts with the sellers acquired from
an AGHI affiliate.
Upon completion of the proposed initial public offering described below, the
Company will acquire an approximate 74.2% equity interest in American General
Hospitality Operating Partnership, L.P. (the "Operating Partnership"). A
wholly owned subsidiary of the Company will be the sole general partner of the
Operating Partnership. The Operating Partnership will own the Initial Hotels
and will lease them to AGH Leasing, L.P. (the "Lessee"), which is owned, in
part, by certain officers of the Company, under operating leases
("Participating Leases") which provide for rent based on the revenues of the
Initial Hotels. The Lessee has entered into management agreements pursuant to
which all of the Initial Hotels will be managed by American General
Hospitality, Inc. ("AGHI").
Proposed Initial Public Offering--The Company has filed a registration
statement with the Securities and Exchange Commission pursuant to which the
Company expects to offer 7,000,000 shares of its common stock to the public
(the "Offering"). The Company expects to qualify as a REIT under sections 856-
860 of the Internal Revenue Code. Upon consummation of the Offering, the
Company will contribute all of the net proceeds of the Offering to AGH GP,
Inc. ("General Partner") and AGH LP, Inc. ("Limited Partner"), which, in turn,
will contribute such proceeds to the Operating Partnership in exchange for an
approximate 74.2% equity interest in the Operating Partnership. The General
Partner, a wholly owned subsidiary of the Company, will own a 1.0% interest in
the Operating Partnership. The Limited Partner, also a wholly owned subsidiary
of the Company, will initially own an approximately 73.2% limited partnership
interest in the Operating Partnership.
The Company will acquire directly or indirectly a 100% interest in each of
the Initial Hotels for an aggregate of 2,511,106 of units of limited
partnership interest ("OP Units") (1,157,673 OP Units to the Primary
Contributors, which consist of the principals of AGHI and the Lessee and
certain of their respective affiliates, and 1,353,433 OP Units to parties
unaffiliated with the Primary Contributors); 155,518 shares of Common Stock to
the AGHI Employee Retirement and Savings Plan (the "Plan"), which the
Company's executive officers own less than a 5.0% beneficial interest in the
Plan); and approximately $91.0 million in cash to parties unaffiliated with
the Primary Contributors, which will be subject to approximately $52.9 million
in mortgage indebtedness of which approximately $33.5 million will be repaid
from the net proceeds of the Offering). The Operating Partnership will
reimburse AGHI for approximately $900,000 for direct out-of-pocket expenses
incurred in connection with the acquisition of the Initial Hotels, including
legal, environmental and engineering expenses. In addition, the Operating
Partnership will sell certain personal property relating to certain of the
Initial Hotels to the Lessee in exchange for one or more five-year recourse
promissory notes in the aggregate principal amount of $315,000 that will be
secured by such personal property.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Distributions--The Company intends to make regular quarterly distributions
to stockholders which are dependent upon receipt of distributions from the
Operating Partnership.
3. DESCRIPTION OF CAPITAL STOCK
The total number of shares of all classes of stock that the Company has
authority to issue consists of 100,000,000 shares of Common Stock, $.01 par
value per share, and 20,000,000 shares of Preferred Stock, $.01
F-13
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO BALANCE SHEET--(CONTINUED)
par value per share, undesignated as to class, series or terms. No shares of
Preferred Stock are outstanding or will be outstanding immediately after
consummation of the Offering.
Common Stock--The holders of Common Stock are entitled to one vote per share
on all matters voted on by shareholders, including elections of directors.
Subject to any preferential rights of any outstanding series of Preferred
Stock, the holders of Common Stock are entitled to such dividends as may be
declared from time to time by the Board of Directors from funds available
therefrom, and upon liquidation are entitled to receive a pro rata share of
all assets of the Company available for distribution to such holders.
Preferred Stock--The Board of Directors is authorized to provide for the
issuance of shares of Preferred Stock in one or more series, to establish the
number of shares in each series and to fix the designation, powers,
preferences and rights of each such series and the qualifications, limitations
or restrictions thereof. Because the Board of Directors has the power to
establish the preferences and rights of each class or series of Preferred
Stock, the Board of Directors may afford the holders of any series or class of
Preferred Stock preferences, powers and rights, voting or otherwise, senior to
the rights of holders of Common Stock. The issuance of Preferred Stock could
have the effect of delaying or preventing a change in control of the Company.
The Company has no present intention to issue shares of Preferred Stock.
4. EMPLOYEE BENEFITS
The Board of Directors will adopt, subject to stockholder approval prior to
the Offering, 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").
The 1996 Plan--Each employee of the Company or of an affiliate of the
Company (other than employees of the Lessee and AGHI who are not also
employees of the Company), or any other person whose efforts contribute to the
Company's performance is eligible to participate 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. Under
the 1996 Plan the total number of shares available for grant is 900,000 shares
of Common Stock of which not more than 50,000 shares may be granted as stock
awards.
The Directors' Plan--A maximum of 100,000 shares of Common Stock may be
issued under the Directors' Plan. The Directors' Plan provides that each
director will be awarded nonqualified options to purchase 10,000 shares of
Common Stock at the fair market value at the date of grant.
Following consummation of the Offering, the Company intends to grant to the
Company's officers and directors options to acquire an aggregate 400,000
shares of Common Stock at the Offering Price and stock awards representing
50,000 shares of restricted Common Stock.
Employment Agreements--The Company will enter 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 will enter
into employment agreements with three other executive officers each for a term
of five years at an aggregate annual base compensation of $230,000.
F-14
<PAGE>
AGH LEASING, L.P.
PRO FORMA BALANCE SHEET
MAY 29, 1996
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Furniture, fixtures and equipment.................................. $315,000(A)
Cash and cash equivalents.......................................... 500,000(B)
--------
Total assets................................................... $815,000
========
LIABILITIES AND EQUITY
Advances from Operating Partnership................................ $315,000(A)
Equity............................................................. 500,000(B)
--------
Total liabilities and equity................................... $815,000
========
</TABLE>
- --------
(A) Upon consummation of the Offering, the Lessee will purchase $315,000 of
furniture, fixtures, and equipment from the Company in exchange for a note
payable of $315,000 which will be due over five years and will bear
interest at 10% per annum.
(B) Reflects the cash contribution of $500,000 from the partners upon
consummation of the Offering.
F-15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
AGH Leasing, L.P.
We have audited the accompanying balance sheet of AGH Leasing, L.P. (The
"Partnership") as of May 29, 1996 (date of inception). This balance sheet is
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of AGH Leasing, L.P. as of May 29,
1996 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
May 29, 1996
F-16
<PAGE>
AGH LEASING, L.P.
BALANCE SHEET
MAY 29, 1996
<TABLE>
<S> <C>
ASSETS
Cash.................................................................... $100
----
$100
====
LIABILITIES AND EQUITY
Commitments and contingencies...........................................
Equity.................................................................. $100
====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-17
<PAGE>
AGH LEASING, L.P.
NOTES TO BALANCE SHEET
1. ORGANIZATION AND PROPOSED INITIAL PUBLIC OFFERING
Organization--AGH Leasing, L.P. (the "Lessee"), was formed on May 29, 1996
as a Delaware limited partnership. Upon completion of the proposed initial
public offering described below, American General Hospitality Corporation (the
"Company") will acquire an approximate 74.2% equity interest in American
General Hospitality Operating Partnership, L.P. (the "Operating Partnership").
In order for the Company to qualify as a real estate investment trust
("REIT"), neither the Company nor the Operating Partnership can operate
hotels; therefore, the Operating Partnership, which will own 13 hotels (the
"Initial Hotels"), and will lease the Initial Hotels to the Lessee under
operating leases ("Participating Leases") which provide for rent based on the
revenues of the Initial Hotels.
The financial statements of the Lessee will include the results of
operations of the hotels leased from the Operating Partnership due to the
Lessee's control over the operations of the hotels during the 12 year term of
the Participating Leases. The Lessee has complete discretion in establishing
room rates and all rates for hotel goods and services. Likewise, all operating
expenses of the hotels are under the control of the Lessee. The Lessee has the
right to manage or to enter into management contracts with other parties to
manage the hotels. If the Lessee elects to enter into management contracts
with parties other than American General Hospitality, Inc. ("AGHI"), the
Lessee must obtain the prior written consent of the Operating Partnership,
which consent may not be unreasonably withheld. The Lessee, with the written
consent of the Operating Partnership, has entered into management agreements
pursuant to which all of the Initial Hotels will be managed by AGHI. The
Lessee is owned in part by certain executive officers of the Company and AGHI.
Proposed Initial Public Offering--The Company, which intends to qualify as a
REIT, has filed a registration statement with the Securities and Exchange
Commission pursuant to which the Company expects to offer 7,000,000 shares of
its common stock to the public (the "Offering"). The Company expects to
qualify as a REIT under sections 856-860 of the Internal Revenue Code. Upon
consummation of the Offering, the Company will contribute all of the net
proceeds of the Offering to the Operating Partnership in exchange for an
approximate 74.2% equity interest in the Operating Partnership. The Operating
Partnership will use such funds to purchase certain of the Initial Hotels,
repay debt and other obligations of the Initial Hotels, and for working
capital.
2. EQUITY
Each partner contributed a pro-rata cash contribution based on his
respective partnership interest.
The partners of the Lessee have agreed upon consummation of the Offering to
(i) initially capitalize the Lessee with $500,000 in cash and (ii) pledge
275,000 units in the Operating Partnership ("OP Units") having a value of
approximately $5.5 million based on the Offering Price to the Operating
Partnership to collateralize the Lessee's obligations under the Participating
Leases.
Until the Lessee's net worth equals the greater of (i) $6 million and (ii)
17.5% of actual rent payments from hotels leased to the Lessee during the
preceding calender year, the Lessee will not pay distributions to its partners
or make any other distributions to affiliates of the Lessee other than
pursuant to the management agreements with AGHI and for limited amounts
related to Lessee overhead (except for the purpose of permitting its partners
to pay taxes on the income attributable to them from the Lessee while it is a
limited partnership and except for distributions relating to interest or
dividends received by the Lessee from cash or securities held by it) and will
be required during this period, 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 limitations in the Company's
Charter, at the option of the Company, OP Units from the Operating
Partnership, in an amount equal to the Lessee's cash flow attributable to the
Participating Leases for the preceding fiscal year (after establishing a
reserve for partner tax distributions).
F-18
<PAGE>
INITIAL HOTELS AND LESSEE
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995, THE TWELVE MONTHS ENDED MARCH 31, 1996
ANDTHE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
The following unaudited Pro Forma Combined Statements of Operations are
presented as if the consummation of the Formation Transactions and the
application of the net proceeds of the Offering as set forth under the caption
"Use of Proceeds" had occurred on January 1, 1995, and all of the Initial
Hotels had been leased by the Lessee pursuant to the Participating Leases.
Such pro forma information is based in part upon the combined statements of
operations of the AGH Predecessor Hotels (unaudited financial information for
the Holiday Inn Dallas DFW Airport West hotel for the period prior to its
acquisition in June 1995 was obtained from the prior owner) and AGH
Acquisition Hotels. Such information should be read in conjunction with the
Financial Statements included in this Prospectus. In management's opinion, all
adjustments necessary to reflect the effects of the Formation Transactions and
the Offering have been made.
The following unaudited Pro Forma Combined Statements of Operations are not
necessarily indicative of what results of operations of the Initial Hotels and
Lessee would have been assuming such transactions had been completed on
January 1, 1995, nor does it purport to represent the results of operations
for future periods.
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
AGH PREDECESSOR HOTELS AGH ACQUISITION HOTELS
---------------------------------------------------- ----------------------------------------
PRIOR TO PRO FORMA PRO FORMA PRO FORMA
HISTORICAL ACQUISITION ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA COMBINED
----------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
(A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room revenue...... $ 9,020,479 $ 1,532,369 $ 16,391 (B) $10,569,239 $44,736,447 $ 24,485 (B) $44,760,932 $55,330,171
Food and beverage
revenue.......... 1,293,238 420,569 1,713,807 16,424,522 53,175 (B) 16,477,697 18,191,504
Other revenue..... 568,415 92,884 81,592 (B) 742,891 3,579,485 41,056 (B) 3,620,541 4,363,432
----------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
Total revenue... 10,882,132 2,045,822 97,983 13,025,937 64,740,454 118,716 64,859,170 77,885,107
----------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
Expenses:
Property
operating costs
and expenses..... 3,928,801 743,827 (22,614)(C) 4,650,014 25,325,087 (350,847)(C) 24,974,240 29,624,254
General and
administrative... 1,270,163 157,452 (8,675)(C) 1,418,940 5,780,741 (179,593)(C) 5,601,148 7,020,088
Advertising and
promotion........ 663,285 97,924 761,209 3,874,160 (10,283)(D) 3,863,877 4,625,086
Repairs and
maintenance...... 478,552 104,843 583,395 2,719,954 (7,182)(D) 2,712,772 3,296,167
Utilities......... 509,142 91,129 600,271 2,945,878 2,945,878 3,546,149
Management fees... 383,607 61,199 7,709 (E) 452,515 1,285,385 615,018 (E) 1,900,403 2,352,918
Franchise costs... 332,274 83,718 415,992 1,701,346 1,701,346 2,117,338
Depreciation...... 2,409,211 126,676 (2,535,887)(F) 5,498,602 (5,435,602)(F) 63,000 63,000
Amortization...... 70,843 (70,843)(G) 152,588 (152,588)(G)
Real estate and
personal
property taxes,
and property
insurance........ 389,955 37,406 (427,361)(H) 1,481,258 (1,481,258)(H)
Interest
expense.......... 1,572,244 (1,572,244)(I) 4,734,958 (4,703,458) 31,500 31,500
Other expense..... 364,238 (360,011)(J) 4,227 897,414 (843,557)(J) 53,857 58,084
Participating
Lease expenses... 4,195,780 (K) 4,195,780 20,579,362 (K) 20,579,362 24,775,142
----------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
Total expenses.. 12,372,315 1,504,174 (794,146) 13,082,343 56,397,371 8,030,012 64,427,383 77,509,726
----------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
Revenues over
(under)
expenses....... $(1,490,183) $ 541,648 $ 892,129 $ (56,406) $ 8,343,083 $ (7,911,296) $ 431,787 $ 375,381
=========== =========== =========== =========== =========== ============ =========== ===========
</TABLE>
See Notes to Pro Forma Combined Statements of Operations
F-19
<PAGE>
INITIAL HOTELS AND LESSEE
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
AGH AGH
PREDECESSOR PRIOR TO PRO FORMA ACQUISITION PRO FORMA PRO FORMA
HOTELS ACQUISITION ADJUSTMENTS PRO FORMA HOTELS ADJUSTMENTS PRO FORMA COMBINED
----------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
(A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room revenue...... $10,019,733 $692,473 $ 24,678 (B) $10,736,884 $46,065,824 $ 27,320 (B) $46,093,144 $56,830,028
Food and beverage
revenue.......... 1,587,236 166,659 1,753,895 16,522,311 59,376 (B) 16,581,687 18,335,582
Other income...... 639,498 37,778 81,592 (B) 758,868 3,699,579 41,374 (B) 3,740,953 4,499,821
----------- -------- ----------- ----------- ----------- ------------ ----------- -----------
Total revenue... 12,246,467 896,910 106,270 13,249,647 66,287,714 128,070 66,415,784 79,665,431
----------- -------- ----------- ----------- ----------- ------------ ----------- -----------
Expenses:
Property
operating costs
and expenses..... 4,454,876 315,602 (29,068)(C) 4,741,410 25,738,591 (354,125)(C) 25,384,466 30,125,876
General and
administrative... 1,409,498 72,488 (9,555)(C) 1,472,431 5,864,772 (178,685)(C) 5,686,087 7,158,518
Advertising and
promotion........ 719,942 41,034 760,976 3,954,203 (10,283)(D) 3,943,920 4,704,896
Repairs and
maintenance...... 518,315 40,656 558,971 2,760,199 (7,182)(D) 2,753,017 3,311,988
Utilities......... 588,889 26,410 615,299 2,920,854 2,920,854 3,536,153
Management fees... 430,939 26,744 (61,287) (E) 396,396 1,308,331 358,477 (E) 1,666,808 2,063,204
Franchise costs... 382,827 37,524 420,351 1,739,901 1,739,901 2,160,252
Depreciation...... 1,661,334 50,670 (1,712,004)(F) 4,992,005 (4,929,005)(F) 63,000 63,000
Amortization...... 82,238 (82,238)(G) 123,198 (123,198)(G)
Real estate and
personal
property taxes,
and property
insurance........ 438,900 7,123 (446,023)(H) 1,456,183 (1,456,183)(H)
Interest
expense.......... 1,773,838 (1,773,838)(I) 4,827,694 (4,796,194)(I) 31,500 31,500
Other expense..... 354,524 (346,517)(J) 8,007 918,472 (881,706) 36,766 44,773
Participating
Lease expenses... 4,321,394 (K) 4,321,394 21,580,898 (K) 21,580,898 25,902,292
----------- -------- ----------- ----------- ----------- ------------ ----------- -----------
Total expenses.. 12,816,120 618,251 (139,136) 13,295,235 56,604,403 9,202,814 65,807,217 79,102,452
----------- -------- ----------- ----------- ----------- ------------ ----------- -----------
Revenues over
(under)
expenses....... $ (569,653) $278,659 $ 245,406 $ (45,588) $ 9,683,311 $ (9,074,744) $ 608,567 $ 562,979
=========== ======== =========== =========== =========== ============ =========== ===========
</TABLE>
See Notes to Pro Forma Combined Statements of Operations
F-20
<PAGE>
INITIAL HOTELS AND LESSEE
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
AGH AGH
PREDECESSOR PRO FORMA ACQUISITION PRO FORMA PRO FORMA
HOTELS ADJUSTMENTS PRO FORMA HOTELS ADJUSTMENTS PRO FORMA COMBINED
----------- ----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room revenue........... $2,624,614 $ 8,287 (B) $2,632,901 $11,561,801 $ 7,204 (B) $11,569,005 $14,201,906
Food and beverage
revenue............... 509,331 509,331 4,173,807 49,185 (B) 4,222,992 4,732,323
Other income........... 173,450 (B) 173,450 989,702 (B) 989,702 1,163,152
---------- --------- ---------- ----------- ----------- ----------- -----------
Total revenue........ 3,307,395 8,287 3,315,682 16,725,310 56,389 16,781,699 20,097,381
---------- --------- ---------- ----------- ----------- ----------- -----------
Expenses:
Property operating
costs and expenses.... 1,201,571 (7,313)(C) 1,194,258 6,380,431 (90,513)(C) 6,289,918 7,484,176
General and
administrative........ 371,977 (2,495)(C) 369,482 1,421,240 (45,252)(C) 1,375,988 1,745,470
Advertising and
promotion............. 178,207 178,207 1,146,405 (2,396)(D) 1,144,009 1,322,216
Repairs and
maintenance........... 130,247 130,247 712,728 (1,795)(D) 710,933 841,180
Utilities.............. 155,844 155,844 653,974 653,974 809,818
Management fees........ 115,115 (16,091) (E) 99,024 332,666 99,547 (E) 432,213 531,237
Franchise costs........ 100,695 100,695 315,052 315,052 415,747
Depreciation........... 288,688 (288,688)(F) 1,222,556 (1,206,806)(F) 15,750 15,750
Amortization........... 16,248 (16,248)(G) 39,528 (39,528)(G)
Real estate and
personal property
taxes, and property
insurance............. 114,138 (114,138)(H) 372,957 (372,957)(H)
Interest expense....... 457,146 (457,146)(I) 1,248,618 (1,240,743)(I) 7,875 7,875
Other expense.......... 48,920 (44,840)(J) 4.080 262,596 (248,695)(J) 13,901 17,981
Participating Lease
expenses.............. 1,047,441 (K) 1,047,441 5,480,467 (K) 5,480,467 6,527,908
---------- --------- ---------- ----------- ----------- ----------- -----------
Total expenses....... 3,178,796 100,482 3,279,278 14,108,751 2,331,329 16,440,080 19,719,358
---------- --------- ---------- ----------- ----------- ----------- -----------
Revenues over (under)
expenses............ $ 128,599 $ (92,195) $ 36,404 $ 2,616,559 $(2,274,940) $ 341,619 $ 378,023
========== ========= ========== =========== =========== =========== ===========
</TABLE>
See Notes to Pro Forma Combined Statements of Operations
F-21
<PAGE>
INITIAL HOTELS AND LESSEE
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The pro forma combined statements of operations of the Lessee include the
results of operations of the hotels leased from the Operating Partnership due
to the Lessee's control over the operations of the hotels during the twelve-
year term of the Participating Leases. The Lessee has complete discretion in
establishing room rates and all rates for hotel goods and services. Likewise,
all operating expenses of the hotels are under the control of the Lessee. The
Lessee has the right to manage or to enter into management contracts with
other parties to manage the hotels. If the Lessee elects to enter into
management contracts with parties other than American General Hospitality,
Inc. ("AGHI"), the Lessee must obtain the prior written consent of the
Operating Partnership, which consent may not be unreasonably withheld. The
Lessee, with the written consent of the Company, has entered into management
agreements pursuant to which all of the Initial Hotels will be managed by
AGHI.
(A) Represents the historical results of operations of the Holiday Inn
Dallas DFW Airport West prior to acquisition by the AGH Predecessor Hotels in
June 1995.
(B) Represents adjustments for certain room and food and beverage revenues
that were treated as complimentary in the historical statement of operations.
Also includes adjustments to telephone commissions to conform the Initials
Hotels' commission structure to the structure under new contracts AGHI will
have with its telecommunications providers.
(C) Reflects the elimination of expenses which are not expected to be
incurred by the Lessee. The expenses consist primarily of the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Property Operating Costs and
Expenses:
Certain changes in employee
benefits.................... $(155,002) $(158,332) $(41,090)
Operating lease expense...... (218,459) (224,861) (56,736)
--------- --------- --------
$(373,461) $(383,193) $(97,826)
========= ========= ========
General and Administrative
expenses:
Certain changes in employee
benefits.................... $ (24,431) $ (23,523) $ (6,462)
Operating lease expense...... (19,837) (20,717) (5,285)
Owner related expenses....... (144,000) (144,000) (36,000)
--------- --------- --------
$(188,268) $(188,240) $(47,747)
========= ========= ========
</TABLE>
The pro forma adjustment for certain changes in employee benefits represents
changes in employee benefits at two hotels to conform to the benefits provided
by AGHI. The pro forma adjustment to operating lease expense results from the
pay-off of certain operating leases of the hotels at closing. The pro forma
adjustment for owner related expenses represents the elimination of various
charges from the owners at one of the hotels, which related to personal
expenditures.
(D) Represents changes in employee benefits at one hotel to conform to the
benefits provided by AGHI.
(E) Represents the elimination of historical management fees, and the
addition of new management fees to be incurred under the Management
Agreements. The new management fees consist of a base fee of 1.5% of total
revenue and an incentive fee of up to 2.0% of total revenue. The incentive
fee, if applicable, is equal to 0.025% of annual total revenue for each 0.1%
increase in annual total revenues over the total revenues for the preceding
twelve month period up to the maximum incentive fee.
(F) Reflects the elimination of historical depreciation which is to be
recorded by the Operating Partnership and the addition of the depreciation
related to the $315,000 of furniture, fixtures and equipment purchased by the
Lessee from the Operating Partnership. The furniture, fixtures and equipment
will be depreciated over an estimated useful life of 5 years.
(G) Net decrease reflects the elimination of deferred loan costs
amortization.
(H) Reflects the elimination of real estate and personal property taxes, and
property insurance which is to be paid by the Operating Partnership.
F-22
<PAGE>
INITIAL HOTELS AND LESSEE
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(I) Reflects elimination of historical debt interest expense. Any future
interest expense related to debt will be paid by the Operating Partnership.
The addition to interest expense relates to an advance made by the Operating
Partnership to the Lessee for the FF&E purchase. The advance of $315,000 bears
interest at 10% and is due over five years.
(J) Represents ground lease expense to be paid by the Operating Partnership
and the elimination of operating lease expense resulting from the pay-off of
certain operating leases of the hotels at closing.
(K) Represents lease payments to the Operating Partnership from the Lessee
pursuant to the Participating Leases calculated on a pro forma basis by
applying the rent provisions of the Participating Leases to the pro forma
revenues of the Initial Hotels. The departmental revenue thresholds in certain
of the Participating Lease formulas adjust in the future beginning January 1,
1997. See "The Initial Hotels--the Participating Leases."
The Participating Lease expense is comprised of the following:
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Base Rent..................... $15,392,000 $15,329,000 $3,848,000
Excess of Participating Rent
over Base Rent............... 9,383,142 10,510,292 2,679,908
----------- ----------- ----------
Total Participating Lease
expense.................... $24,775,142 $25,902,292 $6,527,908
=========== =========== ==========
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
American General Hospitality Corporation
We have audited the accompanying combined balance sheets of the AGH
Predecessor Hotels (described in Note 1) as of December 30, 1994 and December
29, 1995 and the related combined statements of operations, equity and cash
flows for the period from December 30, 1993 through December 31, 1993 and the
years ended December 30, 1994 and December 29, 1995. These combined financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the AGH
Predecessor Hotels as of December 30, 1994 and December 29, 1995 and the
combined results of their operations and their cash flows for the period from
December 30, 1993 through December 31, 1993 and the years ended December 30,
1994 and December 29, 1995 in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
March 29, 1996
F-24
<PAGE>
AGH PREDECESSOR HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, MARCH 31,
1994 1995 1996
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investment in hotel properties, at cost:
Land.................................. $ 680,000 $ 1,496,515 $ 1,496,515
Buildings and improvements............ 11,162,793 18,427,855 19,111,550
Furniture, fixtures and equipment..... 3,028,860 3,439,484 3,474,271
----------- ----------- -----------
14,871,653 23,363,854 24,082,336
Less accumulated depreciation........... (409,067) (945,502) (1,234,190)
----------- ----------- -----------
Net investment in hotel properties...... 14,462,586 22,418,352 22,848,146
Cash and cash equivalents............... 615,066 857,608 845,258
Restricted cash......................... 130,386 441,445 395,014
Accounts receivable, net................ 109,719 281,169 392,552
Inventories............................. 41,407 55,611 59,889
Prepaid expenses........................ 44,400 166,463 108,907
Deferred expenses....................... 50,212 370,046 375,912
Other assets............................ 9,000 85,410 89,326
----------- ----------- -----------
Total assets........................ $15,462,776 $24,676,104 $25,115,004
=========== =========== ===========
LIABILITIES AND EQUITY
Debt.................................... $11,016,322 $19,277,646 $19,972,015
Accounts payable, trade................. 199,312 560,862 364,519
Accrued expenses and other liabilities.. 419,643 832,889 580,164
----------- ----------- -----------
Total liabilities................... 11,635,277 20,671,397 20,916,698
----------- ----------- -----------
Commitments and contingencies (Note 4)
Capital................................. 4,145,000 5,812,391 5,877,391
Accumulated deficit..................... (317,501) (1,807,684) (1,679,085)
----------- ----------- -----------
Total equity........................ 3,827,499 4,004,707 4,198,306
----------- ----------- -----------
Total liabilities and equity........ $15,462,776 $24,676,104 $25,115,004
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-25
<PAGE>
AGH PREDECESSOR HOTELS
COMBINED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 30, 1993 THROUGH DECEMBER 31, 1993,
THE YEARS ENDED DECEMBER 30, 1994 AND DECEMBER 29, 1995 AND
THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1993 1994 1995 1995 1996
-------- ---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Room revenue.......... $ 17,941 $3,431,654 $ 9,020,479 $1,625,360 $2,624,614
Food and beverage
revenue.............. 6,158 552,697 1,293,238 215,333 509,331
Other revenue......... 1,448 223,211 568,415 102,367 173,450
-------- ---------- ------------ ---------- ----------
Total revenue....... 25,547 4,207,562 10,882,132 1,943,060 3,307,395
-------- ---------- ------------ ---------- ----------
Expenses:
Property operating
costs and expenses... 2,907 1,070,415 2,610,089 456,990 750,262
Food and beverage
costs and expenses... 1,115 503,537 1,318,712 218,506 451,309
General and
administrative....... 1,922 561,140 1,270,163 232,642 371,977
Advertising and
promotion............ 966 308,497 663,285 121,550 178,207
Repairs and
maintenance.......... 809 195,279 478,552 90,484 130,247
Utilities............. 217,496 509,142 76,097 155,844
Management fees....... 1,022 162,151 383,607 67,783 115,115
Franchise costs....... 155,206 332,274 50,142 100,695
Depreciation.......... 46,982 362,085 2,409,211 1,036,565 288,688
Amortization.......... 2,428 70,843 4,853 16,248
Real estate and
personal property
taxes, and property
insurance............ 831 177,717 389,955 65,193 114,138
Interest expense...... 430,535 1,572,244 255,552 457,146
Other expense......... 347,570 364,238 58,634 48,920
-------- ---------- ------------ ---------- ----------
Total expenses...... 56,554 4,494,056 12,372,315 2,734,991 3,178,796
-------- ---------- ------------ ---------- ----------
Net income (loss)... $(31,007) $ (286,494) $ (1,490,183) $ (791,931) $ 128,599
======== ========== ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-26
<PAGE>
AGH PREDECESSOR HOTELS
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
EQUITY
-----------
<S> <C>
Balance, December 30, 1993
Net loss........................................................ $ (31,007)
Capital contributions........................................... 1,600,000
-----------
Balance, December 31, 1993........................................ 1,568,993
Net loss........................................................ (286,494)
Capital contributions........................................... 3,086,000
Distributions................................................... (541,000)
-----------
Balance, December 30, 1994........................................ 3,827,499
Net loss........................................................ (1,490,183)
Capital contributions........................................... 1,863,118
Distributions................................................... (195,727)
-----------
Balance, December 29, 1995........................................ 4,004,707
Net income (unaudited).......................................... 128,599
Capital contributions (unaudited)............................... 65,000
-----------
Balance, March 31, 1996 (unaudited)............................... $ 4,198,306
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-27
<PAGE>
AGH PREDECESSOR HOTELS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 30, 1993 THROUGH DECEMBER 31, 1993,
THE YEARS ENDED DECEMBER 30, 1994 AND DECEMBER 29, 1995 AND THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------------------- ---------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating
activities:
Net income (loss)...... $ (31,007) $ (286,494) $ (1,490,183) $ (791,931) $ 128,599
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation.......... 46,982 362,085 2,409,211 1,036,565 288,688
Amortization.......... 2,428 70,843 4,853 16,248
Changes in assets and
liabilities:
Restricted cash..... (130,386) (311,059) (70,228) 46,431
Accounts receiv-
able............... (8,120) (101,599) (171,450) (16,135) (111,383)
Inventories......... (8,275) (33,132) (14,204) 9,294 (4,278)
Prepaid expenses.... (15,770) (28,630) (122,063) (19,770) 57,556
Other assets........ (9,000) (76,410) (93,916) (3,916)
Franchise
agreements......... (170,500)
Organization costs.. (13,139) (108,677) (10,873) (9,764)
Accounts payable,
trade.............. 440 198,872 361,550 (27,096) (196,343)
Accrued expenses and
other liabilities.. 163,366 256,277 413,246 (73,794) (252,725)
----------- ----------- ------------ ---------- ---------
Net cash provided by
(used in) operating
activities......... 147,616 217,282 790,304 (53,031) (40,887)
----------- ----------- ------------ ---------- ---------
Cash flows from
investing activities:
Improvements and
additions to hotel
properties........... (1,294,387) (2,199,840) (280,728) (718,482)
Acquisition of hotel
properties, net of
cash acquired........ (5,879,500) (7,697,767) (8,165,137)
----------- ----------- ------------ ---------- ---------
Net cash used in
investing
activities......... (5,879,500) (8,992,154) (10,364,977) (280,728) (718,482)
----------- ----------- ------------ ---------- ---------
Cash flows from
financing activities:
Proceeds from
borrowings............ 4,875,000 6,350,000 10,357,250 266,576 713,498
Principal payments on
borrowings............ (208,678) (2,095,926) (147,445) (19,129)
Payments for deferred
loan costs............ (39,500) (111,500) (25,000) (12,350)
Capital contributions.. 1,600,000 3,086,000 1,863,118 5,000 65,000
Distributions paid..... (541,000) (195,727) (35,300)
----------- ----------- ------------ ---------- ---------
Net cash provided by
financing
activities......... 6,475,000 8,646,822 9,817,215 63,831 747,019
----------- ----------- ------------ ---------- ---------
Net change in cash and
cash equivalents....... 743,116 (128,050) 242,542 (269,928) (12,350)
Cash and cash
equivalents at
beginning of periods... 743,116 615,066 615,066 857,608
----------- ----------- ------------ ---------- ---------
Cash and cash
equivalents at end of
periods................ $ 743,116 $ 615,066 $ 857,608 $ 345,138 $ 845,258
=========== =========== ============ ========== =========
Supplemental disclosures
of cash flow
information:
Cash paid during the
year for interest..... $ 430,535 $ 1,572,244 $ 255,552 $ 457,146
=========== ============ ========== =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-28
<PAGE>
AGH PREDECESSOR HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION AND PROPOSED INITIAL PUBLIC OFFERING
Organization--American General Hospitality Corporation (the "Company"), a
newly organized Maryland corporation which intends to qualify as a real estate
investment trust ("REIT"), has been formed to acquire equity interests in 13
hotels (the "Initial Hotels"). Four of the Initial Hotels (the "AGH
Predecessor Hotels") will be acquired primarily from limited partnerships
controlled by the shareholders of American General Hospitality, Inc. (the
"AGHI Affiliates"). The remaining nine Initial Hotels (the "AGH Acquisition
Hotels") will be acquired primarily from parties controlled by persons
unaffiliated with AGHI.
Upon completion of the proposed initial public offering described below, the
Company will acquire a 74.2% equity interest in American General Hospitality
Operating Partnership, L.P. (the "Operating Partnership"). A wholly owned
subsidiary of the Company will be the sole general partner of the Operating
Partnership. The Operating Partnership will own the Initial Hotels and will
lease them to AGH Leasing, L.P. (the "Lessee") under operating leases
("Participating Leases") which provide for rent based on the revenues of the
Initial Hotels. The Lessee has entered into management agreements pursuant to
which all of the Initial Hotels will be managed by American General
Hospitality, Inc. ("AGHI").
Basis of Presentation--The accompanying combined financial statements of the
AGH Predecessor Hotels have been presented on a combined basis due to common
ownership and management and because the entities are expected to be the
subject of a business combination with the Company upon consummation of the
proposed initial public offering.
The AGH Predecessor Hotels consist of the 165 room Courtyard by Marriott-
Meadowlands located in Secaucus, New Jersey (purchased land, buildings and
improvements, and furniture, fixtures and equipment for cash in December 1993
for approximately $5.9 million), the 23 room Hotel Maison de Ville located in
New Orleans, Louisiana (purchased land, buildings and improvements, and
furniture, fixtures and equipment for cash in August 1994 for approximately
$2.5 million), the 124 room Hampton Inn Richmond Airport located in Richmond,
Virginia (purchased land, buildings and improvements, and furniture, fixtures
and equipment for cash in December 1994 for approximately $5.1 million) and
the 243 room Holiday Inn Dallas DFW Airport West located in Bedford, Texas
(purchased land, buildings and improvements, and furniture, fixtures and
equipment for cash in June 1995 for approximately $8.0 million).
The acquisition of each AGH Predecessor Hotel has been accounted for as a
purchase and accordingly, the results of operations for each AGH Predecessor
Hotel has been included in the combined statements of operations since the
respective dates of acquisition.
Proposed Initial Public Offering--The Company expects to file a registration
statement with the Securities and Exchange Commission (the "SEC") pursuant to
which the Company expects to offer 7,000,000 shares of its common stock to the
public (the "Offering"). The Company expects to qualify as a REIT under
sections 856-860 of the Internal Revenue Code of 1986, as amended (the
"Code"). Upon consummation of the Offering, the Company will contribute all of
the net proceeds of the Offering to the Operating Partnership in exchange for
an approximate 74.2% equity interest in the Operating Partnership. The
Operating Partnership will use such funds to purchase certain of the Initial
Hotels, repay debt and other obligations of the Initial Hotels, and for
working capital.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Hotel Properties--Hotel properties are stated at the lower of
cost or net realizable value and are depreciated using the straight-line
method over estimated useful lives of 39 years for building and improvements
and 5 to 7 years for furniture, fixtures and equipment.
F-29
<PAGE>
AGH PREDECESSOR HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Management of the AGHI Affiliates review the carrying value of each property
to determine if circumstances exist indicating an impairment in the carrying
value of the investment of the hotel property or that depreciation periods
should be modified. If facts or circumstances support the possibility of
impairment, management of the AGHI Affiliates 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
AGHI Affiliates 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 betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and the related accumulated depreciation are removed
from the accounts and the gain or loss is included in operations.
Cash and Cash Equivalents--All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
Restricted Cash--Restricted cash consists primarily of amounts held in
escrow for capital and property tax reserves.
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 primarily consist of deferred loan
costs, franchise fees and organization costs. Amortization of deferred loan
cost is computed using the effective yield method based upon the terms of the
loan agreements. Amortization of franchise fees is computed using the
straight-line method based upon the terms of the agreements. Amortization of
organization costs is computed using the straight-line method over five years.
Accumulated amortization at December 29, 1995 is $73,271.
Income Taxes--The AGH Predecessor Hotels are owned by Texas limited
partnerships which are not taxable entities. 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. The
Company proposes to qualify as a REIT under the Code, and will therefore not
be subject to corporate income taxes. Accordingly, the combined statements of
operations contain no provision for federal income taxes.
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.
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--Management of the AGHI Affiliates places cash
deposits at a major bank. At December 31, 1995, bank account balances exceeded
federal depository insurance limits by approximately $600,000. Management
believes credit risk related to these deposits is minimal.
F-30
<PAGE>
AGH PREDECESSOR HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Recently Issued Statement of Financial Accounting Standards--The AGH
Predecessor Hotels adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" during the year ended December 29, 1995.
The adoption of SFAS No. 121 had no material effect on the AGH Predecessor
Hotels' financial statements.
Interim Financial Information -- The unaudited interim financial statements
as of March 31, 1996 and for the three months ended March 31, 1995 and 1996
have been prepared pursuant to the rules and regulations of the SEC. The notes
to the interim financial statements included herein are intended to highlight
significant changes to the notes to the December 31, 1996 financial statements
and present interim disclosures required by the SEC. The accompanying interim
financial statements reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the interim financial statements. All
such adjustments are of a normal and recurring nature.
3. DEBT
Debt at December 30, 1994 and December 29, 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
First mortgage notes payable in various monthly
installments including interest at rates ranging from
LIBOR plus 4.25% (5.44% at December 29, 1995) to
prime plus 1% (8.5% at December 29, 1995) maturing at
various dates from August 1999 through December
2001................................................. $10,916,322 $17,666,294
Product improvement plan note payable in various
monthly installments including interest at LIBOR plus
4.25%................................................ 1,511,352
Note payable to AGHI.................................. 100,000 100,000
----------- -----------
$11,016,322 $19,277,646
=========== ===========
</TABLE>
All debt is collateralized by the investment in hotel properties.
Aggregate annual principal payments for the AGHI Affiliates' debt at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1996.......................................................... $ 605,506
1997.......................................................... 656,503
1998.......................................................... 687,677
1999.......................................................... 2,094,750
2000 and thereafter........................................... 15,233,210
-----------
$19,277,646
===========
</TABLE>
4. COMMITMENTS
Management fees represent amounts paid to AGHI based upon percentages of
gross revenue ranging from 3% to 4%.
Franchise costs represent the annual expense for franchise royalties and
reservation services under the terms of hotel franchise agreements expiring in
2005 (Holiday Inn), 2007 (Hampton Inn), and 2013 (Courtyard by Marriott).
Franchise costs are based upon varying percentages of gross room revenue
ranging from 4% to 5%. No franchise costs were incurred for the Hotel Maison
de Ville.
F-31
<PAGE>
AGH PREDECESSOR HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Each hotel, except for the Hotel Maison de Ville, is required to remit
varying percentages of gross room revenue ranging from 1.5% to 4% 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.
The AGHI Affiliates lease the Courtyard by Marriott-Meadowlands hotel land,
under a noncancellable operating lease agreement which expires in 2036. The
AGHI Affiliates have the option to extend the lease for an additional twenty
years upon the same terms. The lease provides for contingent rental payments
based on 3% of gross room revenues which for the years ended December 30, 1994
and December 29, 1995 approximated 65% of the aggregate rental expense under
the operating lease. Additionally, certain equipment is leased under
noncancellable operating lease agreements expiring at varying intervals
through August 1996. Minimum future rental payments required under operating
leases as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1996.......................................................... $ 163,842
1997.......................................................... 175,300
1998.......................................................... 187,800
1999.......................................................... 187,800
2000 and thereafter........................................... 14,432,340
-----------
$15,147,082
===========
</TABLE>
Rental expense was $311,007 and $360,011 for the years ended December 30,
1994 and December 29, 1995, respectively.
As a result of the Offering and the resulting prepayment of debt, a portion
of the proceeds of the Offering will be utilized to pay prepayment penalties
on two notes payable totalling $733,879 based on an estimated pay off date of
July 19, 1996.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards 107 requires all entities to
disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the AGHI Affiliates report the carrying amount of
cash and cash equivalents, restricted cash, 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 AGHI Affiliate's
debt approximates fair value due to the AGHI Affiliates ability to obtain such
borrowings at comparable interest rates.
6. PRO FORMA INFORMATION (UNAUDITED)
Due to the impact of the acquisitions discussed in Note 1, the historical
results of operations may not be indicative of future results of operations.
The following unaudited pro forma condensed combined statements of operations
for the years ended December 30, 1994 and December 29, 1995 are presented as
if the hotel acquisitions described in Note 1 occurred on January 1, 1994.
The unaudited pro forma condensed combined statements of operations do not
purport to represent what actual results of operations would have been if the
acquisitions had occurred on such date or to project results
F-32
<PAGE>
AGH PREDECESSOR HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
for any future period. The following unaudited pro forma information does not
include pro forma adjustments related to the proposed initial public offering
and related transactions.
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Total revenue.................................. $11,171,889 $12,927,954
Hotel operating expenses....................... 8,257,439 8,905,916
Depreciation................................... 1,198,055 2,618,055
Interest....................................... 2,543,215 1,973,765
Other corporate expenses....................... 761,015 791,599
----------- -----------
Net loss....................................... $(1,587,835) $(1,361,381)
=========== ===========
</TABLE>
7. SUBSEQUENT EVENT
As discussed in Note 1, the four AGH Predecessor Hotels will be acquired
subsequent to March 29, 1996. The Company and the Operating Partnership will
exchange shares of Common Stock and OP Units for interests in the selling
entities and certain net assets will be transferred at historical cost basis.
In addition, the hotels will be refinanced upon acquisition and post-
acquisition debt will be different than the historical debt reflected in the
accompanying financial statements. Furthermore, all management agreements will
be terminated and new management agreements will be implemented. The combined
financial statements do not reflect any of the transactions in connection with
the Offering and related transactions.
The AGH Predecessor Hotels repaid in full the December 29, 1995 outstanding
debt of $100,000 and the accounts payable of $195,000 to AGHI.
F-33
<PAGE>
AGH PREDECESSOR HOTELS
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 29, 1995
<TABLE>
<CAPTION>
COST CAPITALIZED GROSS AMOUNTS AT
SUBSEQUENT TO WHICH CARRIED
INITIAL COST ACQUISITION AT CLOSE OF PERIOD ACCUMULATED
----------------------- ----------------- ----------------------------------- DEPRECIATION
BUILDING BUILDING BUILDING BUILDINGS
AND AND AND AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL IMPROVEMENTS
----------- ------------ ---------- ------------ ---- ------------ ---------- ------------ ----------- ------------
(A) (B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Courtyard by
Marriott
Meadowlands
Secaucus, NJ.... $ 4,767,446 $ 4,780,496 $ 238,936 $ 5,019,432 $ 5,019,432 $246,400
Hampton Inn
Richmond Airport
Richmond, VA.... 4,795,400 $ 505,000 3,590,369 244,933 $ 505,000 3,835,302 4,340,302 98,566
Holiday Inn Dal-
las DFW Airport
West
Bedford, TX..... 8,161,352 816,515 6,532,118 852,292 816,515 7,384,410 8,200,925 96,464
Hotel Maison de
Ville
New Orleans,
LA.............. 1,553,448 175,000 1,641,777 546,934 175,000 2,188,711 2,363,711 64,977
----------- ---------- ----------- ---------- ---------- ----------- ----------- --------
$19,277,646 $1,496,515 $16,544,760 $1,883,095 $1,496,515 $18,427,855 $19,924,370 $506,407
=========== ========== =========== ========== ========== =========== =========== ========
<CAPTION>
NET LIFE
BOOK VALUE UPON WHICH
BUILDINGS DEPRECIATION
AND DATE OF DATE OF IN STATEMENT
DESCRIPTION IMPROVEMENTS CONSTRUCTION ACQUISITION IS COMPUTED
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Courtyard by
Marriott
Meadowlands
Secaucus, NJ.... $ 4,773,032 1989 12/30/93 40 YRS
Hampton Inn
Richmond Airport
Richmond, VA.... 4,241,736 1972 12/29/94 40 YRS
Holiday Inn Dal-
las DFW Airport
West
Bedford, TX..... 8,104,461 1974 6/7/95 40 YRS
Hotel Maison de
Ville
New Orleans,
LA.............. 2,298,734 1788 8/8/94 40 YRS
------------
$19,417,963
============
</TABLE>
(a) Reconciliation of land and buildings and improvements:
<TABLE>
<S> <C>
Balance at January 1, 1994... $ 4,780,496
Additions during the year
1994:
Improvements................ 7,062,297
-----------
Balance at December 30,
1994......................... 11,842,793
Additions during the year
1995: 8,081,577
-----------
Balance at December 29,
1995......................... $19,924,370
===========
</TABLE>
(b) Reconciliation of Accumulated Depreciation:
<TABLE>
<S> <C>
Balance at beginning of year Jan-
uary 1, 1994..................... $ 46,982
Depreciation for the year 1994: 185,174
--------
Balance at December 30, 1994..... 232,156
Depreciation for the year 1995: 274,251
--------
Balance at December 29, 1995..... $506,407
========
</TABLE>
F-34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors American General Hospitality Corporation
We have audited the accompanying combined balance sheets of the AGH
Acquisition Hotels (described in Note 1) as of December 31, 1994 and 1995 and
the related combined statements of operations, equity and cash flows for each
of the three years in the period ended December 31, 1995. These combined
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 to the financial statements and are not
intended to be a complete presentation of the AGH Acquisition Hotels.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the AGH
Acquisition Hotels as of December 31, 1994 and 1995, and the combined results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
April 8, 1996
F-35
<PAGE>
AGH ACQUISITION HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<S> <C> <C> <C>
ASSETS
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Investments in hotel properties, at
cost:
Land and land improvement.......... $ 9,174,723 $ 9,174,723 $ 9,174,723
Buildings and improvements......... 70,574,085 73,047,848 73,218,749
Furniture, fixtures and equipment.. 21,948,731 21,999,984 22,267,228
------------ ------------ -----------
101,697,539 104,222,555 104,660,700
Less accumulated depreciation........ (33,171,163) (36,842,175) (38,064,731)
------------ ------------ -----------
Net investment in hotel properties... 68,526,376 67,380,380 66,595,969
Cash and cash equivalents............ 2,514,782 4,247,740 5,245,341
Restricted cash...................... 1,006,323 1,454,731 2,380,396
Accounts receivable, net............. 1,917,888 1,677,438 2,521,992
Inventories.......................... 571,883 735,266 624,557
Prepaid expenses..................... 379,842 477,443 518,929
Deferred expenses.................... 462,933 558,706 520,636
Other assets......................... 661,774 90,669 110,122
------------ ------------ -----------
Total assets..................... $ 76,041,801 $ 76,622,373 $78,517,942
============ ============ ===========
LIABILITIES AND EQUITY
Debt................................. $ 46,013,273 $ 43,861,547 $51,827,466
Capital lease obligation............. 2,862,995 2,625,082 2,562,897
Accounts payable, trade.............. 884,218 768,251 1,135,404
Payable to affiliates................ 2,145,068 2,231,449 2,173,403
Accrued expenses and other liabili-
ties................................ 3,819,118 3,847,515 3,514,883
------------ ------------ -----------
Total liabilities................ 55,724,672 53,333,844 61,214,053
------------ ------------ -----------
Commitments and contingencies (Note
4)..................................
Capital.............................. 11,960,065 6,588,382 (2,012,817)
Retained earnings.................... 8,357,064 16,700,147 19,316,706
------------ ------------ -----------
Total equity..................... 20,317,129 23,288,529 17,303,889
------------ ------------ -----------
Total liabilities and equity..... $ 76,041,801 $ 76,622,373 $78,517,942
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-36
<PAGE>
AGH ACQUISITION HOTELS
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Room revenue.......... $36,811,936 $40,109,552 $44,736,447 $10,232,424 $11,561,801
Food and beverage rev-
enue................. 15,446,922 15,826,164 16,424,522 4,076,018 4,173,807
Other revenue......... 4,678,562 3,169,064 3,579,485 869,608 989,702
----------- ----------- ----------- ----------- -----------
Total revenue....... 56,937,420 59,104,780 64,740,454 15,178,050 16,725,310
----------- ----------- ----------- ----------- -----------
Expenses:
Property operating
costs and expenses... 11,639,735 11,611,249 12,583,203 2,898,122 3,232,127
Food and beverage
costs and expenses... 12,023,204 12,331,905 12,741,884 3,068,805 3,148,304
General and adminis-
trative.............. 4,877,037 5,398,014 5,780,741 1,337,209 1,421,240
Advertising and promo-
tion................. 3,735,277 3,822,370 3,874,160 1,066,362 1,146,405
Repairs and mainte-
nance................ 2,744,397 2,564,251 2,719,954 672,483 712,728
Utilities............. 2,898,837 3,021,303 2,945,878 678,998 653,974
Management fees....... 799,987 933,961 1,285,385 309,720 332,666
Franchise costs....... 1,403,567 1,492,504 1,701,346 276,497 315,052
Depreciation.......... 5,550,188 5,344,060 5,498,602 1,729,152 1,222,556
Amortization.......... 250,459 277,887 152,588 68,918 39,528
Real estate and
personal property
taxes, and
property insurance... 1,632,849 1,651,113 1,481,258 398,032 372,957
Interest expense...... 4,667,281 4,340,948 4,734,958 1,155,882 1,248,618
Other expense......... 909,555 820,168 897,414 241,539 262,596
----------- ----------- ----------- ----------- -----------
Total expenses...... 53,132,373 53,609,733 56,397,371 13,901,719 14,108,751
----------- ----------- ----------- ----------- -----------
Revenues over ex-
penses............. $ 3,805,047 $ 5,495,047 $ 8,343,083 $ 1,276,331 $ 2,616,559
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-37
<PAGE>
AGH ACQUISITION HOTELS
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
EQUITY
-----------
<S> <C>
Balance, December 31, 1992......................................... $19,706,810
Revenues over expenses........................................... 3,805,047
Distributions.................................................... (3,743,317)
-----------
Balance, December 31, 1993......................................... 19,768,540
Revenues over expenses........................................... 5,495,047
Capital contributions............................................ 1,803,806
Distributions.................................................... (6,750,264)
-----------
Balance, December 31, 1994......................................... 20,317,129
Revenues over expenses........................................... 8,343,083
Capital contributions............................................ 1,486,050
Distributions.................................................... (6,857,733)
-----------
Balance, December 31, 1995......................................... 23,288,529
Net income (unaudited)........................................... 2,616,559
Capital contributions (unaudited)................................ 404,221
Distributions (unaudited)........................................ (9,005,420)
-----------
Balance, March 31, 1996 (unaudited)................................ $17,303,889
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-38
<PAGE>
AGH ACQUISITION HOTELS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating
activities:
Revenues over
expenses............. $ 3,805,047 $ 5,495,047 $ 8,343,083 $1,276,331 $2,616,559
Adjustments to
reconcile revenues
over expenses
to net cash provided
by operating
activities:
Depreciation......... 5,550,188 5,344,060 5,498,602 1,729,152 1,222,556
Amortization......... 250,459 277,887 152,588 68,918 39,528
Changes in assets and
liabilities:
Restricted cash...... (501,015) 128,081 (448,408) (1,274,883) (925,665)
Accounts receivable.. 208,742 393,847 240,450 (60,067) (844,554)
Inventories.......... 17,473 17,928 (163,383) 26,161 110,709
Prepaid expenses..... (84,011) (53,658) (97,601) (224,638) (41,486)
Other assets......... (511,774) 1,546,499 571,105 514,939 (19,453)
Franchise
agreements.......... (78,804) (4,000)
Organization costs... (135,928) (3,239)
Accounts payable,
trade............... (311,030) 141,223 (115,967) 115,377 367,153
Payable to
affiliates.......... 129,927 66,559 86,381 55,577 (58,046)
Accrued expenses and
other liablilities.. 881,626 357,616 28,397 (287,973) (332,632)
----------- ----------- ----------- ---------- ----------
Net cash provided by
operating
activities......... 9,220,900 13,711,089 14,092,008 1,938,894 2,134,669
----------- ----------- ----------- ---------- ----------
Cash flows from invest-
ing activities:
Improvements and
additions to hotel
properties........... (1,274,727) (4,903,592) (4,352,606) (972,147) (438,145)
----------- ----------- ----------- ---------- ----------
Cash flows from financ-
ing activities:
Proceeds from
borrowings........... 493,713 202,287 638,538 561,111 14,316,797
Principal payments on
borrowings........... (4,374,090) (2,662,272) (2,790,264) (445,592) (6,350,878)
Payments on capital
lease obligation..... (206,194) (221,486) (237,913) (57,893) (62,185)
Payments for deferred
loan costs........... (189,152) (245,122) (13,342) (1,458)
Capital
contributions........ 1,803,806 1,486,050 654,515 404,221
Distributions paid.... (3,743,317) (6,750,264) (6,857,733) (1,270,136) (9,005,420)
----------- ----------- ----------- ---------- ----------
Net cash used in
financing
activities......... (7,829,888) (7,817,081) (8,006,444) (571,337) (698,923)
----------- ----------- ----------- ---------- ----------
Net change in cash and
cash equivalents....... 116,285 990,416 1,732,958 395,410 997,601
Cash and cash
equivalents at
beginning of period.... 1,408,081 1,524,366 2,514,782 2,514,782 4,247,740
----------- ----------- ----------- ---------- ----------
Cash and cash
equivalents at end of
period................. $ 1,524,366 $ 2,514,782 $ 4,247,740 $2,910,192 $5,245,341
=========== =========== =========== ========== ==========
Supplemental disclosures of cash
flow information:
Cash paid during the
year for interest.... $ 4,793,349 $ 4,275,522 $ 4,590,280 $1,221,248 $1,402,999
=========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-39
<PAGE>
AGH ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization--American General Hospitality Corporation (the "Company"), a
newly organized Maryland corporation which intends to qualify as a real estate
investment trust ("REIT"), has been formed to acquire equity interests in 13
hotels (the "Initial Hotels"). Four of the Initial Hotels (the "AGH
Predecessor Hotels") will be acquired primarily from limited partnerships
controlled by the shareholders of American General Hospitality, Inc. (the
"AGHI Affiliates"). The remaining nine Initial Hotels (the "AGH Acquisition
Hotels") will be acquired primarily from parties controlled by persons
unaffiliated with AGHI.
Upon completion of the proposed initial public offering described below, the
Company will acquire a 74.2% equity interest in American General Hospitality
Operating Partnership, L.P. (the "Operating Partnership"). A wholly owned
subsidiary of the Company will be the sole general partner of the Operating
Partnership. The Operating Partnership will own the Initial Hotels and will
lease them to AGH Leasing, L.P. (the "Lessee") under operating leases
("Participating Leases") which provide for rent based on the revenues of the
Initial Hotels. The Lessee has entered into management agreements pursuant to
which all of the Initial Hotels will be managed by American General
Hospitality, Inc. ("AGHI").
Basis of Presentation--The accompanying combined financial statements of the
AGH Acquisition Hotels have been presented on a combined basis due to
anticipated common ownership and management since each of the entities are
expected to be the subject of a business combination with the Company upon
consummation of the proposed initial public offering. The AGH Acquisition
Hotels consist of the following:
<TABLE>
<CAPTION>
PROPERTY NAME LOCATION NO. OF ROOMS
------------- -------- ------------
<S> <C> <C>
Holiday Inn Dallas DFW Airport South Irving, Texas 409
Hilton Hotel-Toledo Toledo, Ohio 213
Holiday Inn New Orleans International
Airport Kenner, Louisiana 304
Holiday Inn Park Center Plaza San Jose, California 231
Holiday Inn Select-Madison Madison, Wisconsin 227
Holiday Inn Mission Valley San Diego, California 318
Le Baron Airport Hotel San Jose, California 327
Days Inn Ocean City Ocean City, Maryland 162
Fred Harvey Albuquerque Airport Hotel Albuquerque, New Mexico 266
</TABLE>
Two hotels are owned by entities that conduct business as taxable
corporations and were managed so that income taxes were the responsibility of
the owners. The remaining hotels are owned by various partnerships for income
tax purposes. These financial statements have been prepared to show the
operations and financial position of the combined AGH Acquisition Hotels,
substantially all of whose assets and operations will be acquired by the
Company. The Company intends to qualify as a REIT and will not pay any federal
income taxes, therefore the financial statements have been presented on a
pretax basis.
Proposed Initial Public Offering--The Company has filed its registration
statement with the Securities and Exchange Commission (the "SEC") pursuant to
which the Company expects to offer 7,000,000 shares of its common stock to the
public (the "Offering"). The Company expects to qualify as a REIT under
sections 856-860 of the Internal Revenue Code of 1986, as amended (the
"Code"). Upon consummation of the Offering, the Company will contribute all of
the net proceeds of the Offering to the Operating Partnership in exchange for
an approximate 74.2% equity interest in the Operating Partnership. The
Operating Partnership will use such funds to purchase certain of the Initial
Hotels, repay debt and other obligations of the Initial Hotels, and for
working capital.
F-40
<PAGE>
AGH ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Hotel Properties--Hotel properties 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 31 to 40 years for building
and improvements and 5 to 7 years for furniture, fixtures and equipment.
The respective owners of the AGH Acquisition Hotels review the carrying
value of each property to determine if circumstances exist indicating an
impairment in the carrying value of the investment of the hotel property or
that depreciation periods should be modified. If facts or circumstances
support the possibility of impairment, the respective owners of the AGH
Acquisition Hotels 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. The respective owners of the AGH Acquisition Hotels do 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 betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and the related accumulated depreciation are removed
from the accounts and the gain or loss is included in operations.
Cash and Cash Equivalents--All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
Restricted Cash--Restricted cash consists primarily of amounts held in
escrow for capital and property tax reserves.
Inventories--Inventories consist primarily of food and beverage items;
china; glass and silver; and linen and are stated at the lower of cost
(generally, first-in, first-out) or market.
Deferred Expenses--Deferred expenses primarily consist of deferred loan
costs, franchise fees, and organization costs. Amortization of deferred loan
cost is computed using the effective yield method based upon the terms of the
loan agreements. Amortization of franchise fees is computed using the
straight-line method based upon the terms of the agreements. Amortization of
organization costs is computed using the straight-line method over five years.
Accumulated amortization at December 31, 1994 and 1995 is $892,441 and
$1,045,029, respectively.
Income Taxes--Seven of the nine hotels are included in various limited
partnerships which are not taxable entities. 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. The
Company proposes to qualify as a REIT under the Code and will therefore not be
subject to corporate income taxes. Accordingly, the combined statements of
operations contain no provision for federal income taxes.
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.
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.
F-41
<PAGE>
AGH ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Concentration of Credit Risk--The AGH Acquisition Hotels place cash deposits
at major banks. At December 31, 1995, bank account balances exceeded federal
depository insurance limits by approximately $2.5 million. Management believes
credit risk related to these deposits is minimal.
Significant Customer--The owner of the Hilton Hotel-Toledo is a major
customer of the Hilton Hotel- Toledo. In 1995, 20% of the hotel's room revenue
was attributed to other businesses of the owner.
Recently Issued Statement of Financial Accounting Standards--The AGH
Acquisition Hotels adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" during the year ended December 31, 1995.
The adoption of SFAS No. 121 had no material effect on the AGH Acquisition
Hotels' financial statements.
Interim Financial Information--The unaudited interim financial statements as
of March 31, 1996 and for the three months ended March 31, 1995 and 1994 have
been prepared pursuant to the rules and regulations of the SEC. The notes to
the interim financial statements included herein are intended to highlight
significant changes to the notes to the December 31, 1995 financial statements
and present interim disclosures required by the SEC. The accompanying interim
financial statements reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the interim financial statements. All
such adjustments are of a normal and recurring nature.
3. DEBT
Debt at December 31, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
First mortgage notes payable in various monthly
installments including interest at fixed rates
ranging from 8.5% to 10% maturing at various dates
through October 1, 2004.............................. $18,028,545 $15,959,484
First mortgage notes payable in various monthly
installments including interest at the commercial
paper rate (5.81% at December 31, 1995) plus 4.75%
maturing at July 15, 1997............................ 5,655,275 5,915,904
First mortgage notes payable in quarterly installments
including interest at the prime rate (8.5% at
December 31, 1995) maturing at October 30, 1999...... 7,692,000 7,575,000
First mortgage note payable in monthly installments
including interest at the federal funds rate (6% at
December 31, 1995) plus 2.5% maturing at July 10,
1997................................................. 10,695,513 10,319,709
Product improvement plan loans payable in various
monthly installments including interest at rates
ranging from the bank reference rate (7.8% at
December 31, 1995) plus .5% to 12% maturing at
various dates through April 1, 2001.................. 3,825,000 4,091,450
Other non-current debt................................ 116,940
----------- -----------
$46,013,273 $43,861,547
=========== ===========
</TABLE>
All debt is collateralized by the investments in hotel properties.
F-42
<PAGE>
AGH ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate annual principal payments for the AGHI Acquisition Hotels debt at
December 30, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1996.......................................................... $13,408,767
1997.......................................................... 11,420,835
1998.......................................................... 8,220,838
1999.......................................................... 1,209,019
2000 and thereafter........................................... 9,602,088
-----------
Total..................................................... $43,861,547
===========
</TABLE>
In December 1993, the partnership which owns the Holiday Inn New Orleans
International Airport hotel received $1,814,609 as a full pay-off from a
default on the lease of the hotel in 1992 which resulted in the default of the
mortgage. The $1,814,609 proceeds were transferred to the lender and applied
as a reduction of the principal balance on the nonrecourse mortgage loan to
cure the default. The payoff of $1,814,609 is recognized as other revenue. The
partnership has agreed that the $1,814,609 received in connection with the
promissory note payoff will be netted from funds they may be entitled to
receive in the future in connection with their bankruptcy claims against the
lessee.
4. LEASES
The Fred Harvey Albuquerque Airport Hotel has a noncancellable capital
building lease expiring in December 2013 and a noncancellable operating land
lease that also expires in December 2013; both leases include two five-year
options to renew the leases. The Le Baron Airport Hotel has a noncancellable
operating land lease expiring in July 2002, with one option to renew for an
additional 30 years. The Hilton Hotel-Toledo has a noncancellable operating
land lease that expires in December 2026, with four successive options to
renew the lease. Additionally, certain equipment is leased under
noncancellable lease agreements expiring at varying intervals through April
1998. The Fred Harvey Albuquerque Airport Hotel and the Le Baron Airport Hotel
land leases provide for contingent rental payments based on varying
percentages of revenues which for the years ended December 31, 1994 and 1995
approximated 50% of the aggregate rental expense under the operating leases.
Additionally, the Fred Harvey Albuquerque Airport Hotel land lease requires
the owner to add a new rooms building with at least 100 more guest rooms if
the average occupancy at the hotel is 85% or greater for 24 consecutive
months.
Leased capital assets included in buildings and improvements at December 31,
1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Building and improvements....................... $ 4,620,000 $ 4,620,000
Accumulated depreciation........................ (3,323,102) (3,424,155)
----------- -----------
$ 1,296,898 $ 1,195,845
=========== ===========
</TABLE>
F-43
<PAGE>
AGH ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Minimum future rental payments required under these capital leases (together
with the present value of net minimum lease payments) and operating leases
that have an initial term or remaining noncancellable lease terms in excess of
one year at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
---- ---------- ----------
<S> <C> <C>
1996.................................................. $ 438,236 $ 409,014
1997.................................................. 438,236 299,327
1998.................................................. 438,236 228,613
1999.................................................. 438,236 216,331
2000 and thereafter................................... 2,674,704 3,707,785
---------- ----------
Total minimum lease payment........................... 4,427,648 $4,861,070
==========
Less imputed interest................................. 1,802,566
----------
Present value of net minimum lease payments........... $2,625,082
==========
</TABLE>
Rental expense was $584,924, $676,531, and $705,943 for the years ended
December 31, 1993, 1994, and 1995, respectively.
5. COMMITMENTS
Management fees represent amounts paid to affiliated parties based upon
percentages of gross revenue ranging from 1.5% to 3.0%.
Franchise costs represent the annual expense for franchise royalties and
reservation services under the terms of hotel franchise agreements expiring in
various years ranging from 1998 to 2007. Franchise costs are based upon
varying percentages of gross room revenue ranging from 1.8% to 6.5%.
Each hotel is required to remit varying percentages of gross room revenue
ranging from 1.5% to 4% 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.
As a result of the Offering and the resulting prepayment of debt, a selling
partnership will pay prepayment penalties on one note payable totalling
approximately $504,000 based on an estimated pay off date of July 19, 1996.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards 107 requires all entities to
disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the AGH Acquisition Hotels report the carrying amount
of cash and cash equivalents, restricted cash, 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 AGH
Acquisition Hotels' debt approximates fair value due to the AGH Acquisition
Hotels' ability to obtain such borrowings at comparable interest rates.
7. RELATED PARTY TRANSACTIONS
During 1993, 1994, and 1995, the owner of the Fred Harvey Albuquerque
Airport Hotel paid for all accounts payable, payroll and other miscellaneous
payments for the hotel. The hotel's outstanding payable to the owner for these
payments, included in accounts payable, was $118,512 and $204,893 at December
31, 1994 and 1995, respectively. In addition, an affiliate of the Fred Harvey
Albuquerque Airport Hotel made payments for the hotel in 1992, totalling
$389,000, which are still outstanding and included in accounts payable as of
December 31, 1995.
F-44
<PAGE>
AGH ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Holiday Inn Park Center Plaza paid an annual management fee to an
officer of the entity owning the hotel for the years ending December 31, 1993,
1994 and 1995 of $60,000, $90,000 and $70,000, respectively.
An oral agreement for purchasing and management/financial services exists
between the Le Baron Airport Hotel and an affiliate of the owner. Fees (based
on 2% of gross revenues) paid to the affiliate for the years ending December
31, 1993, 1994 and 1995 are $139,947, $156,041 and $161,009, respectively.
As of December 31, 1995, the Holiday Inn Mission Valley hotel has a $312,500
receivable from its owners.
8. SUBSEQUENT EVENTS
On January 30, 1996, the Holiday Inn Dallas DFW Airport South hotel entered
into a long-term mortgage indebtedness agreement with a financial institution,
for proceeds of $14,250,000 at a fixed interest rate of 8.75% that matures on
February 1, 2011. Proceeds from the loan were used to repay the outstanding
debt of $5,915,904 and for distributions to the owners.
As discussed in Note 1, the nine AGH Acquisition Hotels will be acquired by
the Company subsequent to April 8, 1996. The acquisitions will be accounted
for by the Company under the purchase method of accounting. Accordingly, the
cost basis of the hotels will change to reflect the acquisition prices of the
hotels by the Company. In addition, with the exception of the Holiday Inn
Dallas DFW Airport South, the hotels will be refinanced upon acquisition and
postacquisition debt will be different than the historical debt reflected in
the accompanying financial statements. All management agreements will be
terminated concurrently with the sales of the hotels to the Company. The
combined financial statements do not reflect any of the transactions in
connection with the acquisitions of the nine hotels by the Company.
F-45
<PAGE>
AGH ACQUISITION HOTELS
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
COST CAPITALIZED GROSS AMOUNTS AT
SUBSEQUENT TO WHICH CARRIED
INITIAL COST ACQUISITION AT CLOSE OF PERIOD ACCUMULATED
----------------------- --------------------- ----------------------------------- DEPRECIATION
BUILDING BUILDING BUILDING BUILDING
AND AND AND AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL IMPROVEMENTS
----------- ------------ ---------- ------------ -------- ------------ ---------- ------------ ----------- ------------
(A) (B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn
Dallas DFW
Airport South
Irving, TX...... $5,915,904 $ 500,000 $ 2,810,500 $461,129 $ 1,144,140 $ 961,129 $ 3,954,640 $ 4,915,769 $ 360,051
Holiday Inn Park
Center Plaza San
Jose, CA........ 4,768,192 236,463 2,356,705 6,392,404 236,463 8,749,109 8,985,572 3,662,314
Fred Harvey Al-
buquerque
Airport Hotel
Albuquerque,
NM.............. 7,995,562 1,655,118 9,650,680 9,650,680 302,770
Holiday Inn Se-
lect-Madison
Madison, WI..... 4,231,600 2,615,614 7,050,569 2,215,924 2,615,614 9,266,493 11,882,107 3,802,233
Holiday Inn New
Orleans
International
Airport
Kenner, LA...... 7,440,696 2,567,967 12,179,629 3,390,411 2,567,967 15,570,040 18,138,007 1,847,633
Days Inn Ocean
City
Ocean City, MD.. 500,000 4,230,000 524,000 500,000 4,754,000 5,254,000 438,194
Le Baron Airport
Hotel
San Jose, CA.... 3,163,996 7,000,000 270,716 7,270,716 7,270,716 4,777,777
Holiday Inn Mis-
sion Valley
San Diego, CA... 10,766,159 2,293,550 5,354,094 1,697,161 2,293,550 7,051,255 9,344,805 782,460
Hilton Hotel-To-
ledo
Toledo, OH...... 7,575,000 6,753,093 27,822 6,780,915 6,780,915 580,558
----------- ---------- ----------- -------- ----------- ---------- ----------- ----------- -----------
$43,861,547 $8,713,594 $55,730,152 $461,129 $17,317,696 $9,174,723 $73,047,848 $82,222,571 $16,553,990
=========== ========== =========== ======== =========== ========== =========== =========== ===========
<CAPTION>
NET LIFE
BOOK VALUE UPON WHICH
BUILDING DEPRECIATION
AND DATE OF DATE OF IN STATEMENT
DESCRIPTION IMPROVEMENTS CONSTRUCTION ACQUISITION IS COMPUTED
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Holiday Inn
Dallas DFW
Airport South
Irving, TX...... $ 4,555,718 1974 1993 40 YRS
Holiday Inn Park
Center Plaza San
Jose, CA........ 5,323,258 1975 1975 40 YRS
Fred Harvey Al-
buquerque
Airport Hotel
Albuquerque,
NM.............. 9,347,910 1972 1988 27 YRS
Holiday Inn Se-
lect-Madison
Madison, WI..... 8,079,874 1987 1987 40 YRS
Holiday Inn New
Orleans
International
Airport
Kenner, LA...... 16,290,374 1973 1988 40 YRS
Days Inn Ocean
City
Ocean City, MD.. 4,815,806 1989 1992 40 YRS
Le Baron Airport
Hotel
San Jose, CA.... 2,492,939 1974 1974 40 YRS
Holiday Inn Mis-
sion Valley
San Diego, CA... 8,562,345 1970 1991 40 YRS
Hilton Hotel-To-
ledo
Toledo, OH...... 6,200,357 1987 1993 40 YRS
------------
$65,668,581
============
</TABLE>
(a) Reconciliation of Land and Buildings and Improvements:
<TABLE>
<S> <C>
Balance at January 1, 1994... $76,600,731
Additions during the year
1994:
Improvements................ 3,148,077
-----------
Balance at December 31,
1994......................... 79,748,808
Additions during the year
1995........................ 2,473,763
-----------
Balance at December 31,
1995......................... $82,222,571
===========
</TABLE>
(b) Reconciliation of Accumulated Depreciation:
<TABLE>
<S> <C>
Balance at January 1, 1994.... $12,044,953
Depreciation for the year
1994......................... 2,250,929
-----------
Balance at December 31, 1994.. 14,295,882
Depreciation for the year
1995......................... 2,258,108
-----------
Balance at December 31, 1995.. $16,553,990
===========
</TABLE>
F-46
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AU-
THORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUAL-
IFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 20
The Company.............................................................. 33
Use of Proceeds.......................................................... 41
Distribution Policy...................................................... 42
Capitalization........................................................... 45
Dilution................................................................. 46
Selected Financial Information........................................... 47
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 53
The Hotel Industry....................................................... 63
The Initial Hotels....................................................... 64
Formation Transactions................................................... 87
Management............................................................... 90
Certain Relationships and Transactions................................... 97
AGHI and the Lessee...................................................... 99
Principal Stockholders................................................... 102
Description of Capital Stock............................................. 103
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws.................................................................. 107
Policies and Objectives with Respect to Certain Activities............... 111
Shares Available for Future Sale......................................... 114
Partnership Agreement.................................................... 115
Federal Income Tax Considerations........................................ 118
Underwriting............................................................. 137
Experts.................................................................. 138
Legal Matters............................................................ 138
Additional Information................................................... 139
Glossary................................................................. 140
Index to Financial Statements............................................ F-1
</TABLE>
-----------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7,000,000 Shares
[LOGO]
AMERICAN GENERAL HOSPITALITY CORPORATION
Common Stock
-----------
PROSPECTUS
, 1996
-----------
Smith Barney Inc.
Prudential Securities Incorporated
Legg Mason Wood Walker
Incorporated
The Robinson-Humphrey Company, Inc.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the share of
Common Stock.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 67,699
NASD filing fee................................................ 18,033
NYSE listing fee............................................... 91,600
Financial advisory fee......................................... 1,050,000
Printing, engraving and mailing expenses....................... 350,000
Accountant's fees and expenses................................. 415,000
Blue Sky fees and expenses..................................... 50,000
Legal fees..................................................... 1,300,000
Transfer agent's fees.......................................... 15,000
Miscellaneous expenses......................................... 764,668
----------
Total........................................................ $4,122,000
==========
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES
See response to Item 32.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
The Company sold 15.83, 5.00, 47.51, 15.83 and 15.83 shares of Common Stock
to Messrs. Jorns, Wiles, Sowell, Shaw and Shaw, respectively, on April 12,
1996 for an aggregate price of $100. The shares were purchased for investment
purposes only, and not with a view to any resale, fractionalization or
distribution thereof, and for the purpose of organizing the Company. The
shares have been or will be issued by the Company in reliance on the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended (the
"Act"). The shares sold by the Company on April 12, 1996 will be redeemed by
the Company for $100 upon closing of the Offering. The Company also has agreed
to issue 155,518 shares (subject to adjustment in certain circumstances) of
Common Stock to the Plan, valued at approximately $3.1 million, based on the
Offering Price, in exchange for its interests in five of the Initial Hotels.
The shares that will be purchased by the Plan will be issued by the Company in
reliance on the exemption provided by Section 4(2) of the Act.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provision which eliminates such liability to the
maximum extent permitted by Maryland law.
The Charter of the Company obligates it, to the maximum extent permitted by
Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to any person (or the estate of
any person) who is or was a party to, or is threatened to be made a party to,
any threatened, pending or completed action, suit or proceeding whether or not
by or in the right of the Company, and whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director or
II-1
<PAGE>
officer of the Company, or is or was serving at the request of the Company as
a director, officer, trustee, partner, member, agent or employee of another
corporation, partnership, limited liability company, association, joint
venture, trust or other enterprise. The Charter also permits the Company to
indemnify and advance expenses to any person who served a predecessor of the
Company in any of the capacities described above and to any employee or agent
of the Company or a predecessor of the Company.
The MGCL requires a Maryland corporation (unless its charter provides
otherwise, which the Company's Charter does not) to indemnify a director or
officer who has been successful, on the merits or otherwise, in the defense of
any Maryland proceeding to which he is made a party by reason of his service
in that capacity. The MGCL permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In addition, the MGCL requires the Company,
as a condition to advancing expenses, to obtain (a) a written affirmation by
the director or officer of his good faith belief that he has met the standard
of conduct necessary for indemnification by the Company as authorized by the
Bylaws and (b) a written statement by or on his behalf to repay the amount
paid or reimbursed by the Company if it shall ultimately be determined that
the standard of conduct was not met.
The Company intends to purchase director and officer liability insurance for
the purpose of providing a source of funds to pay any indemnification
described above.
The Underwriting Agreement will contain certain provisions pursuant to which
certain officers, directors and controlling persons may be entitled to be
indemnified by the underwriters named therein.
ITEM 34. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED
None.
II-2
<PAGE>
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(A) INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
American General Hospitality Corporation
Statements of Estimated Revenues Less Expenses for the Year Ended
December 31, 1995, the Twelve Months Ended March 31, 1996 and the Three
Months Ended March 31, 1996 (unaudited)................................ F-2
Pro Forma Consolidated Balance Sheet as of March 31, 1996 (unaudited)... F-6
Report of Independent Accountants....................................... F-11
Balance Sheet as of April 12, 1996 (date of inception).................. F-12
Notes to Balance Sheet.................................................. F-13
AGH Leasing, L.P.
Pro Forma Balance Sheet as of May 29, 1996 (unaudited).................. F-15
Report of Independent Accountants....................................... F-16
Balance Sheet as of May 29, 1996 (date of inception).................... F-17
Notes to Balance Sheet.................................................. F-18
Initial Hotels and Lessee
Pro Forma Combined Statements of Operations for the Year Ended December
31, 1995, the Twelve Months Ended March 31, 1996 and the Three Months
Ended March 31, 1996 (unaudited)....................................... F-19
Notes to Combined Statements of Operations.............................. F-22
AGH Predecessor Hotels
Report of Independent Accountants....................................... F-24
Combined Balance Sheets as of December 30, 1994, December 29, 1995
(audited) and March 31, 1996 (unaudited)............................... F-25
Combined Statements of Operations for the Period from December 30, 1993
through December 31, 1993, the Years Ended December 30, 1994 and
December 29, 1995 (audited) and the Three Months Ended March 31, 1995
and 1996 (unaudited)................................................... F-26
Combined Statements of Equity for the Period from December 30, 1993
through December 31, 1993, the Years Ended December 30, 1994 and
December 29, 1995 (audited) and the Three Months Ended March 31, 1996
(unaudited)............................................................ F-27
Combined Statements of Cash Flows for the Period from December 30, 1993
through December 31, 1993, the Years Ended December 30, 1994 and
December 29, 1995 (audited) and the Three Months Ended March 31, 1995
and 1996 (unaudited)................................................... F-28
Notes to Combined Financial Statements.................................. F-29
Schedule III--Real Estate and Accumulated Depreciation.................. F-34
AGH Acquisition Hotels
Report of Independent Accountants....................................... F-35
Combined Balance Sheets as of December 31, 1994 and 1995 (audited) and
March 31, 1996 (unaudited)............................................. F-36
Combined Statements of Operations for each of the Three Years in the
Period Ended December 31, 1995 (audited) and the Three Months Ended
March 31, 1995 and 1996 (unaudited).................................... F-37
Combined Statements of Equity for each of the Three Years in the Period
Ended December 31, 1995 (audited) and the Three Months Ended March 31,
1996 (unaudited)....................................................... F-38
Combined Statements of Cash Flows for each of the Three Years in the
Period Ended December 31, 1995 (audited) and the Three Months Ended
March 31, 1995 and 1996 (unaudited).................................... F-39
Notes to Combined Financial Statements.................................. F-40
Schedule III--Real Estate and Accumulated Depreciation.................. F-46
</TABLE>
II-3
<PAGE>
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
**1.1 --Form of Underwriting Agreement
*3.1 --Articles of Incorporation of the Registrant
*3.2 --Form of Articles of Amendment and Restatement of the Registrant
**3.3 --Bylaws of the Registrant
*4.1 --Form of Common Stock Certificate for the Registrant
**5.1 --Opinion of Battle Fowler LLP
**8.1 --Opinion of Battle Fowler LLP, as to Tax Matters
--Opinion of Coopers & Lybrand L.L.P., as to Texas Franchise Tax
**8.2 Matters
*10.1 --American General Hospitality Partnership, L.P. Limited Partnership
Formation Agreement
*10.2 --Form of Amended and Restated Agreement of Limited Partnership of
American General Hospitality Operating Partnership, L.P.
--Form of Participating Lease between the Registrant and AGH Leasing,
*10.3 L.P.
--Form of Lease Master Agreement between the Registrant and AGH
*10.4 Leasing, L.P.
*10.5 --Form of Management Agreement between AGH Leasing, L.P. and American
General
Hospitality, Inc.
--Form of Supplemental Representations, Warranties and Indemnity
**10.6 Agreement
*10.7 --Form of Exchange Rights Agreement
*10.8 --Form of Registration Rights Agreement
*10.9 --Form of Lock-up Agreement
*10.10 --Commitment Letter for Line of Credit
*10.11 --Form of American General Hospitality Corporation 1996 Incentive Plan
--Form of American General Hospitality Corporation Non-Employee
*10.12 Directors' Incentive Plan
--Form of Employment Agreement between the Registrant and Steven D.
*10.13 Jorns
--Form of Employment Agreement between the Registrant and Bruce G.
*10.14 Wiles
--Form of Employment Agreement between the Registrant and Kenneth E.
*10.15 Barr
--Form of Employment Agreement between the Registrant and Russ C.
*10.16 Valentine
*10.17 --Form of Shared Services Office Space Agreement
*10.18 --Form of Option Agreement and Right of First Offer/Refusal between
1815 Hotel Associates Limited Partnership and American General
Hospitality Operating Partnership, L.P. (with respect to the
Durham, North Carolina Option Hotel)
*10.19 --Form of Indemnification Agreement between the Registrant and its
executive officers and directors
*10.20 --Omnibus Option Agreement (OP Units) for Holiday Inn Dallas DFW
Airport South
*10.21 --Omnibus Option Agreement (Cash) for Holiday Inn Dallas DFW Airport
South
*10.22 --Contribution Agreement (GP) for Holiday Inn Dallas DFW Airport South
*10.23 --Contribution Agreement (Primary Contributors) for Holiday Inn Dallas
DFW Airport South; Holiday Inn Dallas DFW Airport West; Courtyard
by Marriott-Meadowlands; Hampton Inn Richmond Airport; and Hilton
Hotel-Toledo
*10.24 --Option Agreement for Holiday Inn Dallas DFW Airport West
*10.25 --Contribution Agreement for Holiday Inn New Orleans International
Airport
*10.26 --Sale and Contribution Agreement for Holiday Inn Select-Madison
*10.27 --Purchase and Sale Agreement for Holiday Inn Park Center Plaza
*10.28 --Hotel Purchase Agreement for Fred Harvey Albuquerque Airport Hotel
*10.29 --Hotel Purchase Agreement for Le Baron Airport Hotel
*10.30 --Real Estate Sale Agreement for Days Inn Ocean City
*10.31 --Purchase and Sale Agreement and Escrow Instructions for Holiday Inn
Mission Valley
*10.32 --Omnibus Option Agreement (OP Units) for Hotel Maison de Ville
*10.33 --Omnibus Option Agreement (Cash) for Hotel Maison de Ville
*10.34 --Option Agreement for Hotel Maison de Ville
*10.35 --Option Agreement (the Plan) for Holiday Inn Dallas DFW Airport
South; Holiday Inn Dallas DFW Airport West; Courtyard by Marriott-
Meadowlands; Hampton Inn Richmond Airport;
and Hotel Maison de Ville
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
*10.36 --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)
*10.37 --Form of Management Company Master Agreement among AGH Leasing, L.P.,
American General Hospitality, Inc., Steven D. Jorns and Bruce G.
Wiles.
*21.1 --Subsidiaries of the Company
**23.1 --Consent of Battle Fowler LLP (included in Exhibits 5.1 and 8.1
hereto)
**23.2 --Consent of Coopers & Lybrand L.L.P. giving opinion on Texas
Franchise Tax Matters (included in Exhibit 8.2 hereto)
**23.3 --Consent of Coopers & Lybrand L.L.P.
*24.1 --Powers of Attorney (included on signature page hereto)
*27.1 --Financial Data Schedule
*99.1 --Consent of H. Cabot Lodge III
*99.2 --Consent of James R. Worms
*99.3 --Consent of James McCurry
*99.4 --Consent of Kent R. Hance
</TABLE>
- --------
* Previously filed.
** Filed herewith.
+ To be filed by amendment.
ITEM 36. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 33 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question as to whether such indemnification by it
is against public policy as expressed in the Act, and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement.
(2) For purpose of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof;
notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or
high end of the estimated offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in "Calculation of
Registration Fee" table in the effective registration statement.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS AMENDMENT NO. 4
TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED IN THE CITY OF DALLAS, STATE OF TEXAS ON JULY 15,
1996.
AMERICAN GENERAL HOSPITALITY CORPORATION
a Maryland corporation (Registrant)
/s/ Steven D. Jorns
By: _________________________________
STEVEN D. JORNS
Chairman of the Board, Chief
Executive Officer, and President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES INDICATED ON JULY 15, 1996.
SIGNATURE TITLE DATE
/s/ Steven D. Jorns Chairman of the
- ------------------------------------- Board, Chief July 15, 1996
STEVEN D. JORNS Executive Officer,
and President
/s/ Kenneth E. Barr Executive Vice
- ------------------------------------- President, Chief July 15, 1996
KENNETH E. BARR Financial Officer,
and Principal
Accounting Officer
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
**1.1 --Form of Underwriting Agreement
*3.1 --Articles of Incorporation of the Registrant
*3.2 --Form of Articles of Amendment and Restatement of the Registrant
**3.3 --Bylaws of the Registrant
*4.1 --Form of Common Stock Certificate for the Registrant
**5.1 --Opinion of Battle Fowler LLP
**8.1 --Opinion of Battle Fowler LLP, as to Tax Matters
**8.2 --Opinion of Coopers & Lybrand L.L.P., as to Texas Franchise Tax
Matters
*10.1 --American General Hospitality Partnership, L.P. Limited Partnership
Formation Agreement
*10.2 --Form of Amended and Restated Agreement of Limited Partnership of
American General Hospitality Operating Partnership, L.P.
--Form of Participating Lease between the Registrant and AGH Leasing,
*10.3 L.P.
--Form of Lease Master Agreement between the Registrant and AGH
*10.4 Leasing, L.P.
*10.5 --Form of Management Agreement between AGH Leasing, L.P. and American
General
Hospitality, Inc.
**10.6 --Form of Supplemental Representations, Warranties and Indemnity
Agreement
*10.7 --Form of Exchange Rights Agreement
*10.8 --Form of Registration Rights Agreement
*10.9 --Form of Lock-up Agreement
*10.10 --Commitment Letter for Line of Credit
*10.11 --Form of American General Hospitality Corporation 1996 Incentive Plan
*10.12 --Form of American General Hospitality Corporation Non-Employee
Directors' Incentive Plan
*10.13 --Form of Employment Agreement between the Registrant and Steven D.
Jorns
*10.14 --Form of Employment Agreement between the Registrant and Bruce G.
Wiles
*10.15 --Form of Employment Agreement between the Registrant and Kenneth E.
Barr
*10.16 --Form of Employment Agreement between the Registrant and Russ C.
Valentine
*10.17 --Form of Shared Services Office Space Agreement
*10.18 --Form of Option Agreement and Right of First Offer/Refusal between
1815 Hotel Associates Limited Partnership and American General
Hospitality Operating Partnership, L.P. (with respect to the
Durham, North Carolina Option Hotel)
*10.19 --Form of Indemnification Agreement between the Registrant and its
executive officers and directors
*10.20 --Omnibus Option Agreement (OP Units) for Holiday Inn Dallas DFW
Airport South
*10.21 --Omnibus Option Agreement (Cash) for Holiday Inn Dallas DFW Airport
South
*10.22 --Contribution Agreement (GP) for Holiday Inn Dallas DFW Airport South
*10.23 --Contribution Agreement (Primary Contributors) for Holiday Inn Dallas
DFW Airport South; Holiday Inn Dallas DFW Airport West; Courtyard
by Marriott-Meadowlands; Hampton Inn Richmond Airport; and Hilton
Hotel-Toledo
*10.24 --Option Agreement for Holiday Inn Dallas DFW Airport West
*10.25 --Contribution Agreement for Holiday Inn New Orleans International
Airport
*10.26 --Sale and Contribution Agreement for Holiday Inn Select-Madison
*10.27 --Purchase and Sale Agreement for Holiday Inn Park Center Plaza
*10.28 --Hotel Purchase Agreement for Fred Harvey Albuquerque Airport Hotel
*10.29 --Hotel Purchase Agreement for Le Baron Airport Hotel
*10.30 --Real Estate Sale Agreement for Days Inn Ocean City
*10.31 --Purchase and Sale Agreement and Escrow Instructions for Holiday Inn
Mission Valley
*10.32 --Omnibus Option Agreement (OP Units) for Hotel Maison de Ville
*10.33 --Omnibus Option Agreement (Cash) for Hotel Maison de Ville
*10.34 --Option Agreement for Hotel Maison de Ville
*10.35 --Option Agreement (the Plan) for Holiday Inn Dallas DFW Airport
South; Holiday Inn Dallas DFW Airport West; Courtyard by Marriott-
Meadowlands; Hampton Inn Richmond Airport;
and Hotel Maison de Ville
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
*10.36 --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)
*10.37 --Form of Management Company Master Agreement among AGH Leasing, L.P.,
American General Hospitality, Inc., Steven D. Jorns and Bruce G.
Wiles.
*21.1 --Subsidiaries of the Company
**23.1 --Consent of Battle Fowler LLP (included in Exhibits 5.1 and 8.1
hereto)
**23.2 --Consent of Coopers & Lybrand L.L.P. giving opinion on Texas
Franchise Tax Matters (included in Exhibit 8.2 hereto)
**23.3 --Consent of Coopers & Lybrand L.L.P.
*24.1 --Powers of Attorney (included on signature page hereto)
*27.1 --Financial Data Schedule
*99.1 --Consent of H. Cabot Lodge III
*99.2 --Consent of James R. Worms
*99.3 --Consent of James McCurry
*99.4 --Consent of Kent R. Hance
</TABLE>
- --------
* Previously filed.
** Filed herewith.
+ To be filed by amendment.
<PAGE>
EXHIBIT 1.1
7,000,000 Shares
AMERICAN GENERAL HOSPITALITY CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
July __, 1996
SMITH BARNEY INC.
PRUDENTIAL SECURITIES INCORPORATED
LEGG MASON WOOD WALKER, INCORPORATED
THE ROBINSON-HUMPHREY COMPANY, INC.
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
American General Hospitality Corporation, a Maryland corporation (the
"Company"), intending to qualify for federal income tax purposes as a real
estate investment trust pursuant to Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the "Code"), proposes to issue and sell an
aggregate of 7,000,000 shares (the "Firm Shares") of its common stock, $0.01 par
value per share (the "Common Stock"), to you and to the other Underwriters named
in Schedule I hereto (collectively, the "Underwriters") for whom you are acting
----------
as representatives (the "Representatives"). The Company also proposes to sell
to the Underwriters, upon the terms and conditions set forth in Section 3
hereof, up to an additional 1,050,000 shares (the "Additional Shares") of Common
Stock. The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "Shares." Except where the context requires otherwise, the
term "Company" shall include the Initial Hotels (as defined in the Prospectus
defined below), as if the Company had owned and operated the Initial Hotels
during the periods covered by the financial statements included in the
Registration Statement and the Prospectus.
The Company and American General Hospitality Operating Partnership, L.P., a
Delaware limited partnership of which a wholly-owned subsidiary of the Company
acts as the sole general partner (together with any of its subsidiary
partnerships or limited liability companies, the "Operating Partnership"), wish
to confirm as follows their agreements with you and the other several
Underwriters on whose behalf you are acting, in connection with the several
purchases of the Shares by the Underwriters.
<PAGE>
1. Registration Statement and Prospectus. The Company has prepared and
-------------------------------------
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-11 under the Act No. 333-4568 (the
"Initial Registration Statement"), including a prospectus subject to completion
relating to the Shares. The term "Registration Statement" as used in this
Agreement means the Initial Registration Statement (including all financial
schedules and exhibits), as amended at the time it becomes effective, and any
registration statement filed with the Commission pursuant to Rule 462(b) under
the Act (the "Rule 462(b) Registration Statement") or, if the Initial
Registration Statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this Agreement.
If it is contemplated, at the time this Agreement is executed, that a post-
effective amendment to the Initial Registration Statement or a Rule 462(b)
Registration Statement will be filed and must be declared effective before the
offering of the Shares may commence, the term "Registration Statement" as used
in this Agreement means the Initial Registration Statement or the Rule 462(b)
Registration Statement as amended by said post-effective amendment. The term
"Prospectus" as used in this Agreement means (X) if the Company relies on Rule
434 under the Act, the Term Sheet (as defined below) relating to the Shares that
is first filed pursuant to Rule 424(b)(7) under the Act together with the
Prepricing Prospectus (as defined below) identified therein that such Term Sheet
supplements, or (Y) if the Company does not rely on Rule 434 under the Act, the
prospectus in the form included in the Registration Statement, or, if the
prospectus included in the Registration Statement omits information in reliance
on Rule 430A under the Act and such information is included in a prospectus
filed with the Commission pursuant to Rule 424(b) under the Act, the term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectus filed with the Commission pursuant to
Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means
the prospectus subject to completion in the form included in the Initial
Registration Statement at the time of the initial filing of such registration
statement with the Commission, and as such prospectus shall have been amended
from time to time prior to the date of the Prospectus. The term "Term Sheet"
means any term sheet that satisfies the requirements of Rules 434 and 424(b)
under the Act. Any reference in this Agreement to the "date" of a Prospectus
that includes a Term Sheet means the date of such Term Sheet. Capitalized terms
used but not otherwise defined herein have the meanings given to them in the
Prospectus.
2. The Formation. It is understood that substantially contemporaneously
-------------
with the offering and sale of the Firm Shares to the Underwriters, the Company,
the Operating Partnership, AGH Leasing, L.P. (the "Lessee"), certain entities
(the "AGHI Selling Entities") affiliated with American General Hospitality, Inc.
("AGHI") and certain unaffiliated entities (the "Unaffiliated Selling Entities"
and, collectively with the AGHI Selling Entities, the "Selling Entities") will
enter into a series of transactions collectively described in the Prospectus as
the "Formation Transactions." Such transactions are referred to herein as the
"Formation." The documents required to be executed and delivered in order to
consummate the Formation, including, without limitation, the documents listed on
Schedule 2(a) attached hereto, are
- -------------
2
<PAGE>
hereinafter collectively referred to as the "Formation Documents," and each
Formation Document constituting an agreement is hereinafter referred to as a
"Formation Agreement." The terms "Relevant Party" and "Relevant Parties" as
used herein with respect to a Formation Document or Formation Agreement means
each of the following party or parties executing such Formation Document or
Formation Agreement: the Company, the Operating Partnership, the Subsidiaries
(as defined below), any Asset Entity (as defined herein), the Lessee, AGHI and
the AGHI Selling Entities.
For purposes of this Agreement and unless the context requires otherwise,
each of the Operating Partnership, AGH GP, Inc., a Nevada corporation ("AGH
GP"), AGH LP, Inc., a Nevada corporation ("AGH LP"), and the other partnerships
and limited liability companies listed on Schedule 2(b) hereto is deemed a
-------------
"Subsidiary" of the Company.
3. Agreements to Sell and Purchase. The Company hereby agrees, subject to
-------------------------------
all the terms and conditions set forth herein, to issue and sell to each
Underwriter and, upon the basis of the representations, warranties and
agreements of the Company, AGH GP, AGH LP and the Operating Partnership herein
contained and subject to all the terms and conditions set forth herein, each
Underwriter agrees, severally and not jointly, to purchase from the Company, at
a purchase price of $_____ per Share (the "purchase price per share"), the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto (or such number of Firm Shares increased as set forth in
- ----------
Section 11 hereof).
The Company also agrees, subject to all the terms and conditions set forth
herein, to sell to the Underwriters, and, upon the basis of the representations,
warranties and agreements of the Company, AGH GP, AGH LP and the Operating
Partnership herein contained and subject to all the terms and conditions set
forth herein, the Underwriters shall have the right to purchase from the
Company, at the purchase price per share, pursuant to an option (the "over-
allotment option"), which may be exercised at any time and from time to time
prior to 9:00 p.m., New York City time, on the 30th day after the date of the
Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the New York Stock Exchange is open for
trading), up to an aggregate of 1,050,000 Additional Shares. Additional Shares
may be purchased only for the purpose of covering over-allotments made in
connection with the offering of the Firm Shares. Upon any exercise of the over-
allotment option, each Underwriter, severally and not jointly, agrees to
purchase from the Company the number of Additional Shares (subject to such
adjustments as you may determine in order to avoid fractional shares) which
bears the same proportion to the number of Additional Shares to be purchased by
the Underwriters as the number of Firm Shares set forth opposite the name of
such Underwriter in Schedule I hereto (or such number of Firm Shares increased
----------
as set forth in Section 11 hereof) bears to the aggregate number of Firm Shares.
4. Terms of Public Offering. The Company has been advised by you that the
------------------------
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
3
<PAGE>
5. Delivery of the Shares and Payment Therefor. Delivery to the
-------------------------------------------
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, at 10:00
a.m., New York City time, on July __, 1996 (the "Closing Date"). The place of
closing for the Firm Shares and the Closing Date may be varied by agreement
between you and the Company.
Delivery to the Underwriters of and payment for any Additional Shares to be
purchased by the Underwriters shall be made at the aforementioned office of
Smith Barney Inc. at such time on such date (the "Option Closing Date"), which
may be the same as the Closing Date but shall in no event be earlier than the
Closing Date nor earlier than three nor later than ten business days after the
giving of the notice hereinafter referred to, as shall be specified in a written
notice from you on behalf of the Underwriters to the Company of the
Underwriters' determination to purchase a number, specified in such notice, of
Additional Shares. The place of closing for any Additional Shares and the
Option Closing Date for such Shares may be varied by agreement between you and
the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 a.m., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 a.m., New York City time, on the
business day next preceding the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and any Additional
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, against payment of the purchase
price therefor by wire transfer of immediately available funds to the Company.
6. Agreements of the Company and the Operating Partnership. The Company
-------------------------------------------------------
and the Operating Partnership jointly and severally agree with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Company will endeavor to cause the Registration Statement or such post-effective
amendment to become effective as soon as possible and will advise you promptly
and, if requested by you, will confirm such advice in writing, when the
Registration Statement or such post-effective amendment has become effective.
(b) The Company will advise you promptly and, if requested by you, will
confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Initial Registration Statement, any Rule
462(b) Registration Statement, any Prepricing Prospectus or the Prospectus or
for additional information; (ii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Initial Registration Statement or any
Rule 462(b) Registration Statement or of the suspension of qualification of the
Shares for offering or sale in any jurisdiction or the initiation of any
proceeding for such purpose; and (iii)
4
<PAGE>
within the period of time referred to in paragraph (h) below, of any change in
the Company's condition (financial or other), business, prospects, properties,
net worth or results of operations, or of the happening of any event, which
makes any statement of a material fact made in the Registration Statement or the
Prospectus (as then amended or supplemented) untrue or which requires the making
of any additions to or changes in the Registration Statement or the Prospectus
(as then amended or supplemented) in order to state a material fact required by
the Act or the regulations thereunder to be stated therein or necessary in order
to make the statements therein not misleading, or of the necessity to amend or
supplement the Prospectus (as then amended or supplemented) to comply with the
Act or any other law. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will
make every reasonable effort to obtain the withdrawal of such order at the
earliest possible time.
(c) The Company will furnish to you, without charge, five signed copies of
the Initial Registration Statement and of each amendment thereto, including
financial statements and all exhibits thereto, and any Rule 462(b) Registration
Statement and will also furnish to you, without charge, such number of conformed
copies of the Initial Registration Statement and of each amendment thereto, but
without exhibits, and any Rule 462(b) Registration Statement as you may
reasonably request.
(d) The Company will not (i) file any amendment to the Registration
Statement or any Rule 462(b) Registration Statement or make any amendment or
supplement to the Prospectus or the Term Sheet of which you shall not previously
have been advised or to which, within one business day following your receipt of
a copy of the document proposed to be filed, you shall reasonably object after
being so advised or (ii) so long as, in the opinion of counsel for the
Underwriters, a prospectus is required to be delivered in connection with sales
by any Underwriter or dealer, file any information, documents or reports
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), without delivering a copy of such information, documents or reports to
you, as Representatives of the Underwriters, prior to or concurrently with such
filing.
(e) Prior to the execution and delivery of this Agreement, the Company has
delivered to you, without charge, in such quantities as you have requested,
copies of each form of the Prepricing Prospectus. The Company consents to the
use, in accordance with the provisions of the Act and with the securities or
Blue Sky or real estate syndication laws of the jurisdictions in which the
Shares are offered by the several Underwriters and by dealers, prior to the date
of the Prospectus, of each Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as possible
and thereafter from time to time for such period as in the opinion of counsel
for the Underwriters a prospectus is required by the Act to be delivered in
connection with sales by any Underwriter or dealer, the Company will
expeditiously deliver to each Underwriter and each dealer, without charge, as
many copies of the Prospectus (and of any amendment or supplement thereto) as
you may reasonably request. The Company consents to the use of the Prospectus
(and of any
5
<PAGE>
amendment or supplement thereto) in accordance with the provisions of the Act
and with the securities or Blue Sky or real estate syndication laws of the
jurisdictions in which the Shares are offered by the several Underwriters and by
all dealers to whom Shares may be sold, both in connection with the offering and
sale of the Shares and for such period of time thereafter as a prospectus is
required by the Act to be delivered in connection with sales by any Underwriter
or dealer. If during such period of time any event shall occur that in the
judgment of the Company or in the opinion of counsel for the Underwriters is
required to be set forth in the Prospectus (as then amended or supplemented) or
should be set forth therein in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, or if it is
necessary to supplement or amend the Prospectus in order to comply with the Act
or any other law, the Company will forthwith prepare and, subject to the
provisions of paragraph (d) above, file with the Commission an appropriate
supplement or amendment thereto, and will expeditiously furnish to the
Underwriters and dealers a reasonable number of copies thereof. In the event
that the Company and you, as Representatives of the several Underwriters, agree
that the Prospectus should be amended or supplemented, the Company, if requested
by you, will promptly issue a press release announcing or disclosing the matters
to be covered by the proposed amendment or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several Underwriters and by dealers under the
securities or Blue Sky or real estate syndication laws of such jurisdictions as
you may designate and will file such consents to service of process or other
documents necessary or appropriate in order to effect such registration or
qualification; provided that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified or
to take any action which would subject it to service of process in suits, other
than those arising out of the offering or sale of the Shares, in any
jurisdiction where it is not now so subject.
(h) The Company will make generally available to its security holders a
consolidated earnings statement, which need not be audited, covering a twelve-
month period commencing after the effective date of the Registration Statement
and ending not later than 15 months thereafter, as soon as practicable after the
end of such period, which consolidated earnings statement shall satisfy the
provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company will furnish to
you (i) concurrently with mailing or filing, a copy of each report of the
Company mailed to stockholders or filed with the Commission, and (ii) from time
to time such other information concerning the Company as you may reasonably
request, which information you will treat confidentially unless the Company has
publicly disclosed such information.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 11 hereof or by notice given by you terminating this
Agreement pursuant to Section 11 hereof) or if this Agreement shall be
terminated by the Underwriters because of any failure or refusal on
6
<PAGE>
the part of the Company to comply with the terms or fulfill any of the
conditions of this Agreement, the Company agrees to reimburse the
Representatives for all out-of-pocket expenses (including reasonable fees and
expenses of counsel for the Underwriters) incurred by you in connection
herewith.
(k) The Company will apply the net proceeds from the sale of the Shares in
accordance with the description set forth under the caption "Use of Proceeds" in
the Prospectus.
(l) If Rule 430A of the Act is employed, the Company will timely file with
the Commission the Prospectus pursuant to Rule 424(b) under the Act and will
advise you of the time and manner of such filing.
(m) If Rule 434 of the Act is employed, the Company will timely file with
the Commission a Term Sheet relating to the Shares, which shall identify the
Prepricing Prospectus that it supplements, containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act.
(n) If Rule 462(b) of the Act is employed, the Company shall both file a
Rule 462(b) Registration Statement with the Commission in compliance with Rule
462(b) and pay the applicable fees in accordance with Rule 111 promulgated under
the Act by the earlier of (i) 10:00 p.m. New York City time on the date of this
Agreement and (ii) the time confirmations are sent or given, as specified by
Rule 462(b)(2).
(o) Except as provided in this Agreement, the Company will not sell, offer
to sell, solicit an offer to buy, contract to sell, or otherwise transfer or
dispose of shares of any Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock (whether through the
issuance or granting of any options, warrants, commitments, subscriptions,
rights to purchase or otherwise), for a period of one year after the date of the
Prospectus, without the prior written consent of Smith Barney Inc.; provided,
however, that the foregoing shall not prohibit (i) the Company from granting
options or restricted shares of Common Stock to certain officers, employees and
directors of the Company and its affiliates under the Company's 1996 Incentive
Plan or its Non-Employee Directors' Incentive Plan or the issuance of shares of
Common Stock upon exercise of any options granted under such plans or (ii) the
Company or the Operating Partnership from issuing Common Stock, OP Units or
other securities exchangeable for Common Stock that are issued in connection
with the acquisition of a hotel property.
(p) The Company has furnished or will furnish to you "lock-up" letters, in
form and substance satisfactory to you, signed by each of its officers and
directors named in the Prospectus and each Primary Contributor (as defined in
the Prospectus) identified on Schedule 6(p) hereto.
-------------
7
<PAGE>
(q) Except as stated in this Agreement and in the Prepricing Prospectus and
Prospectus, the Company has not taken, nor will it take, directly or indirectly,
any action designed to or that might reasonably be expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares.
(r) The Company will file timely and accurate reports on Form SR with the
Commission in accordance with Rule 463 under the Act and promptly will furnish
the Representatives with copies of such reports.
(s) The Company will use its best efforts to have the Common Stock listed,
subject to notice of issuance, on the New York Stock Exchange concurrently with
the effectiveness of the registration statement.
(t) The Company will use its best efforts to meet the requirements to
qualify, commencing with the fiscal year ending December 31, 1996, as a "real
estate investment trust" under the Code.
(u) The Company and the Operating Partnership in good faith will enforce
the terms of any agreements with the Lessee and the Selling Entities or any
parties affiliated with the Lessee or the Selling Entities.
7. Representations and Warranties of the Company, AGH GP, AGH LP and the
---------------------------------------------------------------------
Operating Partnership. The Company, AGH GP, AGH LP and the Operating
- ---------------------
Partnership, jointly and severally, represent and warrant to each Underwriter
that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 424 under the Act complied when so filed in all
material respects with the provisions of the Act. The Commission has not issued
any order preventing or suspending the use of any Prepricing Prospectus. No
stop order suspending the effectiveness of the Registration Statement or any
part thereof has been issued and no proceeding for that purpose has been
instituted or, to the knowledge of the Company, threatened by the Commission or
the securities authority of any state or other jurisdiction.
(b) The registration statement in the form in which it became or becomes
effective and also in such form as it may be when any post-effective amendment
thereto shall become effective and the Prospectus or any Term Sheet that is a
part thereof and any supplement or amendment thereto when filed with the
Commission under Rule 424(b) or Rule 434 under the Act, complied or will comply
in all material respects with the provisions of the Act and did not or will not
at any such times contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, except that this representation and warranty
does not apply to statements in the registration statement or the prospectus
made in reliance upon and in conformity with
8
<PAGE>
information relating to any Underwriter furnished to the Company in writing by
or on behalf of any Underwriter through you expressly for use therein.
(c) All the outstanding shares of Common Stock of the Company have been
duly authorized and validly issued, are fully paid and nonassessable and are
free of any preemptive or similar rights; the Shares have been duly authorized
and, when issued and delivered to the Underwriters against payment therefor in
accordance with the terms hereof, will be validly issued, fully paid and
nonassessable and free of any preemptive or similar rights; and the capital
stock of the Company conforms to the description thereof in the Registration
Statement and the Prospectus. Except as disclosed in the Prospectus, there are
no outstanding options, warrants or other rights calling for the issuance of, or
any commitment, plan or arrangement to issue, any capital stock of the Company
or any security convertible into or exchangeable for capital stock of the
Company. As of the Closing Date, the Company will have reserved a sufficient
number of shares of Common Stock for issuance upon (i) exercise of the
redemption of OP Units held by certain continuing investors acquiring OP Units
in connection with the Formation, and (ii) the exercise of options for up to
950,000 shares of Common Stock to be issued under the Company's stock option
plans.
(d) Each of the Company, the Operating Partnership, the Subsidiaries, the
Lessee, the AGHI Selling Entities and AGHI is and, as of the Closing Date, each
Asset Entity will be a corporation, limited partnership, general partnership or
limited liability company duly organized or formed, as the case may be, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or formation. Each such entity and, to the knowledge of the
Company, each of the Unaffiliated Selling Entities, has and as of the Closing
Date, each Asset Entity will have full corporate, partnership or limited
liability company power and authority to own, lease and operate its properties
or properties to be acquired in the Formation, to conduct its business and to
enter into this Agreement and each Formation Agreement to which it is a party.
Each such entity and, to the knowledge of the Company, each of the Unaffiliated
Selling Entities, is and, as of the Closing Date, each Asset Entity will be duly
registered and qualified to conduct its business and is (or, in the case of each
Asset Entity, will be as of the Closing Date) in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification.
(e) As of the Closing Date, (i) all of the outstanding OP Units of the
Operating Partnership, and shares of capital stock, partnership interests or
membership interests in each of the other Subsidiaries, the Lessee, AGHI and the
Asset Entities will be validly issued or created under the agreements forming
the Operating Partnership, the other Subsidiaries, the Lessee, AGHI and the
Asset Entities, and will be owned or held by the persons in the percentage
amounts set forth and in the manner described in the Prospectus, and (ii) the
Amended and Restated Agreement of Limited Partnership of the Operating
Partnership, and the organizational or formation documents of the other
Subsidiaries, the Lessee, AGHI and the Asset Entities shall each be in full
force and effect. AGH GP Inc. is the sole general partner of the Operating
Partnership, and, upon completion of the Formation, will own a 1% general
partnership interest in the Operating Partnership. Upon completion of the
Formation, AGH LP will own an
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approximate 73.2% limited partnership interest in the Operating Partnership.
AGHL GP, Inc. is the sole general partner of the Lessee. Except as described in
the Registration Statement and the Prospectus (or any amendment or supplement
thereto), there are no outstanding options, warrants or other rights calling for
the issuance of, or any commitment, plan or arrangement to issue, any equity
interests in the Operating Partnership, or any membership or equity interests in
the other Subsidiaries, the Lessee, AGHI or the Asset Entities or any security
convertible into, or exchangeable or exercisable for, any such interests in the
Operating Partnership, the other Subsidiaries, the Lessee, AGHI or the Asset
Entities.
(f) The Company has no subsidiaries other than the Subsidiaries. Other
than its interests in the Subsidiaries, the Company does not own, directly or
indirectly, securities of any corporation, partnership, joint venture,
association or other business association.
(g) There are no actions, suits or proceedings pending or, to the knowledge
of the Company, threatened against or affecting the Company, any of the
Subsidiaries, any Selling Entity, the Lessee, AGHI or any of their respective
partners, directors or officers in their capacity as such, or to which any of
the Initial Hotels is subject, that are required to be described in the
Registration Statement or the Prospectus but are not described as required, and
there are no agreements, contracts, indentures, leases or other instruments that
are required to be described in the Registration Statement or the Prospectus or
to be filed as an exhibit to the Registration Statement that are not described
or filed as required by the Act.
(h) Neither the Company, any of the Subsidiaries, any Asset Entity, the
Lessee or AGHI is in violation of its certificate or articles of incorporation
or by-laws, partnership agreement, or other organizational documents, or of any
law, ordinance, administrative or governmental rule or regulation applicable to
such entities or of any decree of any court or governmental agency or body
having jurisdiction over such entities, or in default in any material respect in
the performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any material
agreement, indenture, lease or other instrument to which any such entity is a
party or by which any of them or any of their respective properties may be
bound.
(i) Neither the issuance and sale of the Shares, the execution, delivery or
performance of this Agreement and the Formation Agreements, nor the consummation
of the transactions contemplated hereby or thereby by the Company, the
Subsidiaries, the Lessee, AGHI, or the Selling Entities, as applicable, (i)
requires any consent, approval, authorization or other order of or registration
or filing with, any court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may be required for the
registration of the Shares under the Act and the Exchange Act and compliance
with the securities or Blue Sky laws of various jurisdictions, all of which have
been or will be effected in accordance with this Agreement) or conflicts or will
conflict with or constitutes or will constitute a breach of, or a default under,
the certificate or articles of incorporation or bylaws, partnership agreement or
other organizational documents, of any of such entities or (ii) conflicts or
will conflict with or constitutes or will constitute a breach of, or a default
under, any material
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<PAGE>
agreement, indenture, lease or other instrument to which any of such entities is
a party or by which any of them or any of their respective properties may be
bound, or violates or will violate any statute, law, regulation or filing or
judgment, injunction, order or decree applicable to any of such entities or any
of their respective properties, or will result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of any of such
entities pursuant to the terms of any agreement or instrument to which any of
them is a party or by which any of them may be bound or to which any of the
property or assets of any of them is subject.
(j) The offers and sales of OP Units, and the sales by the Company of
Common Stock prior to the date hereof, are exempt from the registration
requirements of the Act and applicable state securities and blue sky laws.
(k) The accountants, Coopers & Lybrand L.L.P., who have audited the
financial statements included in the Registration Statement and the Prospectus
(and any amendment or supplement thereto), are independent public accountants as
required by the Act.
(l) The financial statements, together with related schedules and notes,
included in the Registration Statement or the Prospectus (and any amendment or
supplement thereto) present fairly, in all material respects, the financial
position, results of operations and changes in financial position of the
Company, the Initial Hotels and Lessee, the AGH Predecessor Hotels and AGH
Acquisition Hotels at the respective dates or for the respective periods to
which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; the other financial and statistical information and data included in
the Registration Statement and the Prospectus (and any amendment or supplement
thereto) are accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the relevant entities; the pro
forma financial statements of the Company included in the Registration Statement
and the Prospectus comply in all material respects with the applicable
requirements of Rule 11-02 of Regulation S-X of the Commission, and the pro
forma adjustments have been made based upon management's reasonable good faith
estimates of the pro forma adjustments and have been properly applied to the
audited historical amounts in the compilation of such statements.
(m) The execution and delivery of, and the performance by the Company, AGH
GP, AGH LP and the Operating Partnership of their respective obligations under,
this Agreement have been duly and validly authorized by each of the Company, AGH
GP, AGH LP and the Operating Partnership, and this Agreement has been duly
executed and delivered by the Company, AGH GP, AGH LP and the Operating
Partnership, and, assuming due authorization, execution and delivery by or on
behalf of the Underwriters, constitutes the valid and legally binding agreement
of each of the Company, AGH GP, AGH LP and the Operating Partnership,
enforceable against the Company, AGH GP, AGH LP and the Operating Partnership in
accordance with its terms, except as the enforceability thereof may be limited
by applicable bankruptcy, insolvency, moratorium and other laws affecting the
enforceability of creditors' rights and general principles of equity.
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<PAGE>
(n) Each Formation Agreement (other than this Agreement) will be duly
authorized and executed by each Relevant Party thereto on or prior to the
Closing Date and each Formation Agreement, assuming the due authorization,
execution and delivery by the other party or parties thereto, will constitute a
valid and binding agreement of the Relevant Parties thereto enforceable in
accordance with its terms, except as the enforceability thereof may be limited
by applicable bankruptcy, insolvency, moratorium and other laws affecting the
enforceability of creditors' rights and general principles of equity.
(o) Except as disclosed in the Prospectus, subsequent to the respective
dates as of which such information is given in the Registration Statement and
the Prospectus (or any amendment or supplement thereto), neither the Company nor
any of the Subsidiaries has incurred any liability or obligation, direct or
contingent, or entered into any transaction, not in the ordinary course of
business, that is material to the Company and the Subsidiaries taken as a whole,
and there has not been any change in the capital stock, or material increase in
the short-term debt or long-term debt, of the Company or any of the
Subsidiaries, or any material adverse change, or any development involving or
which may reasonably be expected to involve, a prospective material adverse
change, in the condition (financial or other), business, net worth or results of
operations of the Company and the Subsidiaries taken as a whole.
(p) The purchase agreements or contribution agreements pursuant to which
the Operating Partnership will acquire the Initial Hotels or all of the equity
interests in certain of the Selling Entities, the forms of which or actual
copies of which have been filed as exhibits to the Registration Statement
(collectively, the "Purchase Agreements"), have been duly authorized, executed
and delivered by each of the Relevant Parties thereto and, to the knowledge of
the Company, each of the other parties thereto. The Purchase Agreements give
the Operating Partnership (directly or as assignee) the right (subject only to
customary closing deliveries and other immaterial closing conditions), upon
payment of the amounts provided in the Purchase Agreements, to acquire the
Initial Hotels or all of the equity interests in certain of the Selling
Entities. Each Selling Entity that will continue in existence as the owner of
an Initial Hotel following the consummation of the Formation is referred to
herein as an "Asset Entity." Such Purchase Agreements and all deeds,
assignments of leases, assignments of partnership interests and other documents
delivered or to be delivered in connection therewith are legally sufficient to
effect the sale to the Operating Partnership or the Company of all right, title
and interest in and to the Initial Hotels or the equity interests in the Asset
Entities upon payment of the amounts provided for in the Purchase Agreements.
Upon the consummation of the Formation Transactions, the Operating Partnership
or the Company (either directly or through an Asset Entity) will have, good and
marketable title in fee simple to each of the items of real property and good
and marketable title to each of the items of personal property which are
included in the Initial Hotels or are referred to in the Registration Statement
and the Prospectus or are reflected in the financial statements referred to in
Section 7(l) hereof as being owned by the present owners of the Initial Hotels
(the "Present Owners") or the Operating Partnership, as the case may be, and
valid and enforceable leasehold interests in each of the items of real and
personal property which are included in the Initial Hotels or are referred to in
the Registration Statement and the Prospectus as being leased by the Present
Owners or the Operating
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<PAGE>
Partnership, as the case may be, in each case free and clear of all liens,
charges, encumbrances,claims, security interests, defects and restrictions,
other than those described in the Registration Statement and the Prospectus and
those which do not and will not have a material adverse effect on the
properties, business, financial condition or results of operations of the
Company and the Subsidiaries. All leases pursuant to which the Operating
Partnership will lease any items of real or personal property included in the
Initial Hotels, including, without limitation, all ground leases with respect to
the real property underlying certain of the Initial Hotels, are valid, binding
and enforceable leases. Such leases conform in all material respects to the
description thereof set forth in the Registration Statement and, to the
knowledge of the Company, no notice has been given or material claim asserted by
anyone adverse to the rights of the Present Owners under any of such leases or
affecting the Operating Partnership's right to continued possession of any
leased property.
(q) The Company has not distributed and, prior to the later to occur of (i)
the Closing Date and (ii) completion of the distribution of the Shares, will not
distribute any offering material in connection with the offering and sale of the
Shares other than the Registration Statement, the Prepricing Prospectus, the
Prospectus or other materials, if any, permitted by the Act.
(r) As of the Closing Date and after giving effect to the Formation, (i)
the Company, the Operating Partnership, each of the other Subsidiaries, the
Lessee and AGHI will have all permits, licenses, franchises and authorizations
of governmental and regulatory authorities ("permits") as are necessary to own
its respective properties and to conduct its business in the manner described in
the Prospectus, (ii) each of the Company, the Operating Partnership, the other
Subsidiaries, the Lessee and AGHI has fulfilled and performed all its material
obligations with respect to such permits, and no event has occurred which
allows, or after notice or lapse of time would allow, revocation or termination
thereof or results in any other material impairment of the rights of the holder
of any such permit, subject in each case to such qualification as may be set
forth in the Prospectus, and (iii) except as described in the Prospectus, none
of such permits contains any restriction that is materially burdensome to the
Company, the Operating Partnership, any of the other Subsidiaries, the Lessee or
AGHI.
(s) The Company together with its Subsidiaries maintains, and will maintain
upon consummation of the Formation Transactions, a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(t) None of the Company, any of its Subsidiaries or any employee or agent
of any of them, has made any payment of funds of the Company or any Subsidiary
or received
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<PAGE>
or retained any funds in violation of any law, rule or regulation or of a
character required to be disclosed in the Prospectus.
(u) The Company, each of the Subsidiaries, the Lessee and AGHI have filed
all tax returns required to be filed, which returns are complete and correct in
all material respects, and neither the Company, any Subsidiary, the Lessee or
AGHI is in default in the payment of any taxes which were payable pursuant to
said returns or any assessments with respect thereto, other than any taxes being
contested in good faith by the applicable entity.
(v) Except as described in the Prospectus, no person or entity has any
right to require the registration of any shares of Common Stock or any other
securities of the Company because of the filing of the registration statement or
sale of the Shares contemplated by this Agreement.
(w) The Company and its Subsidiaries are organized and intend to operate in
the manner described in the Registration Statement so that the Company will meet
the requirements for qualification as a real estate investment trust under
Sections 856 through 860 of the Code and the rules and regulations thereunder as
currently in effect, commencing with the year ending December 31, 1996. The
Operating Partnership and each Subsidiary that is a partnership or a limited
liability company will be treated as a partnership, and not as an association
taxable as a corporation or a publicly traded partnership, for federal income
tax purposes.
(x) The Company, the Subsidiaries and the Lessee are not now and after the
sale of the Shares to be sold hereunder and application of the net proceeds from
such sale as described in the Prospectus under the caption "Use of Proceeds,"
none of them will be, an "investment company", or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company Act of
1940, as amended.
(y) As of the Closing Date and after giving effect to the Formation, the
Operating Partnership or an Asset Entity will have obtained ALTA Extended
Coverage Owner's Policies of Title Insurance from title insurers of recognized
financial responsibility on each of the Initial Hotels in the amounts set forth
in Schedule 7(y), and such title insurance shall be in full force and effect.
-------------
(z) As of the Closing Date and after giving effect to the Formation, the
Company, the Subsidiaries, the Lessee and AGHI will be insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are customary in the businesses in which they are then engaged; and
neither the Company, nor any Subsidiary has any reason to believe that it will
not be able to renew that coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not materially and adversely affect the
condition (financial or other), business, net worth or results of operations of
the Company and the Subsidiaries taken as a whole, the Lessee or AGHI except as
described in or contemplated by the Prospectus.
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<PAGE>
(aa) The Formation Transactions, including the leasing of the Initial
Hotels by the Lessee, and the management of each Initial Hotel by AGHI, have
been approved by each franchisor that is party to a franchise agreement or
license (a "Franchise Agreement") with respect to the Initial Hotels (each, a
"Franchisor"), and the consummation of the Formation Transactions will not
result in a material breach of any Franchise Agreement to which the Initial
Hotels are subject. Upon the consummation of the Formation Transactions, there
will be no franchise agreements and/or licenses used in connection with the
operation of the Initial Hotels except for the Franchise Agreements with the
Franchisors and except as disclosed on Schedule 7(aa). The assignment of the
--------------
Franchise Agreements or the entering into of new Franchise Agreements in
connection with the Formation Transactions has been approved by each Franchisor.
The Initial Hotels are in material compliance with all of the terms of the
Franchise Agreements, and there are no requirements or duties on the part of any
party and no understandings as to any required improvements or other
expenditures in connection with the Initial Hotels in connection with such
consents or the entering into of new Franchise Agreements except as set forth in
the Prospectus. The Company has no reason to believe that it cannot complete
the proposed renovations and repositionings of certain of the Initial Hotels in
the manner and at the cost described in the Prospectus or that the proposed new
franchise licenses for certain of the Initial Hotels will not be granted as
contemplated by the Prospectus.
(ab) To the knowledge of the Company (i) no lessee, licensee or
concessionaire of any portion of any of the Initial Hotels is in default under
any of the leases or licenses governing such properties and there is no event
which, but for the passage of time or the giving of notice, or both, would
constitute a default under any of such leases or license, except such defaults
that would not, upon consummation of the Formation Transactions, singly or in
the aggregate, have a material adverse effect on the condition (financial or
otherwise), business, properties, net worth, results of operations or prospects
of the Company or its Subsidiaries taken as a whole; and (ii) except as set
forth in the Prospectus, all such leases or licenses are assignable without
consent, or approval has been obtained to assign any such lease or license, to
the Company, the Operating Partnership, the Subsidiaries or the Lessee, as
applicable, on the Closing Date. Other than payments set forth in the Purchase
Agreements, none of the Company, any Subsidiaries nor the Lessee will be
required to make any payments to, or on behalf of, any of the Selling Entities
or any other parties other than taxing authorities in connection with the
acquisition of the Initial Hotels.
(ac) Neither the Company nor any of its directors, officers or controlling
persons has taken, directly or indirectly, any action intended, or which might
reasonably be expected, to cause or result, under the Act or otherwise, in, or
which has constituted, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(ad) The Shares are duly authorized for listing, subject to official notice
of issuance, on the New York Stock Exchange.
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<PAGE>
(ae) Neither the Company, any of its Subsidiaries, the Lessee or AGHI is
involved in any material labor dispute nor, to the knowledge of the Company, is
any such dispute threatened. No general labor problems exists or, to the
knowledge of the Company, is imminent with the employees of any of the Initial
Hotels, the Company, any of the Subsidiaries, the Lessee or AGHI. All
applicable notification requirements in connection with the Worker Adjustment
and Retraining Notification Act ("WARN") have been fulfilled in connection with
the transfer of the Initial Hotels to the Operating Partnership.
(af) The Company, the Subsidiaries, the Lessee and AGHI, upon the
consummation of the Formation Transactions, will have sufficient trademarks,
trade names, patent rights, copyrights, licenses, trade secrets, approvals and
governmental authorizations (the "Intangible Rights") necessary to conduct the
business of the Initial Hotels as now conducted and as proposed to be conducted
as described in the Prospectus; the expiration of any Intangible Rights other
than the use of the franchise names pursuant to the Franchise Agreements would
not, singly or in the aggregate, have a material adverse effect on the condition
(financial or otherwise), business, properties, net worth, results of operations
or prospects of such entity; and the Company does not have any knowledge of any
material infringement of any Intangible Right and there is no claim being made
against any of the AGHI Selling Entities, the Company, any of the Subsidiaries,
the Lessee or AGHI or, to the knowledge of the Company, the Unaffiliated Selling
Entities, regarding any Intangible Right which could have a material adverse
effect on the condition (financial or otherwise), business, prospects,
properties, net worth, results of operations or prospects of any of the Company,
any of the Subsidiaries, AGHI, the Lessee or any Initial Hotel.
(ag) The personal property (including, but not limited to, furniture,
equipment, and towels) to be acquired from the Selling Entities in connection
with the Initial Hotels is adequate to enable the Company, the Operating
Partnership, AGHI and the Lessee, as applicable, to continue to conduct the
business of the Initial Hotels in the manner in which such operations have
normally been conducted by the Selling Entities and as proposed to be conducted
as described in the Prospectus. The Company has provided the Representatives
with a replacement schedule for such personal property (receipt of which the
Representatives hereby acknowledge), which the Company reasonably believes is
sufficient to permit the business of the Initial Hotels to continue to be
conducted in the manner in which such business has been conducted by the Selling
Entities, which will comply with the requirements of the Franchise Agreements
and which will permit the Company to qualify as a real estate investment trust
for federal income tax purposes.
(ah) Except as described in the Prospectus, upon completion of the
Formation, the mortgages and deeds of trust encumbering the Initial Hotels will
not be cross-defaulted or cross-collateralized with any other property not owned
directly or indirectly by the Company or the Subsidiaries.
(ai) Each of the Initial Hotels, the Company, the Subsidiaries, the Asset
Entities, the Lessee and AGHI, (i) is and will be, as of the Closing Date and
upon
16
<PAGE>
consummation of the Formation Transactions, in compliance in all material
respects with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) has received, or will have received,
as of the Closing Date and upon consummation of the Formation Transactions, as
the case may be, all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective business and (iii) is,
and will be as of the Closing Date and upon consummation of the Formation
Transactions, in material compliance with all terms and conditions of any such
permit, license or approval.
(aj) (i) Except as may be specifically disclosed in the "Phase I"
environmental assessment reports referred to in the Prospectus (the
"Environmental Reports"), the Company, the Subsidiaries, AGHI, the Lessee and
the AGHI Selling Entities have not at any time, and, to the knowledge of the
Company, no other party has at any time, handled, buried, stored, retained,
refined, transported, processed, manufactured, generated, produced, spilled,
allowed to seep, leak, escape or leach, or be pumped, poured, emitted, emptied,
discharged, injected, dumped, transferred or otherwise disposed of or dealt
with, Hazardous Materials (as hereinafter defined) on, to or from the Initial
Hotels. The Company, the Subsidiaries, the Lessee and AGHI do not intend to use
the Initial Hotels or any subsequently acquired properties for the purpose of
handling, burying, storing, retaining, refining, transporting, processing,
manufacturing, generating, producing, spilling, seeping, leaking, escaping,
leaching, pumping, pouring, emitting, emptying, discharging, injecting, dumping,
transferring or otherwise disposing of or dealing with Hazardous Materials,
except for such Hazardous Materials as may be customarily required in hotel
operations, stored and used in the quantities customary for such uses and in
compliance with applicable Environmental Laws.
(ii) Except as disclosed in the Environmental Reports, to the
knowledge of the Company, there has been no seepage, leak, escape, leach,
discharge, injection, release, emission, spill, pumping, pouring, emptying
or dumping of Hazardous Materials into waters on or adjacent to the Initial
Hotels or onto lands from which such hazardous or toxic waste of substances
might seep, flow or drain into such waters.
(iii) Except as disclosed in the Environmental Reports, neither
the Company, any Subsidiary, the Lessee or AGHI has received notice of any
occurrence or circumstance which, with notice or passage of time or both,
would give rise to, any claim under or pursuant to any Environmental Law
pertaining to hazardous or toxic waste or substances on or originating from
the Initial Hotels or arising out of the conduct of any such party,
including, without limitation, pursuant to any Environmental Law.
(iv) No environmental engineering firm which prepared the
Environmental Reports (or amendments thereto) or physical condition
(engineering) reports with respect to the Initial Hotels was employed for
such purpose on a contingent basis or has any substantial interest in the
Company, the Subsidiaries, any of the Selling Entities, AGHI or the Lessee.
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As used herein, "Hazardous Material" shall include, without
limitation, any flammable explosives, radioactive materials, hazardous
materials, hazardous wastes, hazardous or toxic substances, or related
materials, asbestos or any material as defined by any Federal, state or
local environmental law, ordinance, rule, or regulation including, without
limitation, Environmental Laws, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section
9601, et seq.) ("CERCLA"), the Hazardous Materials Transportation Act, as
-- ---
amended (49 U.S.C. Section 1801, et seq.), the Resource Conservation and
-- ---
Recovery Act, as amended (42 U.S.C. Section 9601, et seq.) and in the
-- ---
regulations adopted and publications promulgated pursuant to each of the
foregoing or by any Federal, state or local governmental authority having
or claiming jurisdiction over the Initial Hotels as described in the
Prospectus.
(ak) To the knowledge of the Company, all physical condition
(engineering) reports obtained for the Initial Hotels in connection with the
Formation Transactions are materially true and correct. The Company will set
aside annually, as a cash reserve account for capital expenditures and
replacement and refurbishment of furniture, fixtures and equipment, an amount
equal to 4.0% of total hotel revenues for each of the Initial Hotels. Other
than as described in the Prospectus, neither the Company, any of the
Subsidiaries, the Lessee, AGHI nor any AGHI Selling Entity is aware of any
material capital expenditures (other than expenditures for maintenance in the
ordinary course of business) which will be required in connection with any of
the Initial Hotels prior to the fifth anniversary of this Agreement.
(al) The assets of the Company and the Subsidiaries do not, and as of
the Closing Date and after giving effect to the Formation will not constitute,
"plan assets" under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
(am) The transfer of interests in certain of the Initial Hotels by the
American General Hospitality, Inc. Employee Retirement Savings Plan to the
Company in exchange for Common Stock under the Formation Agreement relating to
such exchange does not constitute a prohibited transaction within the meaning of
section 406 of ERISA.
(an) The statements set forth in the Prospectus under the caption
"Federal Income Tax Considerations," insofar as they purport to describe the
provisions of the laws and documents referred to therein, are accurate and
complete in all material respects.
(ao) The Company has complied with all provisions of Florida Statutes,
(S) 517.075 relating to issuers doing business with Cuba.
Any certificate signed by any officer of the Company, AGH GP, AGH LP,
the Operating Partnership, any Subsidiary, the Lessee or AGHI on behalf of any
of such entities and delivered to you or to counsel for the Underwriters shall
be deemed a representation and warranty by such entity to each Underwriter as to
the matters covered thereby.
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8. Indemnification and Contribution. (a) The Company, AGH GP, AGH LP and
--------------------------------
the Operating Partnership, jointly and severally, agree to indemnify and hold
harmless each of you and each other Underwriter, the directors, officers,
employees and agents of each Underwriter and each person, if any, who controls
any Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act from and against any and all losses, claims, damages, liabilities
and expenses (including reasonable costs of investigation) arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to such
Underwriter furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use in connection therewith; provided,
however, that the indemnification contained in this paragraph (a) with respect
to any Prepricing Prospectus shall not inure to the benefit of any Underwriter
(or to the benefit of any person controlling such Underwriter) on account of any
such loss, claim, damage, liability or expense arising from the sale of the
Shares by such Underwriter to any person if a copy of the Prospectus shall not
have been delivered or sent to such person within the time required by the Act
and the regulations thereunder, and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained in such
Prepricing Prospectus was corrected in the Prospectus, provided that the Company
has delivered the Prospectus to the several Underwriters in requisite quantity
on a timely basis to permit such delivery or sending within the time required by
the Act. The foregoing indemnity agreement shall be in addition to any
liability which the Company may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, AGH GP, AGH LP or the Operating
Partnership, such Underwriter or such controlling person shall promptly notify
in writing the Company, AGH GP, AGH LP or the Operating Partnership, and the
Company, AGH GP, AGH LP or the Operating Partnership shall assume the defense
thereof, including the employment of counsel and payment of all fees and
expenses. Such Underwriter or any such controlling person shall have the right
to employ separate counsel in any such action, suit or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Underwriter or such controlling person unless
(i) the Company, AGH GP, AGH LP and the Operating Partnership have agreed in
writing to pay such fees and expenses, (ii) the Company, AGH GP, AGH LP and the
Operating Partnership have failed to assume the defense and employ counsel, or
(iii) the named parties to any such action, suit or proceeding (including any
impleaded parties) include both such Underwriter or such controlling person and
the Company, AGH GP, AGH LP or the Operating Partnership and such Underwriter or
such controlling person shall have been advised in writing by its counsel that
representation of such indemnified party and the Company, AGH GP, AGH LP or the
Operating Partnership by the same counsel would be inappropriate under
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applicable standards of professional conduct (whether or not such representation
by the same counsel has been proposed) due to actual or potential differing
interests between them (in which case the Company, AGH GP, AGH LP and the
Operating Partnership shall not have the right to assume the defense of such
action, suit or proceeding on behalf of such Underwriter or such controlling
person). In any event, it is understood, however, that the Company, AGH GP, AGH
LP and the Operating Partnership shall, in connection with any one such action,
suit or proceeding or separate but substantially similar or related actions,
suits or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
only one separate firm of attorneys (in addition to any local counsel) at any
time for all such Underwriters and controlling persons not having actual or
potential differing interests with you or among themselves, which firm shall be
designated in writing by Smith Barney Inc., and that all such fees and expenses
shall be reimbursed as they are incurred. The Company, AGH GP, AGH LP or the
Operating Partnership shall not be liable for any settlement of any such action,
suit or proceeding effected without its written consent, but if settled with
such written consent, or if there be a final judgment for the plaintiff in any
such action, suit or proceeding, the Company, AGH GP, AGH LP and the Operating
Partnership agrees to indemnify and hold harmless any Underwriter, to the extent
provided in the preceding paragraph, and any such controlling person from and
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, the Operating Partnership, AGH GP and AGH LP and
their respective directors and officers who sign the Registration Statement, and
any person who controls the Company, the Operating Partnership, AGH GP or AGH LP
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
to the same extent as the foregoing indemnity from the Company, AGH GP, AGH LP
and the Operating Partnership to each Underwriter, but only with respect to
losses, claims, damages,liabilities and expenses arising out of or based upon
any untrue statement or alleged untrue statement of a material fact set forth in
the information relating to such Underwriter furnished in writing by or on
behalf of such Underwriter through you expressly for use in the Registration
Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement thereto. If any action, suit or proceeding shall be brought against
the Company, AGH GP, AGH LP or the Operating Partnership, or any of their
respective directors, any such officer, or any such controlling person based on
the Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be sought
against any Underwriter pursuant to this paragraph (c), such Underwriter shall
have the rights and duties given to the Company, AGH GP, AGH LP and the
Operating Partnership by paragraph (b) above (except that if the Company, AGH
GP, AGH LP or the Operating Partnership shall have assumed the defense thereof
such Underwriter shall not be required to do so, but may employ separate counsel
therein and participate in the defense thereof, but the fees and expenses of
such counsel shall be at such Underwriter's expense), and the Company, AGH GP,
AGH LP and the Operating Partnership, their respective directors, any such
officer, and any such controlling person shall have the rights and duties given
to the Underwriters by paragraph (b) above. The foregoing indemnity agreement
shall be in addition to any liability which the Underwriters may otherwise have.
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(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, AGH GP, AGH LP and the Operating Partnership on the one hand and the
Underwriters on the other hand from the offering of the Shares, or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company, AGH
GP, AGH LP and the Operating Partnership on the one hand and the Underwriters on
the other in connection with the statements or omissions that resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company, AGH
GP, AGH LP and the Operating Partnership on the one hand and the Underwriters on
the other shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Shares (before deducting expenses) received by the
Company, AGH GP, AGH LP and the Operating Partnership bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The
relative fault of the Company, AGH GP, AGH LP and the Operating Partnership on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, AGH GP, AGH LP and the Operating
Partnership on the one hand or by the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(e) The Company, AGH GP, AGH LP, the Operating Partnership and the
Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 8 were determined by a pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation that does not take account of the equitable considerations
referred to in paragraph (d) above. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities and
expenses referred to in paragraph (d) above shall be deemed to include, subject
to the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating any claim or
defending any such action, suit or proceeding. Notwithstanding the provisions
of this Section 8, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price of the Shares underwritten by it
and distributed to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8 are several in proportion to the respective numbers
of Firm Shares set forth opposite their names in Schedule I hereto (or such
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numbers of Firm Shares increased as set forth in Section 11 hereof)
21
<PAGE>
and not joint. For purposes of this Section 8(e), each person, if any, who
controls a party to this Agreement within the meaning of the Act, shall have the
same rights to contribution as that party, and each officer of the Company who
signed the Registration Statement shall have the same rights to contributions as
the Company.
(f) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company, AGH GP, AGH LP and the Operating
Partnership set forth in this Agreement shall remain operative and in full force
and effect, regardless of (i) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter or the Company, AGH GP,
AGH LP and the Operating Partnership, their respective directors or officers, or
any person controlling the Company, AGH GP, AGH LP or the Operating Partnership
, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Underwriter or any person
controlling any Underwriter, or to the Company, AGH GP, AGH LP and the Operating
Partnership, their respective directors or officers, or any person controlling
the Company, AGH GP, AGH LP and the Operating Partnership, shall be entitled to
the benefits of the indemnity, contribution, and reimbursement agreements
contained in this Section 8.
9. Conditions of Underwriters' Obligations. The several obligations of
---------------------------------------
the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Initial Registration Statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may commence,
the Initial Registration Statement or such post-effective amendment shall have
become effective not later than 5:30 p.m., New York City time, on the date
hereof, or at such later date and time as shall be consented to in writing by
you; and, if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 p.m., New York City
time, on the date of this Agreement; all filings, if any, required by Rules 424
and 430A under the Act shall have been timely made; if required, the Prospectus
or any Term Sheet that constitutes a part thereof and any amendment or
supplement thereto shall have been filed with the Commission in the manner and
within the time period required by Rules 434 and 424(b) under the Act; no stop
order suspending the effectiveness of the Registration Statement shall have been
issued and no proceeding for that purpose shall have been instituted or, to the
knowledge of the Company or
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<PAGE>
any Underwriter, threatened by the Commission, and any request of the Commission
for additional information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effectiveness of this Agreement, there shall not
have occurred (i) any change, or any development involving a prospective change,
in or affecting the condition (financial or other), business, properties, net
worth, or results of operations of the Company and the Subsidiaries taken as a
whole not contemplated by the Prospectus, which in your reasonable opinion, as
Representatives of the several Underwriters, would materially, adversely affect
the market for the Shares, or (ii) any event or development relating to or
involving the Company or any officer or director of the Company, which makes any
statement made in the Prospectus untrue or which, in the reasonable opinion of
the Company and its counsel or the Underwriters and their counsel, requires the
making of any addition to or change in the Prospectus in order to state a
material fact required by the Act or any other law to be stated therein or
necessary in order to make the statements therein not misleading, if amending or
supplementing the Prospectus to reflect such event or development would, in your
reasonable opinion, as Representatives of the several Underwriters, materially
adversely affect the market for the Shares.
(c) You shall have received on the Closing Date, opinions of Battle
Fowler, LLP, counsel for the Company, the Subsidiaries, the Lessee and AGHI,
dated the Closing Date and addressed to you, as Representatives of the several
Underwriters, in the form set forth on Exhibit 9(c) attached hereto.
In rendering their opinion as aforesaid, counsel may rely upon an
opinion or opinions, each dated the Closing Date, of other counsel retained by
them or the Company as to laws of any jurisdiction other than the United States
or the State of New York, provided that (1) each such local counsel is
acceptable to the Representatives, (2) such reliance is expressly authorized by
each opinion so relied upon, and a copy of each such opinion is delivered to the
Representatives and is, in form and substance, satisfactory to them and their
counsel, and (3) counsel shall state in their opinion that they believe that
they and the Underwriters are justified in relying thereon. In addition, in
rendering the foregoing opinion, such counsel may rely, as to matters of fact,
to the extent they deem proper, on certificates of responsible officers of the
Company, the Operating Partnership, the Lessee, AGH GP, AGH LP and AGHI and
certificates or other written statements of officers or departments of various
jurisdictions having custody of documents respecting the existence or good
standing of the Company, the Operating Partnership, the Lessee, AGH GP, AGH LP
and AGHI, provided that copies of all such opinions, statements or certificates
shall be delivered to Underwriters' counsel.
(d) You shall have received on the Closing Date an opinion of Coopers
& Lybrand L.L.P., special tax advisor to the Company, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, satisfactory
in form and substance to counsel for the Underwriters, to the effect that the
discussion contained in the Prospectus under
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<PAGE>
the caption "Federal Income Tax Considerations - Other Tax Considerations"
fairly summarizes the Texas state tax considerations that are material to a
holder of Shares.
(e) You shall have received on the Closing Date an opinion of Hunton &
Williams, counsel for the Underwriters, dated the Closing Date and addressed to
you, as Representatives of the several Underwriters, with respect to the
Registration Statement, the Prospectus and this Agreement and such other related
matters as you may request.
(f) You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and the
Closing Date, from Coopers & Lybrand L.L.P., independent certified public
accountants, substantially in the forms heretofore approved by you and a copy of
the segmentation analysis of such accountants with respect to the bases of the
personal property and real property to be leased by the Operating Partnership to
the Lessee.
(g) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been taken or, to the knowledge of the Company or the Underwriters, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there shall
not have been any change in the capital stock of the Company nor any material
increase in the short-term or long-term debt of the Company (other than in the
ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); (iii) there shall not have been since the respective dates as of which
information is given in the Registration Statement and the Prospectus (or any
amendment or supplement thereto), except as may otherwise be stated in the
Registration Statement and Prospectus (or any amendment or supplement thereto),
any material adverse change in the condition (financial or other), business,
prospects, properties, net worth or results of operations of the AGH Predecessor
Hotels or the AGH Acquisition Hotels or the Company and the Subsidiaries taken
as a whole; (iv) the Company and the Subsidiaries shall not have any
liabilities or obligations, direct or contingent (whether or not in the ordinary
course of business), that are material to the Company and the Subsidiaries,
taken as a whole, other than those reflected or contemplated in the Registration
Statement or the Prospectus (or any amendment or supplement thereto); and (v)
all the representations and warranties of the Company, the Operating
Partnership, AGH LP and AGH GP contained in this Agreement shall be true and
correct on and as of the date hereof and on and as of the Closing Date as if
made on and as of the Closing Date, and you shall have received a certificate,
dated the Closing Date and signed by the chief executive officer and the chief
financial officer of the Company, AGH GP and AGH LP (or such other officers as
are acceptable to you), to the effect set forth in this Section 9(g) and in
Section 9(h).
(h) On or prior to the Closing Date, the Representatives shall have
received the executed "lock-up" agreements referred to in Section 6(n).
(i) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
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(j) All of the Formation Documents shall have been executed and, if
applicable, delivered contemporaneously with or prior to the sale of the Firm
Shares.
(k) Each of the Formation Transactions shall have been consummated
contemporaneously with or prior to the sale of the Firm Shares hereunder.
(l) The Company shall have delivered to the Underwriters satisfactory
evidence of the following with respect to each Initial Hotel:
(i) a copy of an executed and recordable valid deed therefor
(other than those Initial Hotels continuing to be held by an Asset Entity),
naming the Operating Partnership as the grantee thereunder;
(ii) an enforceable assignment and assumption agreement in
respect of all leases and any lease guarantees being transferred to the
Operating Partnership in connection with the Formation;
(iii) an ALTA Extended Coverage Owner's Policy of Title
Insurance (or a commitment to issue such a policy) naming the Operating
Partnership as name insured and insuring (or committing to insure) that the
Operating Partnership or a Subsidiary owns fee title to the real property in an
amount at least equal to the amounts set forth on Schedule 7(y), which policy
(or
-------------
commitment) shall be issued by a title insurance company reasonably acceptable
to the Underwriters (any such person or persons, the "Title Company"), and
contain as exceptions to title only the exceptions described in the Formation
Documents relating to the transfer of such Initial Hotel or all the equity
interests in the entity owning such hotel in connection with the Formation or
which counsel for the Underwriters shall have approved (the "Permitted
Exceptions") and any such endorsements to such policy as the Underwriters may
reasonably require;
(iv) a survey of the Initial Hotel in form satisfactory to the
Underwriters and the Title Company in connection with the issuance of an ALTA
Extended Coverage Owner's Policy of Title Insurance;
(v) policies or certificates of insurance relating to such
Initial Hotel evidencing coverages and in amounts customarily obtained by owners
of similar properties ;
(vi) UCC, judgment and tax lien searches confirming that the
personal property comprising a part of such Initial Hotel is subject to no Liens
other than Permitted Exceptions;
(vii) copies of such affidavits, certificates and instruments
of indemnification as shall reasonably be required to induce the Title Company
to issue the policy (or commitment) contemplated in subparagraph (iii) above;
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<PAGE>
(viii) a schedule or other written evidence of checks payable
to the appropriate public officials in payment of all recording costs and
transfer taxes (or checks or wire transfers to the Title Company in respect of
such amounts) due in respect of any recording of instruments in connection with
the Formation Transactions, together with a check or wire transfer for the Title
Company in payment of the Title Company's premium, search and examination
charges, survey costs and any other amounts due in connection with the issuance
of its policy;
(ix) if such Initial Hotel is to remain subject after the
Formation to an existing indenture, mortgage, deed of trust, loan agreement,
bond debenture, note agreement or other evidence of indebtedness ("Existing
Indebtedness"), an agreement dated not earlier than 30 days prior to the Closing
Date from the holder of such Existing Indebtedness together with any other
necessary party indicating such holder's consent to those Formation Transactions
requiring its consent and effecting any required modifications to the documents
evidencing such Existing Indebtedness;
(x) an engineering (structural) report from an engineer or
engineers and in a form reasonably satisfactory to you;
(xi) all documentation necessary to effect the transfer of
all personal property in connection with such Initial Hotel to the Operating
Partnership, including a bill of sale for the furniture, fixtures and equipment,
together with checks payable to the appropriate public officials in payment of
all recording costs and transfer taxes (including sales taxes) due in respect of
the transfer of such personal property; provided, that such payment may be made
out of the proceeds of the Offering; and
(xii) such other agreements, documents, instruments, reports,
articles or evidences of payments properly executed, where applicable, as may be
required pursuant to the Formation Documents to effect the transfer of such
Initial Hotel in connection with the Formation.
(m) The Shares shall have been listed or approved for
listing, subject to notice of issuance, on the New York Stock Exchange.
(n) The Company, AGH GP, AGH LP, the Operating Partnership,
the Lessee and AGHI shall have furnished to the Representatives such
certificates, in addition to those specifically mentioned herein, as you shall
have reasonably requested.
(o) All actions necessary to permit the Company to make
borrowings under the Line of Credit, as defined and described in the Prospectus,
shall have been taken .
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel in your reasonable discretion.
26
<PAGE>
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the satisfaction on and as of any Option Closing Date
of the conditions set forth in this Section 9, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (b) through (g) shall be dated the Option
Closing Date and the opinions and letter called for by paragraphs (c), (d), (e)
and (f) shall be revised to reflect the sale of Additional Shares.
10. Expenses. The Company agrees to pay the following costs and
--------
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), any Rule 462(b) Registration Statement, each
Prepricing Prospectus, the Prospectus, and each amendment or supplement to any
of them; (ii) the printing (or reproduction) and delivery (including postage,
air freight charges and charges for counting and packaging) of such copies of
the registration statement, each Prepricing Prospectus, the Prospectus, and all
amendments or supplements to any of them as may be reasonably requested for use
in connection with the offering and sale of the Shares; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the Shares,
including any stamp taxes in connection with the original issuance and sale of
the Shares; (iv) the printing (or reproduction) and delivery of this Agreement,
the preliminary and supplemental Blue Sky Memoranda and all other agreements or
documents printed (or reproduced) and delivered in connection with the offering
of the Shares; (v) the registration of the Common Stock under the Exchange Act
and the listing of the Shares on the New York Stock Exchange; (vi) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states as provided in Section 6(g)
hereof (including the reasonable fees, expenses and disbursements of counsel for
the Underwriters relating to the preparation, printing or reproduction, and
delivery of the preliminary and supplemental Blue Sky Memoranda and such
registration and qualification); (vii) the filing fees and the fees and expenses
of counsel for the Underwriters in connection with any filings required to be
made with the National Association of Securities Dealers, Inc.; (viii) the
transportation and other expenses incurred by or on behalf of Company
representatives in connection with presentations to prospective purchasers of
the Shares; (ix) the fees and expenses of the Company's accountants and the fees
and expenses of counsel (including local and special counsel) for the Company.
11. Effective Date of Agreement. This Agreement shall become
---------------------------
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such post-
effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company,
by notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Company.
If any one or more of the Underwriters shall fail or refuse to
purchase Firm Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the
27
<PAGE>
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters are obligated but fail or refuse to purchase is not more than one-
tenth of the aggregate number of Firm Shares which the Underwriters are
obligated to purchase on the Closing Date, each non-defaulting Underwriter shall
be obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule I hereto bears to the aggregate number of
----------
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify in accordance with Section 20 of the
Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Firm
Shares which such defaulting Underwriter or Underwriters are obligated, but fail
or refuse, to purchase, in each case upon the terms set forth in this Agreement.
If any one or more of the Underwriters shall fail or refuse to purchase Firm
Shares which it or they are obligated to purchase on the Closing Date and the
aggregate number of Firm Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Firm Shares which the
Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Firm Shares by one
or more non-defaulting Underwriters or other party or parties approved by you
and the Company are not made within 36 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Underwriter
or the Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any such default of any such Underwriter under this Agreement. The
term "Underwriter" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule I hereto who, with your approval and
----------
the approval of the Company, purchases Shares which a defaulting Underwriter is
obligated, but fails or refuses, to purchase.
Any notice under this Section 11 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed within 24 hours by letter.
12. Termination of Agreement. This Agreement shall be subject to
------------------------
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company, by notice to the Company, if prior to the Closing
Date or any Option Closing Date (if different from the Closing Date and then
only as to the Additional Shares), as the case may be, (i) trading in the Common
Stock shall have been suspended by the Commission or the New York Stock
Exchange, (ii) trading in securities generally on the New York Stock Exchange,
the American Stock Exchange or The Nasdaq Stock Market shall have been suspended
or materially limited, (iii) a general moratorium on commercial banking
activities in New York or Texas shall have been declared by either federal or
state authorities, or (iv) there shall have occurred any outbreak or escalation
of hostilities or other international or domestic calamity, crisis or change in
political, financial or economic conditions, the effect of which on the
financial markets of the United States is such as to make it, in your reasonable
judgment, impracticable or inadvisable to commence or continue the offering of
the Shares at the offering price to the public set forth on the cover page of
the Prospectus or to enforce contracts for the resale of the Shares by the
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Underwriters. Notice of such termination may be given to the Company by
telegram, telecopy or telephone and shall be subsequently confirmed by letter.
13. Information Furnished by the Underwriters. The Company and the
-----------------------------------------
Operating Partnership acknowledge that the statements set forth in the last
paragraph on the cover page, the names of the Underwriters appearing on the
cover page and the back cover page of the Prospectus, the legend with respect to
stabilization and overallotments on the inside cover page, the list of
Underwriters and their respective allotments appearing under the caption
"Underwriting" in the Prospectus and the statements in the first and third
paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in
the Prospectus, constitute the only information furnished by or on behalf of the
Underwriters through you as such information is referred to in Section 8 hereof.
14. Miscellaneous. Except as otherwise provided in Sections 6, 11 and 12
-------------
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, AGH GP, AGH LP or the
Operating Partnership, at the office of the Company at 3860 West Northwest
Highway, Suite 300, Dallas, Texas 75220, Attention: Steven D. Jorns, Chairman,
Chief Executive Officer and President; or (ii) if to you, as Representatives of
the several Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New
York, New York 10013, Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, the Operating Partnership, AGH GP and AGH LP and
their respective directors and officers, and the other controlling persons
referred to in Section 8 hereof and their respective successors and assigns, to
the extent provided herein, and no other person shall acquire or have any right
under or by virtue of this Agreement. Neither the term "successor" nor the term
"successors and assigns" as used in this Agreement shall include a purchaser
from any Underwriter of any of the Shares in his status as such purchaser.
15. Applicable Law; Counterparts. This Agreement shall be governed by and
----------------------------
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
29
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company, AGH GP, AGH LP and the Operating Partnership and the
several Underwriters.
Very truly yours,
AMERICAN GENERAL HOSPITALITY CORPORATION
By
_____________________________________
Steven D. Jorns
Chairman of the Board,
Chief Executive Officer and President
AMERICAN GENERAL HOSPITALITY
OPERATING PARTNERSHIP, L.P.
By AGH GP, INC.,
as general partner
By __________________________________
Name:
Title:
AGH GP, INC.
By ____________________________________________
Name:
Title:
AGH LP, INC.
By ____________________________________________
Name:
Title:
30
<PAGE>
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I
----------
hereto.
SMITH BARNEY INC.
PRUDENTIAL SECURITIES INCORPORATED
LEGG MASON WOOD WALKER, INCORPORATED
THE ROBINSON-HUMPHREY COMPANY, INC.
As Representatives of the Several Underwriters
By SMITH BARNEY INC.
By _________________________________________________________
Managing Director
31
<PAGE>
SCHEDULE I
NAME OF COMPANY
Number of Number of
Underwriter Firm Shares Underwriter Firm Shares
- ----------- ----------- ----------- -----------
Smith Barney Inc.
Prudential Securities Incorporated
Legg Mason Wood Walker, Incorporated
The Robinson-Humphrey Company, Inc.
_________
Total.......................
=========
32
<PAGE>
SCHEDULE 2(a)
FORMATION DOCUMENTS
33
<PAGE>
SCHEDULE 2(b)
SUBSIDIARIES
34
<PAGE>
SCHEDULE 6(p)
PRIMARY CONTRIBUTORS
35
<PAGE>
SCHEDULE 7(y)
TITLE INSURANCE AMOUNTS
36
<PAGE>
SCHEDULE 7(a)(a)
OTHER FRANCHISE LICENSES
37
<PAGE>
Exhibit 9(c)
------------
FORM OF BATTLE FOWLER LLP OPINION
[Schedules I and II, and Exhibits A, B, C, D, E & F, of this Exhibit 9(c) to
Exhibit 1.1 of the Registration Statement set forth herein have not been
included as exhibits to the Registration Statement. The Registrant agrees to
furnish supplementally a copy of any such omitted schedule on exhibit upon
request.]
July ___, 1996
Smith Barney Inc.
Prudential Securities Incorporated
Legg Mason Wood Walker, Incorporated
The Robinson-Humphrey Company, Inc.
c/o Smith Barney Inc.
333 West 34th Street
New York, New York 10001
Re: American General Hospitality Corporation Initial
Public Offering of 7,000,000 shares
of Common Stock, $0.01 par value per share,
pursuant to Registration Statement on Form S-11
(Registration No. 333-4568)
------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to American General Hospitality Corporation, a
Maryland corporation (the "Company"), and American Hospitality Operating
Partnership, L.P., a Delaware limited partnership (the "Operating Partnership"),
in connection with the sale by the Company today of an aggregate of 7,000,000
shares (the "Shares") of common stock, par value $0.01 per share (the "Common
Stock"), of the Company pursuant to that certain Underwriting Agreement, dated
July __, 1996 (the "Underwriting Agreement"), between the Company and Smith
Barney Inc., Prudential Securities Incorporated, Legg Mason Wood Walker,
Incorporated, and The Robinson-Humphrey Company, Inc., as the Representatives
(the "Representatives") of the several Underwriters (together with the
Representatives, the "Underwriters") listed in Schedule I to the Underwriting
Agreement. Substantially contemporaneously with the closing of the offering and
sale of the Shares, the Company and the Operating Partnership will consummate a
series of transactions collectively described in the Prospectus (as defined
below) as the "Formation Transactions." Such transactions are referred to
herein as the "Formation."
<PAGE>
2
This opinion is being furnished pursuant to Section 9(c) of the
Underwriting Agreement. Capitalized terms used herein and not defined herein
shall have the meanings ascribed to such terms in the Underwriting Agreement.
In connection with this opinion, we have examined the following materials:
(a) the Registration Statement of the Company on Form S-11 (File No. 333-
4568) relating to the Shares and Amendments Nos. 1, 2, 3 and 4 thereto (said
registration statement in the Form in which it became effective being
hereinafter called the "Registration Statement") filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), and the General Rules and Regulations promulgated
thereunder (the "Rules and Regulations");
(b) the final prospectus relating to the offer and sale of the Shares,
dated July __, 1996 (the "Effective Date"), filed with the Commission pursuant
to Rule 424(b) of the Rules and Regulations (the "Prospectus");
(c) memorandum to the file regarding telephonic confirmation from the
staff of the Securities and Exchange Commission (the "Commission") of the
effectiveness of the Registration Statement;
(d) the Amended and Restated Articles of Incorporation of the Company (the
"Charter"), as certified by the State Department of Assessments and Taxation of
the State of Maryland on July __, 1996 as being a true and complete copy of such
document as filed in the office of the State Department of Assessments and
Taxation (the "SDAT");
(e) the Articles of Incorporation of AGH GP, Inc., a Nevada corporation
("AGH GP"), and AGH LP, Inc., a Nevada corporation ("AGH LP" together with AGH
GP the "Corporate Subsidiaries"), as certified by the Secretary of State of the
State of Nevada on July __, 1996 as being a true and complete copy of such
documents as filed in such office;
(f) the Certificate of Limited Partnership, as amended (the "Partnership
Certificate"), of the Operating Partnership, as certified by the Secretary of
State of the State of Delaware on July __, 1996 as being as a true and correct
copy of such document as filed in the office of the Secretary of State;
(g) (i) the Limited Partnership Formation Agreement of the partnership,
dated April 9, 1996 and (ii) the Amended and
<PAGE>
3
Restated Agreement of Limited Partnership (the "Operating Partnership
Agreement") of the Operating Partnership, dated as of July __, 1996, each as
certified by the Secretary of AGH GP, as general partner of the Operating
Partnership, on the date hereof as being complete, correct and in effect;
(h) the partnership agreements, as amended, of each partnership other than
the Operating Partnership (collectively, the "Partnership Subsidiaries") that
are identified as a Property Partnership in Schedule I hereto, in each case, as
certified by a general partner of such partnership as of the date hereof as
being complete, correct and in effect;
(i) the operating agreements, as amended, and the Certificate of
Formation, as amended, of each of the limited liability companies identified on
Schedule I hereto (the "LLC Subsidiaries" and together with the Corporate
Subsidiaries and the Partnership Subsidiaries the "Subsidiaries") as certified
by an official of the office of the jurisdictions of formation in which such
certificate of formation is filed on the date indicated on such certificate as
being a true and complete copy of such document as filed in such office;
(j) the Certificate of Incorporation of AGHL GP, Inc., a Delaware
corporation ("AGHL GP"), as certified by the Secretary of State of the State of
Delaware on July __, 1996 as being a true and correct copy of such document as
filed in the office of the Secretary of State;
(k) the Certificate of Limited Partnership of AGHL Leasing, L.P., a
Delaware limited partnership (the "Lessee"), as certified by the Secretary of
State of the State of Delaware on July __, 1996 as being a true and correct copy
of such document as filed in the office of the Secretary of State;
(l) the Bylaws of the Company, each Corporate Subsidiary and AGHL GP, as
certified by the Secretary of the Company or such Corporate Subsidiary or AGHL
GP, as the case may be, as of the date hereof as being complete, correct and in
effect;
(m) certificates of good standing issued by the States of Maryland,
Delaware, Nevada, Texas, Ohio and Wisconsin, as indicated on Schedule I hereto;
(n) with respect to the Company, the Operating Partnerships and the
Subsidiaries, the foreign qualification certificates issued by the States of
California, Louisiana, Ohio, Maryland, Wisconsin, New Jersey, Virginia, New
Mexico and Texas, each as indicated on Schedule I hereto;
<PAGE>
4
(o) with respect to the Lessee and AGHL GP, foreign qualification
certificates issued by the states of California, Maryland, New Mexico,
Louisiana, Ohio, Wisconsin, Virginia, New Jersey and Texas, each as indicated on
Schedule I hereto;
(p) resolutions of the Board of Directors of the Company adopted by
unanimous written consent, dated April 12, 1996, April 24, 1996, July 11, 1996,
and July --, 1996, relating, inter alia, to authorization of the Underwriting
Agreement, the Registration Statement, the issuance and sale of the Shares and
arrangements in connection therewith and the adoption of the Charter and Bylaws
of the Company, each as certified by the Secretary of the Company as of the date
hereof as being complete, correct and in effect;
(q) consents of the sole stockholder of the Company dated July --, 1996
relating inter alia, to the adoption of the Charter, and the election of
directors of the Company, as certified by the Secretary of the Company as of the
date hereof as being complete, accurate and in effect;
(r) resolutions of the Board of Directors of each Corporate Subsidiary
adopted by unanimous written consent and dated April 9, 1996, April 10, 1996,
July 11, 1996 and July ___, 1996, relating to, inter alia, certain
organizational matters, approval by AGH GP, individually and as the general
partner of the Operating Partnership, of the Underwriting Agreement and the
Operative Documents to which AGH GP or the Operating Partnership is a party, as
certified by the Secretary of such Corporate Subsidiary as of the date hereof as
being true and complete and in effect;
(s) resolutions of the members of AGH SECAUCUS LLC, dated ____________,
1996, and July 11, 1996, each as certified by the members of AGH SECAUCUS LLC as
of the date hereof as being complete, correct and in effect;
(t) resolutions of the members of AGH UPREIT LLC, dated ________, 1996, and
July 11, 1996, each as certified by the members of AGH UPREIT LLC as of the date
hereof as being complete, correct and in effect;
(u) resolutions of the members of AGH DFW South, LLC, dated _________,
1996, and July 11, 1996, each as certified by the members of AGH DFW South, LLC
as of the date hereof as being complete, correct and in effect;
(v) resolutions of the Board of Directors of AGHL GP adopted by unanimous
written consent, dated May ___, 1996, and July 11, 1996, each as certified by
the
<PAGE>
5
Secretary of AGHL GP as of the date hereof as being complete, correct and in
effect;
(w) the minute books, stock books and stock transfer ledgers of the
Company and each Corporate Subsidiary and AGHL GP as made available for
inspection by the Company;
(x) a specimen stock certificate representing shares of the Common Stock;
(y) a certificate of the Secretary of the Company and of each Corporate
Subsidiary and AGHL GP, dated as of the date hereof, as to the incumbency and
signatures of certain officers of the Company or such Corporate Subsidiary;
(z) the other documents listed as exhibits to the Registration Statement;
(aa) an executed Underwriting Agreement;
(ab) an executed copy of each of the agreements listed on Schedule II
hereto (the "Operative Documents"); and
(ac) the other instruments and documents delivered at today's closing,
including certificates or telegrams of public officials as to matters set forth
therein and certificates of representatives of the Company as to matters set
forth therein.
In rendering this opinion, we have assumed the capacity to sign and the
genuineness of all signatures of all persons executing agreements, instruments
or documents examined or relied upon by us, the authenticity of all agreements,
instruments or documents submitted to us as originals and the conformity with
the original agreements, instruments or documents of all agreements, instruments
or documents submitted to us as copies.
We have also assumed (a) as to all parties other than the Company, the
Operating Partnership, the Subsidiaries, the Lessee and AGHL GP, the due
authorization, execution, acknowledgement as indicated thereon and delivery of
documents referred to herein, and the validity, binding effect and
enforceability thereof against all parties thereto other than the Company, the
Operating Partnership, the Subsidiaries, the Lessee, AGHI and AGHL GP, (b) that
the Company will apply the net proceeds of the sale of the Shares in the manner
described in the Prospectus, and (c) that each of the Underwriters has full
power, authority and legal right, under its charter and other governing
documents and all applicable laws to execute, deliver and perform their
respective obligations under the Underwriting Agreement and the other documents
referred to herein to
<PAGE>
6
which it is a party. We have further assumed that the consideration required to
be paid for the issuance of the Shares and the outstanding shares of stock of
the Company pursuant to the resolutions of the Board of Directors of the Company
authorizing the issuance of those securities has in fact been paid to and
received by the Company.
With respect to matters of fact, we have relied upon the written statements
and certificates of officers of the Company, AGH GP (on behalf of the Operating
Partnership), AGHL GP (on behalf of the Lessee), and authorized representatives
of the LLC Subsidiaries and the general partners of the Partnership Subsidiaries
(including, without limitation, the certificate attached hereto as Exhibit A,
---------
referred to herein as the "Officers Certificate"), representations made by the
Company, the Operating Partnership and the Corporate Subsidiaries in the
Underwriting Agreement, and certificates of public officials. Where matters are
stated to be "to the best of our knowledge" or "known to us," our knowledge is
limited to the actual knowledge of those attorneys in our office who have
directly participated in this engagement, their review of documents provided to
us by the Company, the Operating Partnership and the Subsidiaries in connection
with this engagement and inquiries of officers of the Company, the Operating
Partnership and the Corporate Subsidiaries, the results of which are reflected
in the Officers Certificate. We have not independently verified the accuracy of
the matters set forth in the written statements or certificates upon which we
have relied, including the organization, existence, good standing, assets,
business or affairs of the Company, the Operating Partnership, or any
Subsidiary, nor have we undertaken any lien, intellectual property, suit or
judgment searches or searches of court dockets in any jurisdiction.
Insofar as our opinion relates to matters of Maryland law in paragraphs
1, 3, 5, 6, 8, 11 and 14 below, we have relied exclusively upon the opinion of
Ballard Spahr Andrews & Ingersoll addressed to us, dated the date hereof, a copy
of which is attached hereto as Exhibit B.
---------
Insofar as our opinion relates to matters of Ohio, Wisconsin, Texas or
Nevada law, in paragraphs 2, 4, 6, 8 and 11, we have relied exclusively upon the
opinion of McDonald, Hopkins, Buske & Harber Co., Foley & Lardner, Calhoun &
Stacy P.L.L.C. and McDonald Carano Wilson McCune Bergin Frankovich & Hicks LLP,
respectively. A copy of each such opinion is attached hereto as Exhibit C,
---------
Exhibit D, Exhibit E and Exhibit F.
- --------- --------- ---------
Statements in this opinion as to the legality, validity, binding effect or
enforceability of agreements, instruments and
<PAGE>
7
documents are subject (i) to limitations as to enforceability imposed by
bankruptcy, reorganization, moratorium, fraudulent conveyance, insolvency and
other similar laws and related court decisions of general application relating
to or affecting creditors' rights generally, (ii) to equitable principles
limiting the availability of equitable remedies, and (iii) as to rights to
indemnity, to limitations that may exist under federal and state laws or the
public policy underlying such laws.
Except for the opinions set forth in paragraphs (1) through (14) below, we
express no opinions and no opinions should be implied.
We are not admitted to practice law in any jurisdiction other than the
State of New York and we do not express any opinion as to the laws of any states
or jurisdictions except as to New York law, the Delaware General Corporation
Law, the Delaware Revised Uniform Limited Partnership Act, the Delaware Limited
Liability Company Act and the Federal law of the United States of America.
Upon the basis of and subject to the foregoing and solely in reliance
thereon, we are of the opinion that:
1. All the outstanding shares of Common Stock of the Company have been
duly authorized and validly issued, are fully paid and nonassessable and are
free of any preemptive or similar rights under the Maryland General Corporation
Law. The Shares have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor in accordance with the terms of the
Underwriting Agreement, will be validly issued, fully paid and nonassessable and
free of any preemptive or similar statutory rights. The stock of the Company
conforms in all material respects to the description thereof in the Registration
Statement and the Prospectus.
2. Each of the Operating Partnership, the Subsidiaries, the Lessee and
AGHI is a corporation, limited partnership, general partnership or limited
liability company duly incorporated or formed, as the case may be, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or formation with full corporate, partnership or limited liability
company power and authority to own, lease and operate its properties or
properties to be acquired in the Formation and to conduct its business as
described in the Registration Statement and the Prospectus, and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business as described in the Registration Statement and the Prospectus requires
such registration or qualification; except where the failure to so qualify would
not
<PAGE>
8
have a material adverse effect on the condition, financial or otherwise, or
results of operations of the Company, Operating Partnership, the Lessee, AGHI
and the Subsidiaries, respectively.
3. The Company is a corporation duly incorporated and validly existing
under and by virtue of the laws of the State of Maryland and is in good standing
with the SDAT with full corporate power to own, lease and operate its properties
or properties to be acquired in the Formation and to conduct its business as
described in the Registration Statement and the Prospectus, and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business as described in the Registration Statement and the Prospectus requires
such registration or qualification; except where the failure to so qualify would
not have a material adverse effect on the condition, financial or otherwise, or
results of operations of the Company.
4. All of the outstanding (i) limited partnership interests of the
Operating Partnership and the Lessee and the Partnership Subisidiaries, which
are limited partnerships, (ii) general partnership interests of the Partnership
Subsidiaries, which are general partnerships, or (iii) membership interests in
each of the LLC Subsidiaries were created under the agreements forming the
Operating Partnership, the Lessee, the LLC Subsidiaries and Partnership
Subsidiaries, as the case may be. All of the issued and outstanding shares of
capital stock of the Corporate Subsidiaries have been duly authorized and
validly issued.
5. The form of certificate representing the Shares complies in all
material respects to the requirements of the Maryland General Corporation Law.
6. With respect to the Company, the Operating Partnership, the
Subsidiaries, the Lessee and AGHI, neither the issuance and sale of the Shares,
the execution, delivery or performance of the Underwriting Agreement and the
Operative Documents nor the consummation of the transactions contemplated
thereby by the Company, or the Subsidiaries, the Lessee or AGHI, as applicable,
(i) requires any consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body, agency or official (except such as has been obtained
for the registration of the Shares under the Act and the Securities and Exchange
Act of 1934, as amended, and state securities or Blue Sky laws of various
jurisdictions and clearance by the National Association of Securities Dealers
("NASD") in connection with the purchase and sale of the Shares by the several
underwriters (as to which we express no opinion)) or conflicts or will conflict
with or constitutes or will constitute a breach of, or a default under the
Charter or the certificate or articles of incorporation, or bylaws,
<PAGE>
9
partnership agreement or other organizational documents, of any of such entities
or (ii) conflicts or will conflict with or constitutes or will constitute a
breach of, or a default under, any agreement, indenture, lease or other
instrument known to us to which any of such entities is a party or by which any
of them or any of their respective properties may be bound, which in each case
has been filed as an exhibit to the Registration Statement, or violates or will
violate any statute, law, regulation or filing or judgment, injunction, order or
decree applicable to any of such entities, any of their respective properties,
or will result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of any of such entities pursuant to the terms of any
agreement or instrument known to us, which in each case has been filed as an
exhibit to the Registration Statement, to which any of them is a party or by
which any of them may be bound or to which any of the property or assets of any
of them is subject, except that no opinion is given with respect to the
indemnification and contribution provisions of the Underwriting Agreement or the
requirements of state securities or Blue Sky laws.
7. The offers and sales of limited partnership interests of the Operating
Parnership by the Operating Partnership, and the offers and sales by the Company
of shares of Common Stock prior to the Effective Date as described in the
Registration Statement and the Prospectus, were exempt from the registration
requirements of the Act and, to the extent applicable, New York Blue Sky laws.
8. The execution and delivery of, and the performance by the Company, the
Corporate Subsidiaries and the Operating Partnership of their respective
obligations under, the Underwriting Agreement have been duly and validly
authorized by the Company, the Corporate Subsidiaries and the Operating
Partnership, and the Underwriting Agreement has been duly executed and delivered
by the Company, the Corporate Subsidiaries and the Operating Partnership.
9. Except as described in the Registration Statement and the Prospectus
and to the best of our knowledge, there are no contracts, agreements or
understandings between the Company and any person granting such person or entity
the right to require the registration of any shares of Common Stock or any other
securities of the Company because of the filing of the Registration Statement or
sale of the Shares as contemplated by the Underwriting Agreement.
10. Neither the Company, the Operating Partnership nor any of the
Subsidiaries is required to be registered under the Investment Company Act of
1940, as amended.
<PAGE>
10
11. Each Operative Document has been duly authorized and executed by the
Company, the Operating Partnership, the Subsidiaries and the Lessee, to which it
is a party.
12. To the best of our knowledge, there are no legal actions, suits or
court proceedings pending or threatened against the Company, or any of the
Subsidiaries or the Lessee, or any of their respective partners, directors or
officers in their capacity as such, or to which any of the Initial Hotels (as
defined in the Prospectus) is subject, that are of a character which are
required to be described in the Registration Statement or the Prospectus but are
not described as required. To the best of our knowledge, there are no
agreements, contracts, indentures, leases or other instruments that are required
to be described in the Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement that are not described or filed as
required by the Act.
13. At the Effective Date, the Registration Statement and the Prospectus
and any supplements or amendments thereto (except for the financial statements
and the notes thereto and the schedules and other financial, accounting and
statistical data included therein or excluded therefrom or the exhibits to the
Registration Statement, as to which we do not express any opinion) comply as to
form in all material respects with the requirements of the Act, except that we
express no opinion as to the exhibits to the Registration Statement, or to the
accuracy, completeness or fairness of the statements contained in the
Registration Statement, except to the extent set forth in paragraph 14 hereof
and the third paragraph immediately following paragraph 14.
14. The description of agreements that are summarized under the captions
"The Initial Hotels -- The Participating Leases," "The Initial Hotels -- The
Management Agreements" and "Partnership Agreement," contained in the
Registration Statement and the Prospectus conform in all material respects to
the provisions of such agreements and each such description, respectively,
fairly presents the information contained therein. The statements under the
captions "Description of Capital Stock," "Certain Provisions of Maryland Law and
the Company's Charter and Bylaws," "Shares Available For Future Sale" and
"Federal Income Tax Considerations" (other than statements regarding Texas tax
considerations under the subcaption" -- Other Tax Considerations") to the extent
they constitute matters of law, descriptions of statutes, rules or regulations,
or legal conclusions, each, respectively, fairly presents in all material
respects the information disclosed therein.
<PAGE>
11
We have been advised by the New York Stock Exchange, Inc. that the Shares
are duly authorized for listing, subject to official notice of issuance.
We have been advised by the staff of the Commission that the Registration
Statement and all post-effective amendments, if any, have become effective under
the Act as of July __, 1996 and, to the best of our knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose are pending before or contemplated by the
Commission, and any required filing of the Prospectus.
In addition, we have participated in certain conferences with officers and
other representatives of the Company, the Operating Partnership, the
Subsidiaries, the Lessee, representatives of the Company's independent
accountants and with you and your representatives and counsel in connection with
the preparation of the Registration Statement at which the contents of the
Registration Statement, and the Prospectus therein and related matters were
discussed and, although we have not verified independently and, therefore, do
not assume any responsibility, explicitly or implicitly, for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus, on the basis of the foregoing, nothing has come to
our attention during the course of the above-described process that has caused
us to believe that the Registration Statement at the time the Registration
Statement became effective, or the Prospectus, as of its date, and contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (other than information omitted therefrom in reliance on Rule 430A
under the Act), except that we express no opinion, view or belief with respect
to the financial statements and the notes thereto and the schedules and the
other financial, accounting or statistical data included in or excluded from the
Registration Statement or the Prospectus or the exhibits to the Registration
Statements.
This opinion is being rendered to you for your sole use and may not be made
available to or relied upon by any other person, firm or entity without our
express prior written consent.
Very truly yours,
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
----------------------------------------
BYLAWS
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Corporation
----------------
shall be located at such place or places as the Board of Directors may
designate. The initial principal office of the Corporation shall be 3860 West
Northwest Highway, Suite 300, Dallas, Texas 75220.
Section 2. ADDITIONAL OFFICES. The Corporation may have additional
------------------
offices at such places as the Board of Directors may from time to time determine
or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE. All meetings of stockholders shall be held at the
-----
principal office of the Corporation or at such other place within the United
States as shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the stockholders for the
--------------
election of directors and the transaction of any business within the powers of
the Corporation shall be held on a date and at the time set by the Board of
Directors during the month of May in each year; provided, however, that the
first annual meeting of stockholders to be held in 1996 shall be held during the
month of July.
Section 3. SPECIAL MEETINGS. The president, chief executive officer or
----------------
Board of Directors may call special meetings of the stockholders. Special
meetings of stockholders shall also be called by the secretary of the
Corporation upon the written request of the holders of shares entitled to cast
not less than a majority of all the votes entitled to be cast at such meeting.
Such request shall state the purpose of such meeting and the matters proposed to
be acted on at such meeting. The secretary shall inform such stockholders of
the reasonably estimated cost of preparing and mailing notice of the meeting
and, upon payment to the Corporation
<PAGE>
by such stockholders of such costs, the secretary shall give notice to each
stockholder entitled to notice of the meeting.
Section 4. NOTICE. Not less than ten nor more than 90 days before each
------
meeting of stockholders, the secretary shall give to each stockholder entitled
to vote at such meeting and to each stockholder not entitled to vote who is
entitled to notice of the meeting written or printed notice stating the time and
place of the meeting and, in the case of a special meeting or as otherwise may
be required by any statute, the purpose for which the meeting is called, either
by mail or by presenting it to such stockholder personally or by leaving it at
his residence or usual place of business. If mailed, such notice shall be
deemed to be given when deposited in the United States mail addressed to the
stockholder at his post office address as it appears on the records of the
Corporation, with postage thereon prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Corporation may be
---------------
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except as otherwise set forth in Section 12(a) and
except for such business as is required by any statute to be stated in such
notice. No business shall be transacted at a special meeting of stockholders
except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of stockholders, the chairman
------------
of the board, if there be one, shall conduct the meeting or, in the case of
vacancy in office or absence of the chairman of the board, one of the following
officers present shall conduct the meeting in the order stated: the vice
chairman of the board, if there be one, the president, the vice presidents in
their order of rank and seniority, or a chairman chosen by the stockholders
entitled to cast a majority of the votes which all stockholders present in
person or by proxy are entitled to cast, shall act as chairman, and the
secretary, or, in his absence, an assistant secretary, or in the absence of both
the secretary and assistant secretaries, a person appointed by the chairman
shall act as secretary.
Section 7. QUORUM. At any meeting of stockholders, the presence in person
------
or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the charter of the
Corporation for the vote necessary for the adoption of any measure. If,
however, such quorum shall not be present at any meeting of the stockholders,
the stockholders entitled to vote at such meeting, present in person or by
proxy, shall have the power to adjourn the meeting from time to time to a date
not more than 120 days after the original record date without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present, any business
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may be transacted which might have been transacted at the meeting as originally
notified.
Section 8. VOTING. A plurality of all the votes cast at a meeting of
------
stockholders duly called and at which a quorum is present shall be sufficient to
elect a director. Each share may be voted for as many individuals as there are
directors to be elected and for whose election the share is entitled to be
voted. A majority of the votes cast at a meeting of stockholders duly called
and at which a quorum is present shall be sufficient to approve any other matter
which may properly come before the meeting, unless more than a majority of the
votes cast is required by statute or by the charter of the Corporation. Unless
otherwise provided in the charter, each outstanding share, regardless of class,
shall be entitled to one vote on each matter submitted to a vote at a meeting of
stockholders.
Section 9. PROXIES. A stockholder may vote the stock owned of record by
-------
him, either in person or by proxy executed in writing by the stockholder or by
his duly authorized attorney in fact. Such proxy shall be filed with the
secretary of the Corporation before or at the time of the meeting. No proxy
shall be valid after eleven months from the date of its execution, unless
otherwise provided in the proxy.
Section 10. (a) VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the
----------------------------------
Corporation registered in the name of a corporation, partnership, trust or other
entity, if entitled to be voted, may be voted by an office thereof, a general
partner or trustee thereof, as the case may be, or a proxy appointed by any of
the foregoing individuals, unless some other person who has been appointed to
vote such stock pursuant to a bylaw or a resolution of the governing body of
such corporation or other entity or agreement of the partners of a partnership
presents a certified copy of such bylaw, resolution or agreement, in which case
such person may vote such stock. Any director or other fiduciary may vote stock
registered in his name as such fiduciary, either in person or by proxy.
Shares of stock of the Corporation directly or indirectly owned by it shall
not be voted at any meeting and shall not be counted in determining the total
number of outstanding shares entitled to be voted at any given time, unless they
are held by it in a fiduciary capacity, in which case they may be voted and
shall be counted in determining the total number of outstanding shares at any
given time.
The Board of Directors may adopt by resolution a procedure by which a
stockholder may certify in writing to the Corporation that any shares of stock
registered in the name of the stockholder are held for the account of a
specified person other than the stockholder. The resolution shall set forth the
class of stockholders who may make the certification, the purpose for which
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the certification may be made, the form of certification and the information to
be contained in it; if the certification is with respect to a record date or
closing of the stock transfer books, the time after the record date or closing
of the stock transfer books within which the certification must be received by
the Corporation; and any other provisions with respect to the procedure which
the Board of Directors considers necessary or desirable. On receipt of such
certification, the person specified in the certification shall be regarded as,
for the purposes set forth in the certification, the stockholder of record of
the specified stock in place of the stockholder who makes the certification.
(b) Exemption From Control Share Acquisition Statute. Notwithstanding any
------------------------------------------------
other provision of the charter of the Corporation or these Bylaws, Title 3,
Subtitle 7 of the Corporations and Associations Article of the Annotated Code of
Maryland (or any successor statute) shall not apply to any acquisition by any
person of shares of stock of the Corporation. This section may be repealed, in
whole or in part, at any time, whether before or after an acquisition of control
shares and, upon such repeal, may, to the extent provided by any successor
bylaw, apply to any prior or subsequent control share acquisition.
Section 11. INSPECTORS. At any meeting of stockholders, the chairman of
----------
the meeting may appoint one or more persons as inspectors for such meeting.
Such inspectors shall ascertain and report the number of shares represented at
the meeting based upon their determination of the validity and effect of
proxies, count all votes, report the results and perform such other acts as are
proper to conduct the election and voting with impartiality and fairness to all
the stockholders.
Each report of an inspector shall be in writing and signed by him or by a
majority of them if there is more than one inspector acting at such meeting. If
there is more than one inspector, the report of a majority shall be the report
of the inspectors. The report of the inspector or inspectors on the number of
shares represented at the meeting and the results of the voting shall be prima
-----
facie evidence thereof.
- -----
Section 12. NOMINATIONS AND STOCKHOLDER BUSINESS
------------------------------------
(a) Annual Meetings of Stockholders. (1) Nominations of persons for
-------------------------------
election to the Board of Directors and the proposal of business to be considered
by the stockholders may be made at an annual meeting of stockholders (i)
pursuant to the Corporation's notice of meeting, (ii) by or at the direction of
the Board of Directors or (iii) by any stockholder of the Corporation who was a
stockholder of record both at the time of giving of notice provided for in this
Section 12(a) and at the time of the annual meeting of stockholders, who is
entitled to vote at the meeting and who complied with the notice procedures set
forth in this Section 12(a).
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(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of
this Section 12, the stockholder must have given timely notice thereof in
writing to the secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to the secretary at the principal executive offices of
the Corporation not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than 30 days
or delayed by more than 60 days from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the tenth day following
the day on which public announcement of the date of such meeting is first made.
Such stockholder's notice shall set forth (i) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); (ii) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and of the beneficial
owner, if any, on whose behalf the proposal is made; and (iii) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made, (x) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (y) the number of shares of each class of stock of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (a)(2) of
this Section 12 to the contrary, in the event that the number of directors to be
elected to the Board of Directors is increased and there is no public
announcement naming all of the nominees for director or specifying the size of
the increased Board of Directors made by the Corporation at least 70 days prior
to the first anniversary of the preceding year's annual meeting, a stockholder's
notice required by this Section 12(a) shall also be considered timely, but only
with respect to nominees for any new positions created by such increase, if it
shall be delivered to the secretary at the principal executive offices of the
Corporation not later than the close of business on the tenth day following the
day on which such public announcement is first made by the Corporation.
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(b) Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) provided that the Board of Directors has determined that
directors shall be elected at such special meeting, by any stockholder of the
Corporation who is a stockholder of record both at the time of giving of notice
provided for in this Section 12(b) and at the time of the special meeting, who
is entitled to vote at the meeting and who complied with the notice procedures
set forth in this Section 12(b). In the event the Corporation calls a special
meeting of stockholders for the purpose of electing one or more directors to the
Board of Directors, any such stockholder may nominate a person or persons (as
the case may be) for election to such position as specified in the Corporation's
notice of meeting, if the stockholder's notice containing the information
required by paragraph (a)(2) of this Section 12 shall be delivered to the
secretary at the principal executive offices of the Corporation not earlier than
the 90th day prior to such special meeting and not later than the close of
business on the later of the 60th day prior to such special meeting or the tenth
day following the day on which public announcement is first made of the date of
the special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
(c) General. (1) Only such persons who are nominated in accordance with
-------
the procedures set forth in this Section 12 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 12. The presiding officer of the meeting shall have
the power and duty to determine whether a nomination or any business proposed to
be brought before the meeting was made in accordance with the procedures set
forth in this Section 12 and, if any proposed nomination or business is not in
compliance with this Section 12, to declare that such defective nomination or
proposal be disregarded.
(2) For purposes of this Section 12, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 12, a
stockholder shall also comply with all applicable requirements of state law and
of the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this
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Section 12. Nothing in this Section 12 shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
Section 13. VOTING BY BALLOT. Voting on any question or in any election
----------------
may be viva voce unless the presiding officer shall order or any stockholder
---------
shall demand that voting be by ballot.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the Corporation
--------------
shall be managed under the direction of its Board of Directors.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting or
---------------------------------
at any special meeting called for that purpose, a majority of the entire Board
of Directors may establish, increase or decrease the number of directors,
provided that the number thereof shall never be less than the minimum number
required by the Maryland General Corporation Law, nor more than 15, and further
provided that the tenure of office of a director shall not be affected by any
decrease in the number of directors.
Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of
---------------------------
Directors shall be held immediately after and at the same place as the annual
meeting of stockholders, no notice other than this Bylaw being necessary. The
Board of Directors may provide, by resolution, the time and place, either within
or without the State of Maryland, for the holding of regular meetings of the
Board of Directors without other notice than such resolution.
Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors
----------------
may be called by or at the request of the chairman of the board, president or by
a majority of the directors then in office. The person or persons authorized to
call special meetings of the Board of Directors may fix any place, either within
or without the State of Maryland, as the place for holding any special meeting
of the Board of Directors called by them.
Section 5. NOTICE. Notice of any special meeting of the Board of
------
Directors shall be delivered personally or by telephone, facsimile transmission,
United States mail or courier to each director at his business or residence
address. Notice by personal delivery, by telephone or a facsimile transmission
shall be given at least two days prior to the meeting. Notice by mail shall be
given at least five days prior to the meeting and shall be deemed to be given
when deposited in the United States mail properly addressed, with postage
thereon prepaid. Telephone notice shall be deemed to be given when the director
is personally given such notice in a
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telephone call to which he is a party. Facsimile transmission notice shall be
deemed to be given upon completion of the transmission of the message to the
number given to the Corporation by the director and receipt of a completed
answer-back indicating receipt. Neither the business to be transacted at, nor
the purpose of, any annual, regular or special meeting of the Board of Directors
need be stated in the notice, unless specifically required by statute or these
Bylaws.
Section 6. QUORUM. A majority of the directors shall constitute a quorum
------
for transaction of business at any meeting of the Board of Directors, provided
that, if less than a majority of such directors are present at said meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice, and provided further that if, pursuant to the charter of
the Corporation or these Bylaws, the vote of a majority of a particular group of
directors is required for action, a quorum must also include a majority of such
group.
The directors present at a meeting which has been duly called and convened
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough directors to leave less than a quorum.
Section 7. VOTING. (a) The action of the majority of the directors
------
present at a meeting at which a quorum is present shall be the action of the
Board of Directors, unless the concurrence of a greater proportion is required
for such action by applicable statute.
(b) Any action pertaining to any transaction in which the Corporation is
purchasing, selling, leasing or mortgaging any real estate asset, making a joint
venture investment or engaging in any other transaction in which an advisor,
director or officer of the Corporation, any affiliated lessee or affiliated
contract manager of any property of the Corporation or any affiliate of the
foregoing, has any direct or indirect interest other than as a result of their
status as a director, officer or stockholder of the Corporation, shall be
approved by the affirmative vote of a majority of the Independent Directors (as
defined in the Corporation's charter), even if the Independent Directors
constitute less than a quorum.
Section 8. TELEPHONE MEETINGS. Directors may participate in a meeting by
------------------
means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.
Section 9. INFORMAL ACTION BY DIRECTORS. Any action required or permitted
----------------------------
to be taken at any meeting of the Board of Directors may be taken without a
meeting, if a consent in writing to
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such action is signed by each director and such written consent is filed with
the minutes of proceedings of the Board of Directors.
Section 10. VACANCIES. If for any reason any or all the directors cease
---------
to be directors, such event shall not terminate the Corporation or affect these
Bylaws or the powers of the remaining directors hereunder (even if fewer than
three directors remain). Any vacancy on the Board of Directors for any cause
other than an increase in the number of directors shall be filled by a majority
of the remaining directors, although such majority is less than a quorum. Any
vacancy in the number of directors created by an increase in the number of
directors may be filled by a majority vote of the entire Board of Directors.
The newly-created or eliminated directorships resulting from any increase or
decrease shall be apportioned by the Board of Directors among the three classes
of directorships as provided in the Corporation's charter so as to keep the
number of directors in each class as nearly equal as possible. Any individual
so elected as director shall hold office until the next annual meeting of
stockholders and until his successor is elected and qualifies.
Section 11. COMPENSATION. Directors shall not receive any stated salary
------------
for their services as directors but, by resolution of the Board of Directors,
may receive fixed sums per year and/or per meeting and/or per visit to real
property or other facilities owned or leased by the Corporation and for any
service or activity they performed or engaged in as directors. Directors may be
reimbursed for expenses of attendance, if any, at each annual, regular or
special meeting of the Board of Directors or of any committee thereof and for
their expenses, if any, in connection with each property visit and any other
service or activity they performed or engaged in as directors; but nothing
herein contained shall be construed to preclude any directors from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 12. LOSS OF DEPOSITS. No director shall be liable for any loss
----------------
which may occur by reason of the failure of the bank, trust company, savings and
loan association, or other institution with whom moneys or stock have been
deposited.
Section 13. SURETY BONDS. Unless required by law, no director shall be
------------
obligated to give any bond or surety or other security for the performance of
any of his duties.
Section 14. RELIANCE. Each director, officer, employee and agent of the
--------
Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of
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Directors or officers of the Corporation, regardless of whether such counsel or
expert may also be a director.
Section 15. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
-----------------------------------------------------------
The directors shall have no responsibility to devote their full time to the
affairs of the Corporation. Any director or officer, employee or agent of the
Corporation, in his personal capacity or in a capacity as an affiliate,
employee, or agent of any other person, or otherwise, may have business
interests and engage in business activities similar to or in addition to or in
competition with those of or relating to the Corporation.
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors may
---------------------------------
appoint from among its members an Executive Committee, an Audit Committee, a
Compensation Committee, a Leasing Committee, a Nominating Committee and other
committees, composed of two or more directors, to serve at the pleasure of the
Board of Directors. The members of the Audit Committee and Compensation
Committee shall at all times consist solely of Independent Directors.
Section 2. POWERS. The Board of Directors may delegate to committees
------
appointed under Section 1 of this Article any of the powers of the Board of
Directors, except as prohibited by law.
Section 3. MEETINGS. Notice of committee meetings shall be given in the
--------
same manner as notice for special meetings of the Board of Directors. A
majority of the members of the committee shall constitute a quorum for the
transaction of business at any meeting of the committee. The act of a majority
of the committee members present at a meeting shall be the act of such
committee. The Board of Directors may designate a chairman of any committee,
and such chairman or any two members of any committee may fix the time and place
of its meeting unless the Board shall otherwise provide. In the absence of any
member of any such committee, the members thereof present at any meeting,
whether or not they constitute a quorum, may appoint another director to act in
the place of such absent member. Each committee shall keep minutes of its
proceedings.
Section 4. TELEPHONE MEETINGS. Members of a committee of the Board of
------------------
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or
-----------------------------
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if a consent
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in writing to such action is signed by each member of the committee and such
written consent is filed with the minutes of proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board of
---------
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Corporation shall
------------------
include a chief executive officer, a president, a secretary and a treasurer and
may include a chairman of the board, a vice chairman of the board, one or more
vice presidents, a chief operating officer, a chief financial officer, one or
more assistant secretaries and one or more assistant treasurers. In addition,
the Board of Directors may from time to time appoint such other officers with
such powers and duties as they shall deem necessary or desirable. The officers
of the Corporation shall be elected annually by the Board of Directors at the
first meeting of the Board of Directors held after each annual meeting of
stockholders, except that the chief executive officer may appoint one or more
vice presidents, assistant secretaries and assistant treasurers. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as may be convenient. Each officer shall hold office
until his successor is elected and qualifies or until his death, resignation or
removal in the manner hereinafter provided. Any two or more offices except
president and vice president may be held by the same person. In its discretion,
the Board of Directors may leave unfilled any office except that of president,
treasurer and secretary. Election of an officer or agent shall not of itself
create contract rights between the Corporation and such officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the
-----------------------
Corporation may be removed by the Board of Directors if in its judgment the best
interests of the Corporation would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. Any
officer of the Corporation may resign at any time by giving written notice of
his resignation to the Board of Directors, the chairman of the board, the
president or the secretary. Any resignation shall take effect at any time
subsequent to the time specified therein or, if the time when it shall become
effective is not specified therein, immediately upon its receipt. The
acceptance of a resignation shall not be necessary to make it effective unless
otherwise stated in the resignation. Such resignation shall be without
prejudice to the contract rights, if any, of the Corporation.
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Section 3. VACANCIES. A vacancy in any office may be filled by the Board
---------
of Directors for the balance of the term.
Section 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may designate
-----------------------
a chief executive officer. In the absence of such designation, the chairman of
the board shall be the chief executive officer of the Corporation. The chief
executive officer shall have general responsibility for implementation of the
policies of the Corporation, as determined by the Board of Directors, and for
the management of the business and affairs of the Corporation.
Section 5. CHIEF OPERATING OFFICER. The Board of Directors may designate
-----------------------
a chief operating officer. The chief operating officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 6. CHIEF FINANCIAL OFFICER. The Board of Directors may designate
-----------------------
a chief financial officer. The chief financial officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 7. CHAIRMAN OF THE BOARD. The Board of Directors shall designate
---------------------
a chairman of the board. The chairman of the board shall preside over the
meetings of the Board of Directors and of the stockholders at which he shall be
present. The chairman of the board shall perform such other duties as may be
assigned to him or them by the Board of Directors.
Section 8. PRESIDENT. The president or chief executive officer, as the
---------
case may be, shall in general supervise and control all of the business and
affairs of the Corporation. In the absence of a designation of a chief
operating officer by the Board of Directors, the president shall be the chief
operating officer. He may execute any deed, mortgage, bond, contract or other
instrument, except in cases where the execution thereof shall be expressly
delegated by the Board of Directors or by these Bylaws to some other officer or
agent of the Corporation or shall be required by law to be otherwise executed;
and in general shall perform all duties incident to the office of president and
such other duties as may be prescribed by the Board of Directors from time to
time.
Section 9. VICE PRESIDENTS. In the absence of the president or in the
---------------
event of a vacancy in such office, the vice president (or in the event there be
more than one vice president, the vice presidents in the order designated at the
time of their election or, in the absence of any designation, then in the order
of their election) shall perform the duties of the president and when so acting
shall have all the powers of and be subject to all the restrictions upon the
president; and shall perform such other duties as from time to time may be
assigned to him by the president or by the Board of Directors. The Board of
Directors may designate one or
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more vice presidents as executive vice president or as vice president for
particular areas of responsibility.
Section 10. SECRETARY. The secretary shall (a) keep the minutes of the
---------
proceedings of the stockholders, the Board of Directors and committees of the
Board of Directors in one or more books provided for that purpose; (b) see that
all notices are duly given in accordance with the provisions of these Bylaws or
as required by law; (c) be custodian of the corporate records and of the seal of
the Corporation; (d) keep a register of the post office address of each
stockholder which shall be furnished to the secretary by such stockholder; (e)
have general charge of the share transfer books of the Corporation; and (f) in
general perform such other duties as from time to time may be assigned to him by
the chief executive officer, the president or by the Board of Directors.
Section 11. TREASURER. The treasurer shall have the custody of the funds
---------
and securities of the Corporation and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. In the absence of a designation of a chief financial officer by the
Board of Directors, the treasurer shall be the chief financial officer of the
Corporation.
The treasurer shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the president and Board of Directors, at the regular meetings of
the Board of Directors or whenever it may so require, an account of all his
transactions as treasurer and of the financial condition of the Corporation.
If required by the Board of Directors, the treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, moneys and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant
----------------------------------------------
secretaries and assistant treasurers, in general, shall perform such duties as
shall be assigned to them by the secretary or treasurer, respectively, or by the
president or the Board of Directors. The assistant treasurers shall, if
required by the Board of Directors, give bonds for the faithful performance of
their duties in such sums and with such surety or sureties as shall be
satisfactory to the Board of Directors.
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Section 13. SALARIES. The salaries and other compensation of the officers
--------
shall be fixed from time to time by the Board of Directors and no officer shall
be prevented from receiving such salary or other compensation by reason of the
fact that he is also a director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Directors may authorize any officer or
---------
agent to enter into any contract or to execute and deliver any instrument in the
name of and on behalf of the Corporation and such authority may be general or
confined to specific instances. Any agreement, deed, mortgage, lease or other
document executed by one or more of the directors or by an authorized person
shall be valid and binding upon the Board of Directors and upon the Corporation
when authorized or ratified by action of the Board of Directors.
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the
-----------------
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by such officer or agent of the Corporation in
such manner as shall from time to time be determined by the Board of Directors.
Section 3. DEPOSITS. All funds of the Corporation not otherwise employed
--------
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board of Directors may
designate.
ARTICLE VII
STOCK
Section 1. CERTIFICATES. Each stockholder shall be entitled to a
------------
certificate or certificates which shall represent and certify the number of
shares of each class of stock held by him in the Corporation. Each certificate
shall be signed by the chief executive officer, the president or a vice
president and countersigned by the secretary or an assistant secretary or the
treasurer or an assistant treasurer and may be sealed with the seal, if any, of
the Corporation. The signatures may be either manual or facsimile.
Certificates shall be consecutively numbered; and if the Corporation shall, from
time to time, issue several classes of stock, each class may have its own number
series. A certificate is valid and may be issued whether or not an officer who
signed it is still an officer when it is issued. Each certificate representing
shares which are restricted as to their transferability or voting powers, which
are preferred or limited as to their dividends or as to their allocable portion
of the assets upon liquidation or which are redeemable at the option of the
Corporation, shall have a
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<PAGE>
statement of such restriction, limitation, preference or redemption provision,
or a summary thereof, plainly stated on the certificate. If the Corporation has
authority to issue stock of more than one class, the certificate shall contain
on the face or back a full statement or summary of the designations and any
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications and terms
and conditions of redemption of each class of stock and, if the Corporation is
authorized to issue any preferred or special class in series, the differences in
the relative rights and preferences between the shares of each series to the
extent they have been set and the authority of the Board of Directors to set the
relative rights and preferences of subsequent series. In lieu of such statement
or summary, the certificate may state that the Corporation will furnish a full
statement of such information to any stockholder upon request and without
charge. If any class of stock is restricted by the Corporation as to
transferability, the certificate shall contain a full statement of the
restriction or state that the Corporation will furnish information about the
restrictions to the stockholder on request and without charge.
Section 2. TRANSFERS. Upon surrender to the Corporation or the transfer
---------
agent of the Corporation of a stock certificate duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, the
Corporation shall issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of record of any
share of stock as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share or
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
Notwithstanding the foregoing, transfers of shares of any class of stock
will be subject in all respects to the charter of the Corporation and all of the
terms and conditions contained therein.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the Board
-----------------------
of Directors may direct a new certificate to be issued in place of any
certificate previously issued by the Corporation alleged to have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen or destroyed. When authorizing the
issuance of a new certificate, an officer designated by the Board of Directors
may, in his discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or the owner's
legal representative to advertise the same in such manner as he shall require
and/or to give bond, with sufficient
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<PAGE>
surety, to the Corporation to indemnify it against any loss or claim which may
arise as a result of the issuance of a new certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board
--------------------------------------------------
of Directors may set, in advance, a record date for the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
determining stockholders entitled to receive payment of any dividend or the
allotment of any other rights, or in order to make a determination of
stockholders for any other proper purpose. Such date, in any case, shall not be
prior to the close of business on the day the record date is fixed and shall be
not more than 90 days and, in the case of a meeting of stockholders, not less
than ten days, before the date on which the meeting or particular action
requiring such determination of stockholders of record is to be held or taken.
In lieu of fixing a record date, the Board of Directors may provide that
the stock transfer books shall be closed for a stated period but not longer than
20 days. If the stock transfer books are closed for the purpose of determining
stockholders entitled to notice of or to vote at a meeting of stockholders, such
books shall be closed for at least ten days before the date of such meeting.
If no record date is fixed and the stock transfer books are not closed for
the determination of stockholders, (a) the record date for the determination of
stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day on which the notice of meeting is
mailed or the 30th day before the meeting, whichever is the closer date to the
meeting; and (b) the record date for the determination of stockholders entitled
to receive payment of a dividend or an allotment of any other rights shall be
the close of business on the day on which the resolution of the directors,
declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, except when (i) the determination has been
made through the closing of the transfer books and the stated period of closing
has expired or (ii) the meeting is adjourned to a date more than 120 days after
the record date fixed for the original meeting, in either of which case a new
record date shall be determined as set forth herein.
Section 5. STOCK LEDGER. The Corporation shall maintain at its principal
------------
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.
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<PAGE>
Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors
-----------------------------------
may issue fractional stock or provide for the issuance of scrip, all on such
terms and under such conditions as they may determine. Notwithstanding any
other provision of the charter or these Bylaws, the Board of Directors may issue
units consisting of different securities of the Corporation. Any security
issued in a unit shall have the same characteristics as any identical securities
issued by the Corporation, except that the Board of Directors may provide that
for a specified period securities of the Corporation issued in such unit may be
transferred on the books of the Corporation only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The Board of Directors shall have the power, from time to time, to fix the
fiscal year of the Corporation by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the
-------------
stock of the Corporation may be authorized and declared by the Board of
Directors, subject to the provisions of law and the charter of the Corporation.
Dividends and other distributions may be paid in cash, property or stock of the
Corporation, subject to the provisions of law and the charter.
Section 2. CONTINGENCIES. Before payment of any dividends or other
-------------
distributions, there may be set aside out of any assets of the Corporation
available for dividends or other distributions such sum or sums as the Board of
Directors may from time to time, in its absolute discretion, think proper as a
reserve fund for contingencies, for equalizing dividends or other distributions,
for repairing or maintaining any property of the Corporation or for such other
purpose as the Board of Directors shall determine to be in the best interest of
the Corporation, and the Board of Directors may modify or abolish any such
reserve in the manner in which it was created.
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the charter of the Corporation, the Board of
Directors may from time to time adopt, amend, revise or terminate any policy or
policies with respect to investments by the Corporation as it shall deem
appropriate in its sole discretion.
-17-
<PAGE>
ARTICLE XI
SEAL
Section 1. SEAL. The Board of Directors may authorize the adoption of a
----
seal by the Corporation. The seal shall contain the name of the Corporation and
the year of its incorporation and the words "Incorporated Maryland." The Board
of Directors may authorize one or more duplicate seals and provide for the
custody thereof.
Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or
-------------
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the word
"(SEAL)" adjacent to the signature of the person authorized to execute the
document on behalf of the Corporation.
ARTICLE XII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the charter of the
Corporation or these Bylaws or pursuant to applicable law, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at nor the purpose of any
meeting need be set forth in the waiver of notice, unless specifically required
by statute. The attendance of any person at any meeting shall constitute a
waiver of notice of such meeting, except where such person attends a meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
ARTICLE XIII
AMENDMENT OF BYLAWS
The Board of Directors shall have the exclusive power to adopt, alter or
repeal any provision of these Bylaws and to make new Bylaws.
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<PAGE>
<TABLE>
<S> <C> <C>
CALIFORNIA OFFICE BATTLE FOWLER LLP CABLE ADDRESS
1999 AVENUE OF THE STARS A LIMITED LIABILITY PARTNERSHIP "COUNSELLOR"
SUITE 2700 PARK AVENUE TOWER ------
LOS ANGELES, CA 90067 75 EAST 55TH STREET FACSIMILE
TEL: (310) 277-9090 NEW YORK, N.Y. 10022 (212) 339-9150
FAX: (310) 277-6627 (212) 856-7000
WRITER'S DIRECT DIAL NUMBER
(212) 856-7000
WRITER'S DIRECT FACSIMILE NUMBER
(212) 339-9150
July 12, 1996
</TABLE>
Board of Directors
American General Hospitality Corporation
3860 West Northwest Highway, Suite 300
Dallas, TX 75220
Re: American General Hospitality Corporation
Registration Statement on Form S-11 (No. 333-4568)
--------------------------------------------------
Gentlemen:
We are acting as counsel for American General Hospitality Corporation,
a Maryland corporation (the "Company"), in connection with its Registration
Statement on Form S-11 (Registration No. 333-4568), and any amendments thereto
(the "Registration Statement"), as filed with the Securities and Exchange
Commission, with respect to up to 8,050,000 shares of the Company's Common
Stock, $0.01 par value per share (the "Shares").
In rendering this opinion, we have relied upon, among other things,
our examination of such records of the Company and certificates of its officers
and of public officials as we have deemed necessary for the purpose of the
opinion expressed below.
In addition, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals, and the conformity
to original documents of all documents submitted to us as certified or
photostatic copies. As to various questions of fact material to this opinion,
we have relied, to the extent we deem reasonably appropriate, upon
representations or certificates of officers or directors of the Company and upon
documents, records and instruments furnished to us by the Company,
<PAGE>
PAGE 2
Battle Fowler LLP
Board of Directors July 12, 1996
without independently checking or verifying the accuracy of such documents,
records and instruments furnished to us by the Company.
We are not admitted to the practice of law in any jurisdiction but the
State of New York, and we do not express any opinion as to the laws of other
states or jurisdictions other than the laws of the State of New York and the
federal law of the United States and, with respect to matters of Maryland law,
we have relied exclusively on the opinion of Ballard Spahr Andrews & Ingersoll,
Maryland counsel to the Company. No opinion is expressed as to the effect that
the law of any other jurisdiction may have upon the subject matter of the
opinion expressed herein under conflicts of law principles, rules and
regulations or otherwise.
Based upon the foregoing and having regard for such legal
considerations as we have deemed relevant, we are of the opinion that the Shares
have been duly authorized and, when sold and delivered against payment therefor
in the manner described in such authorization, will be validly issued, fully
paid and non-assessable.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the use
of our name under the caption "Legal Matters" in the Prospectus included
therein. In giving this consent, we do not admit that we are within the
category of persons whose consent is required by Section 7 of the Securities Act
of 1933 or the rules and regulations promulgated thereunder by the Securities
and Exchange Commission.
Very truly yours,
/s/ Battle Fowler LLP
<PAGE>
[Battle Fowler LLP Partner Letterhead]
BATTLE FOWLER LLP
PARK AVENUE TOWER
75 EAST 55TH STREET
NEW YORK, N.Y. 10022
(212) 856-7000
--------
WRITER'S DIRECT DIAL NUMBER
(212) 856-7000
WRITER'S DIRECT FACSIMILE NUMBER
(212) 339-9150
July 12, 1996
American General Hospitality Corporation
3860 West Northwest Highway
Suite 300
Dallas, Texas 75220
Gentlemen:
We have acted as counsel to American General Hospitality Corporation, a
Maryland corporation (the "Company"), in connection with the preparation of a
registration statement (the "Registration Statement") filed with the Securities
and Exchange Commission on May 3, 1996 (No. 333-4568), as amended through the
date hereof, with respect to the offering and sale (the "Offering") of up to
8,050,000 shares of common stock, no par value, of the Company, the Company's
contribution of substantially all of the net proceeds of the Offering to its
wholly-owned subsidiaries, AGH GP, Inc., a Nevada corporation ("AGH GP"), and
AGH LP, Inc., a Nevada corporation ("AGH LP"), and the contribution by AGH GP
and AGH LP of such net proceeds to American General Hospitality Operating
Partnership, L.P., a Delaware limited partnership (the "Operating Partnership"),
in exchange for a general partnership interest and a limited partnership
interest, respectively, in the Operating Partnership. You have requested our
opinion on certain federal income tax matters in connection with the Offering.
The Operating Partnership intends to acquire equity interests in certain
existing hotels and associated personal property (the "Initial Hotels"). The
Operating Partnership will own some of the Initial Hotels directly and will own
the remaining Initial Hotels through limited liability companies, joint ventures
<PAGE>
Battle Fowler LLP
American General Hospitality Corporation July 12, 1996
or subsidiary partnerships (collectively, the "Subsidiary Partnerships"). One
of three limited liability companies ultimately owned by the Company (the
"LLCs") will own a 1 percent general partnership interest and the Operating
Partnership will own a 99 percent limited partnership interest in each
Subsidiary Partnership. The Operating Partnership or the Subsidiary
Partnerships, as the case may be, will lease each of the Initial Hotels to AGH
Leasing, L.P. (the "Lessee"), pursuant to substantially similar operating
leases (the "Leases"). American General Hospitality Inc. will operate the
Initial Hotels pursuant to management agreements (the "Management Agreements")
between it and the Lessee.
In connection with the opinions rendered below, we have examined the
following:
1. the Company's Articles of Amendment and Restatement, as filed with the
Secretary of State of Maryland;
2. the Company's Amended and Restated Bylaws;
3. the Registration Statement, including the prospectus contained as part
of the Registration Statement (the "Prospectus");
4. the Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, among AGH GP, as general partner, AGH LP, as the initial
limited partner and several other limited partners;
5. the Leases, between the Operating Partnership or the Subsidiary
Partnerships and the Lessee;
6. the Lease Master Agreement, between the Operating Partnership, the
Subsidiary Partnerships and the Lessee;
7. the Management Agreements, between American General Hospitality, Inc.
and the Lessee;
8. the appraisals of the personal property contained in the Initial
Hotels, and performed by Hospitality Appraisal Service, LLC (the "Personal
Property Appraisals"); and
9. such other documents as we have deemed necessary or appropriate for
purposes of this opinion.
<PAGE>
Battle Fowler LLP
American General Hospitality Corporation July 12, 1996
In connection with the opinions rendered below, we have assumed generally
that:
1. each of the documents referred to above has been duly authorized,
executed, and delivered; is authentic, if an original, or is accurate, if a
copy; and has not been amended;
2. during its short 1996 taxable year ending December 31, 1996 and
subsequent taxable years, the Company will operate in such a manner that will
make the representations contained in the Representation Letter, dated July 11,
1996 and executed by a duly appointed officer of the Company (the
"Representation Letter"), true for such years;
3. the Company will not make any amendments to its organizational
documents or the Operating Partnership Agreement, after the date of this
opinion that would affect Company's qualification as a real estate investment
trust (a "REIT") for any taxable year;
4. each limited partner (a "Limited Partner") of the Operating Partnership
(other than AGH LP) that is a corporation or other entity has valid legal
existence; and
5. each Limited Partner (other than AGH LP) has full power, authority, and
legal right to enter into and perform the terms of the Operating Partnership
Agreement and the transactions contemplated thereby.
In connection with the opinions rendered below, we also have relied upon
the correctness of the representations contained in the Representation Letter.
For purposes of our opinions, we made no independent investigation of the
facts contained in the documents and assumptions set forth above, the
representations set forth in the Representation Letter, or the Prospectus. No
facts have come to our attention, however, that would cause us to question the
accuracy and completeness of such facts or documents in a material way.
In addition, to the extent that any of the representations provided to us
in the Representation Letter are with respect to matters set forth in the
Internal Revenue Code of 1986, as amended (the "Code"), or the Treasury
regulations thereunder (the "Regulations"), we have reviewed with the
individuals making such representation the relevant portion of the Code and the
applicable
<PAGE>
Battle Fowler LLP
American General Hospitality Corporation July 12, 1996
Regulations and are reasonably satisfied that such individuals understand such
provisions and are capable of making such representations.
Based on the documents and assumptions set forth above, the representations
set forth in the Representation Letter, and the discussion in the Prospectus
under the caption "Federal Income Tax Considerations" (which is incorporated
herein by reference), we are of the opinion that:
(a) commencing with the Company's short taxable year ending December
31, 1996, the Company will qualify to be taxed as a REIT pursuant to
sections 856 through 860 of the Code, and the Company's proposed method of
operation will enable to meet the requirements for qualification and
taxation as a REIT under the Code;
(b) the descriptions of the law and the legal conclusions contained in
the Prospectus under the caption "Federal Income Tax Considerations" are
correct in all material respects, and the discussion contained therein
fairly summarizes the federal tax considerations that are material to a
holder of the Common Shares; and
(c) the Operating Partnership and the Subsidiary Partnerships will be
treated for federal income tax purposes as partnerships and not as
associations taxable as corporations or as publicly traded partnerships.
We will not review on a continuing basis the Company's compliance with the
documents or assumptions set forth above, or the represent ations set forth in
the Representation Letter. Accordingly, no assurance can be given that the
actual results of the Company's operations for any given taxable year will
satisfy the requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the Code and
the Regulations, published administrative interpreta tions thereof, and
published court decisions. The Internal Revenue Service has not issued
Regulations or administrative interpretations with respect to various provisions
of the Code relating to REIT qualification. No assurance can be given that the
law will not change in a way that will prevent the Company from qualifying as a
REIT, or the Operating Partnership or the Subsidiary Partnerships from being
classified as partnerships for federal income tax purposes.
<PAGE>
Battle Fowler LLP
American General Hospitality Corporation July 12, 1996
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Battle Fowler LLP
under the captions "Federal Income Tax Considerations" and "Legal Matters" in
the Prospectus.
The foregoing opinions are limited to the federal income tax matters
addressed herein, and no other opinions are rendered with respect to other
federal tax matters or to any issues arising under the tax laws of any state or
locality. We undertake no obligation to update the opinions expressed herein
after the date of this letter. This opinion letter is solely for the
information and use of the addressees, and may not be relied upon for any
purpose by any other person without our express written consent.
Very truly yours,
<PAGE>
Exhibit 8.2
[LETTERHEAD OF COOPERS & LYBRAND L.L.P.]
July 13, 1996
American General Hospitality Corporation
5860 West Northwest Highway, Suite 3000
Dallas, Texas 75220
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Gentlemen:
Coopers & Lybrand L.L.P. (the "FIRM") has acted as special tax consultant
to American General Hospitality Corporation, a Maryland corporation ("COMPANY"),
in connection with the preparation of a registration statement (the
"REGISTRATION STATEMENT) originally filed with the Securities and Exchange
Commission on May 3, 1996 (No. 333-4568), as amended through the date hereof,
with respect to (i) the offering and sale (the "OFFERING") of up to 8,050,000
shares of its common stock, no par value; (ii) the contribution of substantially
all of the net proceeds of the Offering to Company's wholly-owned subsidiaries,
AGH GP, Inc., a Nevada corporation ("GP CORPORATION"), and AGH LP, Inc., a
Nevada corporation ("LP CORPORATION"); and (iii) the subsequent contribution of
those proceeds by GP Corporation and LP Corporation to American General
Hospitality Operating Partnership, L.P., a Delaware limited partnership
("OPERATING PARTNERSHIP"). You have requested our opinion as to the application
of the Texas franchise tax to Company, GP Corporation, LP Corporation, Operating
Partnership, the LLCs, the Subsidiary LLC and the Subsidiary Partnerships
(as hereinafter defined).
Section I of this letter (the "OPINION LETTER") and the Registration
Statement, including the prospectus contained as part of the Registration
Statement (the "PROSPECTUS"), contain the facts upon which the Firm's opinion is
based. Section II of this Opinion Letter contains the opinion. Section III of
this Opinion Letter contains limitations on the opinion.
I. FACTS
Company owns all of the stock of GP Corporation and LP Corporation. GP
Corporation is the sole general partner of Operating Partnership. LP
Corporation is a limited partner in Operating Partnership. Operating
Partnership intends to acquire and hold interests in certain existing
<PAGE>
American General Hospitality Corporation
July 13, 1996
Page 2
hotels and associated personal property (the "INITIAL HOTELS") either directly
or through acquiring interests in certain subsidiary partnerships (the
"SUBSIDIARY PARTNERSHIPS") or a limited liability company (the "SUBSIDIARY
LLC"). Operating Partnership will be the sole limited partner of the Subsidiary
Partnerships. One of three limited liability companies in which Company and
Operating Partnership are the sole members will be the sole general partner in
each Subsidiary Partnership (individually, an "LLC" and together, the "LLCs").
Operating Partnership and one of the LLCs will be the sole members of Subsidiary
LLC. Operating Partnership, Subsidiary LLC or the Subsidiary Partnerships, as
the case may be, will lease each of the Initial Hotels to AGH Leasing, Inc. (the
"LESSEE") pursuant to substantially similar operating leases. American General
Hospitality Inc. (the "MANAGER") will operate the Initial Hotels pursuant to
management agreements with the Lessee. Neither Company, GP Corporation, LP
Corporation, the LLCs, Operating Partnership, Subsidiary LLC nor the Subsidiary
Partnerships will own any interest in the Lessee or the Manager.
II. OPINION
We have reviewed all authorities as of the date hereof relevant to the
application of the Texas franchise tax to Company, GP Corporation, LP
Corporation, the LLCs, Operating Partnership, Subsidiary LLC and the
Subsidiary Partnerships. Based upon our analysis of the foregoing authorities
and subject to the limitations set forth in Section III, the Firm is of the
opinion as of the date hereof that:
1. The description of the Texas franchise tax considerations and
consequences set forth in the Prospectus under the heading "Federal Income Tax
Considerations - Other Tax Considerations - State and Local Taxes" accurately
summarizes the Texas franchise tax matters discussed therein.
2. LP Corporation is not subject to the Texas franchise tax.
<PAGE>
American General Hospitality Corporation
July 13, 1996
Page 3
3. Operating Partnership and the Subsidiary Partnerships are not subject
to the Texas franchise tax.
4. Company, GP Corporation, each of the LLCs and Subsidiary LLC are
subject to the Texas franchise tax.
5. Company will not owe any Texas franchise tax unless it has gross
receipts apportionable to Texas.
6. GP Corporation will owe Texas franchise tax based on the greater of
(a) .25% of its taxable capital apportionable to Texas or (b) 4.5% of its
taxable earned surplus apportionable to Texas.
7. GP Corporation's gross receipts for purposes of the earned surplus
component of the franchise tax will be based solely upon its share of Operating
Partnership's gross receipts (including Operating Partnership's share of the
Subsidiary Partnerships' gross receipts). For this purpose, gross receipts of
Operating Partnership and the Subsidiary Partnerships will be apportioned as if
they had been received directly by GP Corporation.
8. GP Corporation's gross receipts for purposes of the taxable capital
component of the franchise tax will be based solely on the net profit it
receives from Operating Partnership. For this purpose, net profit distributed
by Operating Partnership to GP Corporation will be apportioned in accordance
with the commercial domicile of Operating Partnership, unless such gross
receipts can be presented properly on a gross basis for generally accepted
accounting principles and GP Corporation uses such method.
9. Each LLC and Subsidiary LLC will owe Texas franchise tax based on the
greater of (a) .25% of its taxable capital apportionable to Texas or (b) 4.5% of
its taxable earned surplus apportionable to Texas.
10. Each LLC's gross receipts for purposes of the earned surplus component
of the franchise tax will be based solely upon its share of the gross receipts
of the Subsidiary Partnership(s) in which it is the general partner and, with
respect to the LLC that is a member in the Subsidiary LLC, certain items
attributable to Subsidiary LLC. For this purpose, each Subsidiary Partnership's
gross receipts will be apportioned as if they had been received directly by the
relevant LLC and the items attributable to Subsidiary LLC will be apportioned
with respect to its state of organization.
11. Each LLC's gross receipts for purposes of the taxable capital component
of the franchise tax will be based solely on the net profit it receives from the
Subsidiary Partnership(s) in which it is the general partner and, with respect
to the LLC that is a member in the Subsidiary LLC, certain items attributable to
Subsidiary LLC. For this purpose, net profit distributed by the Subsidiary
Partnerships to the LLCs will be apportioned in accordance with the commercial
domicile of each Subsidiary Partnership, unless such gross receipts can be
presented properly on a gross basis for generally accepted accounting principles
and the relevant LLC uses such method and the items attributable to Subsidiary
LLC will be apportioned with respect to its state of organization.
<PAGE>
American General Hospitality Corporation
July 13, 1996
Page 4
III. LIMITATIONS
1. Except as otherwise indicated, the opinions set forth in Section II are
based upon the Texas Tax Code and the rules promulgated thereunder, judicial
decisions and current administrative rulings and practices of the Comptroller of
Public Accounts of the State of Texas (the "COMPTROLLER"), all as in effect on
the date of this Opinion Letter. These authorities may be amended or revoked at
any time. Any such changes may or may not be retroactive with respect to
transactions entered into or contemplated prior to the effective date thereof
and could significantly alter the conclusions reached in this Opinion Letter.
There is no assurance that legislative, judicial or administrative changes will
not occur in the future or that any such changes will not (i) subject LP
Corporation, Operating Partnership, or the Subsidiary Partnerships to the Texas
franchise tax; or (ii) cause the Texas franchise tax liability of the Company,
GP Corporation, the LLCs or Subsidiary LLC to materially increase. The Firm
assumes no obligation to update or modify this Opinion Letter to reflect any
developments that may occur after the date hereof.
2. As to certain facts material to our opinion, we have assumed the
accuracy of the representations contained in the Certificate signed by an
officer of Company and attached hereto as Exhibit A, both as of the date thereof
---------
and as of the effective date of the Offering. We also have assumed that
Operating Partnership and each Subsidiary Partnership has been validly formed as
a limited partnership under the laws of the state in which it was organized.
For purposes of our opinion, we made no independent investigation and will not
monitor compliance with the facts contained herein or in the Prospectus, the
assumptions set forth herein or the representations set forth in the
Certificate.
3. The opinion set forth in Section II is not binding on the Comptroller
or the courts and is dependent upon the accuracy and completeness of the facts
set forth in Section I and the Prospectus and the accuracy of the assumptions
set forth in the preceding paragraph (the "ASSUMPTIONS"). The Firm has relied
upon these facts and Assumptions and any inaccuracy in the Assumptions or any
inaccuracy or incompleteness in the Firm's understanding of those facts could
adversely affect the opinion stated in Section II.
4. In connection with the opinion set forth in Section II, the Firm
examined copies or originals, certified or otherwise identified, of such
documents and records as it has deemed necessary or advisable for purposes of
the opinion set forth in Section II. The Firm has assumed that all signatures
on all documents presented to it are genuine, that all documents submitted to it
as originals or copies are accurate, that all information submitted to it was
accurate and complete and that all persons executing and delivering originals or
copies of documents examined by it were competent to execute and deliver such
documents.
<PAGE>
American General Hospitality Corporation
July 13, 1996
Page 5
5. The Firm is expressing its opinion only as of the date hereof and only
as to those matters expressly set forth in Section 11. No opinion should be
inferred as to any other matters including, but not limited to, any federal tax
matters, any matters arising under the tax laws of any state, locality or
jurisdiction other than the State of Texas or any Texas state tax other than the
franchise tax.
6. This Opinion Letter is issued solely for the benefit of the addressees
and may not be relied upon for any purpose by any other person without our
express written consent. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement. We also consent to the references to
Coopers & Lybrand L.L.P. in the Prospectus under the caption "Federal Income
Tax Considerations - State and Local Taxes" and under the caption "Legal
Matters" as having provided an opinion to Battle Fowler LLP. In giving this
consent, we do not admit that we are in the category of persons whose consent is
required by Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations promulgated thereunder by the Securities and Exchange
Commission.
Respectfully submitted,
/s/ Coopers & Lybrand L.L.P.
---------------------------------------
COOPERS & LYBRAND L.L.P.
<PAGE>
EXHIBIT 10.6
SUPPLEMENTAL REPRESENTATIONS,
-----------------------------
WARRANTIES AND INDEMNITY AGREEMENT
----------------------------------
THIS SUPPLEMENTAL REPRESENTATIONS, WARRANTIES AND INDEMNITY AGREEMENT (this
"Agreement") is made and entered into as of July __, 1996 by the individuals
listed on Schedule 1A attached hereto (each an "Indemnitor" and collectively the
-----------
"Indemnitors"), American General Hospitality Operating Partnership, L.P., a
Delaware limited partnership (including and collectively with its subsidiary
partnerships and limited liability companies, the "Operating Partnership"), and
American General Hospitality Corporation, a Maryland corporation (the "Company")
and parent of the sole general partner of the Operating Partnership.
WHEREAS, in connection with the initial public offering of shares of common
stock of the Company (the "Offering"), the Operating Partnership will (i)
acquire direct and indirect equity interests in the partnerships and other
entities listed on Schedule 1B attached hereto (the "Asset Entities") which hold
-----------
interests in the hotels listed opposite the name of each such entity on Schedule
--------
1B (the "Owned Hotels") and (ii) acquire the hotels listed on Schedule 1C
- -- -----------
attached hereto (the "Acquisition Hotels"), (iii) acquire the hotels listed on
Schedule 1D which are currently managed by American General Hospitality, Inc.
- -----------
("AGHI") (the "Managed Hotels" and, together with the Owned Hotels and the
Acquisition Hotels, the "Hotels") and (iv) carry out the other transactions
called for in the agreements listed in Schedule 1E attached hereto, as any of
-----------
such documents may be amended (as so amended, the "Transfer Agreements") (all of
the foregoing transfers and transactions being collectively referred to herein
as the "Formation Transactions" and the Indemnitors and other persons controlled
by the Indemnitors from whom the Operating Partnership will acquire the direct
and indirect equity interests in the Asset Entities sometimes being collectively
referred to herein individually each as a "Transferor" and collectively as the
"Transferors"); and
WHEREAS, to induce the Company to consummate the Offering and to induce the
Company and the Operating Partnership to acquire the interests in the Asset
Entities and the Hotels to be acquired by them pursuant to the Transfer
Agreements, each Indemnitor has agreed to make the representations and
warranties and indemnities contained in this Agreement for the benefit of the
Company and the Operating Partnership.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby agree as follows:
1. Representations and Warranties with Respect to Hotels, Transferor and
---------------------------------------------------------------------
Asset Entities. Each Indemnitor hereby makes the following representations and
- --------------
warranties to the Company and the Operating Partnership (i) as of the date
hereof, (ii) as of the date any of the documents required to effectuate the
Formation Transactions are executed and delivered into escrow (the "Initial
Closing") and (iii) as of the date all documents required to effectuate the
Formation Transactions are released from escrow (the "Final Closing") as
follows:
<PAGE>
1.1 Organization and Qualification. Each Transferor
------------------------------
or Asset Entity that is a limited partnership was duly formed and is validly
existing and in good standing under the laws of its jurisdiction of
organization, and has the requisite power and authority to carry on its business
as it is now being conducted and, if applicable, to execute and perform the
Transfer Agreements and engage in the Formation Transactions to which it is a
party. Each Transferor or Asset Entity that is a general partnership was duly
formed under the laws of its jurisdiction of organization, and has the requisite
power and authority to carry on its business as it is now being conducted and,
if applicable, to execute and perform the Transfer Agreements and engage in the
Formation Transactions to which it is a party. Each Transferor or Asset Entity
that is a corporation was duly organized and is validly existing and in good
standing under the laws of its jurisdiction of organization, and has the
requisite power and authority to carry on its business as it is now being
conducted and, if applicable, to execute and perform the Transfer Agreements and
engage in the Formation Transactions to which it is a party. Each Transferor
and Asset Entity has made available to the Operating Partnership or the Company
complete and correct copies of its governing instruments, together with all
amendments thereto, as in effect on the date of this Agreement and as executed
through the Final Closing. Each Transferor and Asset Entity is duly qualified
or registered to transact business in each jurisdiction in which such
qualification or registration is required, whether by reason of the ownership or
leasing of property, the management of properties owned by others or the conduct
of business, except where the failure to so qualify would not have a material
adverse effect on the condition (financial or otherwise) or the earnings,
assets, business affairs or business prospects of such entity. To the knowledge
of the Indemnitors, each party to the Transfer Agreements relating to the
Managed Hotels and the Acquisition Hotels who is not an individual person is
validly existing in good standing under the laws of the jurisdiction of its
incorporation or organization (if applicable) and is duly qualified or
registered to transact business in each jurisdiction where qualification or
registration is required and has the requisite power and authority to execute
and perform the Transfer Agreements and to engage in the Formation Transactions.
1.2 Authority Relative to Transfer Agreements.
-----------------------------------------
All action of each Transferor and, to the knowledge of the
Indemnitors, each party to the Transfer Agreements relating to the Acquisition
Hotels and the Managed Hotels, necessary to authorize the execution, delivery
and performance by such party of the Transfer Agreements has been taken, and no
other proceedings on the part of such party are necessary to authorize (i) the
execution and delivery by such party (or by any attorney-in-fact duly appointed
pursuant to the Transfer Agreements (an "Attorney-in-Fact")), of the Transfer
Agreements and the deeds, assignment of partnership or other interests and other
deliveries contemplated thereby (the Transfer Agreements and such deeds,
assignments and other deliveries being referred to collectively herein as the
"Transfer Documents") or (ii) the consummation by such party (directly or
through an Attorney-in-Fact) of the Formation Transactions to which it is a
party. Neither the execution and delivery by any Transferor or, to the
knowledge of the Indemnitors, any party to the Transfer Documents relating to
the Acquisition Hotels and the Managed Hotels, (directly or through an Attorney-
in-Fact) of the Transfer Documents to which it is a party, nor the consummation
by such party (directly or through an Attorney-in-
2
<PAGE>
Fact) of the Transactions to which it is a party, nor compliance by such party
(directly or through an Attorney-in-Fact) with any of the provisions of the
Transfer Documents to which it is a party will (i) conflict with or result in
any breach of any provisions of the governing instruments of any such party that
is not an individual person or of any Asset Entity in which such party owns a
direct or indirect interest, (ii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under any
of the terms, conditions, or provisions of any of the organizational documents
of such party or of any Asset Entity, or of any note, bond, mortgage, indenture,
lease, license, easement, right of first refusal or offer, restriction,
contract, agreement or other instrument or obligation to which such party or any
Asset Entity is a party or by which any of the foregoing or any of their
respective properties or other assets may be bound, or (iii) violate any order,
writ, injunction, law, decree, statute, agreement, rule or regulation applicable
to any such party, Asset Entity or Hotel.
1.3 Consents Obtained; Binding Obligation;
--------------------------------------
Absence of Undisclosed Liabilities. All consents or waivers necessary for the
- ----------------------------------
execution and performance of the Transfer Documents by each Transferor party
thereto and, to the knowledge of the Indemnitors, each party to the Transfer
Documents relating to the Managed Hotels and the Acquisition Hotels, (directly
or through an Attorney-in-Fact) and otherwise for the consummation of the
Formation Transactions have been duly obtained and are in full force and effect;
such consents with respect to the Transferors, and, to the knowledge of the
Indemnitors, with respect to the Transfer Agreements relating to the Acquisition
Hotels and Managed Hotels, were solicited in accordance with law and the
applicable partnership agreements or other applicable organizational documents
on the basis of information which did not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. There are no rights of
first refusal, first offer or similar rights with respect to the Owned Hotels or
the Asset Entities or any ownership interests therein being transferred by the
Transferor pursuant to the Transfer Documents or, to the knowledge of the
Indemnitors, with respect to any Acquisition Hotel or Managed Hotel. Each of
the Transfer Documents has been duly and validly executed and delivered by each
Transferor or Asset Entity that is a party thereto and, to the knowledge of the
Indemnitors, each party to the Transfer Documents relating to the Managed Hotels
and the Acquisition Hotels, (directly or through an Attorney-in-Fact) and
constitutes a valid and binding agreement of such party, enforceable against
such party in accordance with its terms, except that such enforcement may be
subject to bankruptcy, conservatorship, receivership, insolvency, moratorium or
similar laws affecting creditors' rights generally or the rights of creditors of
partnerships and to general principles of equity. Upon consummation of the
assignments and other transactions contemplated by the Transfer Documents, the
Operating Partnership (together with the Company) will acquire, directly or
indirectly, good and valid title to, (i) 100% of the ownership interests in each
of the Asset Entities that directly own the Owned Hotels and (ii) to the
knowledge of the Indemnitors, the Managed Hotels and the Acquisition Hotels.
3
<PAGE>
1.4 Brokers. Except as set forth on Schedule
------- --------
1.4(a), no party to the Transfer Agreements nor any of its general partners,
shareholders, officers or directors has employed any broker or finder, or
incurred any liability therefor, in connection with the Formation Transactions
to which it is a party for which the Company or the Operating Partnership could
have any liability.
1.5 Ownership. Attached hereto as Schedule
--------- --------
1.5(a) is a true and complete listing or diagram of (a) the direct and indirect
- ------
owners of each Asset Entity, and (b) the percentage interest owned by each such
owner therein. No Transferor has granted to any person (other than pursuant to
the Transfer Agreements) any option, warrant or other right to acquire any
interest in any Asset Entity or Hotel or, if such Transferor is a partnership,
corporation, or trust, in such Transferor, and, to the knowledge of such
Indemnitor, no other person or entity has granted to any person any right of
first refusal or offer, option, warrant or other right to acquire any interest
in any such Asset Entity, Transferor or Hotel (in each case, other than options,
warrants or other rights of third parties that have been duly waived or
released). No Transferor has pledged its interest in any Asset Entity, entered
into a voting agreement with respect to such interest, or otherwise transferred
beneficial ownership of such interest. Except as disclosed in the Company's
Registration Statement on Form S-11 filed with the Securities and Exchange
Commission (the "Commission") (File No. 333-4568), as amended at the time
declared effective by the Commission (the "Registration Statement") and the
final prospectus relating to the Offering (the "Prospectus"), no person has any
right or has asserted any right to receive any portion of the earnings, cash
flow or proceeds from the operation or sale of any Owned Hotel owned by any
Asset Entity.
1.6 Assets. Except as reflected in the
------
Transfer Agreements or on Schedule 1.6 attached hereto, no Asset Entity owns any
------------
assets other than the interests in the Owned Hotels being transferred to the
Operating Partnership pursuant to the Transfer Agreements and related personal
property, fixtures and inventory.
1.7 Title. Each Asset Entity and, to the
-----
knowledge of the Indemnitors, each seller of a Managed Hotel or Acquisition
Hotel, has good and marketable (with respect to Hotels located in the State of
Texas, good and indefeasible) fee simple title to or leasehold interest in the
Hotels identified in the Transfer Agreements as being owned by such party, in
each case subject only to (i) the liens, encumbrances, debts, liabilities or
obligations, direct or indirect, contingent or non-contingent, and matured or
unmatured, to which the Company and the Operating Partnership are taking subject
as enumerated in the Registration Statement (or on Schedule 1.7(a)), (ii) real
---------------
estate taxes and assessments not yet due and payable, and (iii) title
encumbrances which do not secure the payment of money and for which exceptions
appear in or were issued over by the title insurance commitments listed on
Schedule 1.7(a) (collectively, "Permitted Liabilities").
- ---------------
1.8 Debt. Except for the existing debt
----
secured by a mortgage, deed of trust or similar instrument with respect to each
Hotel, as listed on Schedule 1.8, no Asset Entity, and, to the knowledge of the
------------
Indemnitors, no Managed Hotel or Acquisition Hotel is
4
<PAGE>
subject to any indebtedness which will survive the consummation of the Formation
Transactions. Except as set forth on Schedule 1.8, there exists no default or,
------------
to the knowledge of the Indemnitors, any event which with the passage of time or
notice or both would constitute a default, with respect to the mortgage debt or
any other debt of any such entity or to which any Owned Hotel or any interest in
any Asset Entity or, to the knowledge of the Indemnitors or to which any Managed
Hotel or Acquired Hotel is subject which will survive the consummation of the
Formation Transactions, that has not been cured. The mortgages and deeds of
trust encumbering the Owned Hotels and, to the knowledge of the Indemnitors, the
mortgages and deeds of trust encumbering the Managed Hotels and Acquisition
Hotels, to which the Operating Partnership takes subject, are not convertible
nor will the Operating Partnership, the Company or any lender or other party
hold a participating interest therein and, except as otherwise set forth in the
Registration Statement, such mortgages and deeds of trust are not cross-
defaulted or cross-collateralized to any other mortgage deed of trust or
property. Schedule 1.8 specifies the existing debt that is to be repaid in
------------
connection with the Formation Transactions and also sets forth, if applicable,
the prepayment terms of all mortgage debt being repaid in connection with the
Formation Transactions. Except as set forth on Schedule 1.8, all action
------------
necessary to prepay in full such mortgage debt simultaneously with the
consummation of the Formation Transactions has been taken, all consents or
releases required in connection with such prepayment have been obtained, and
such mortgages and deeds of trust encumbering the Hotels will be satisfied in
full and released contemporaneously with the Final Closing.
1.9 Financial Statements. The consolidated
--------------------
or combined financial statements set forth in the Registration Statement (the
"Financial Statements") have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
specified. The balance sheets in the Financial Statements fairly present the
financial condition of the entities named therein as of the dates shown, and the
income statements in the Financial Statements fairly present the results of
operations of the entities named therein for the periods indicated. There are
no material liens, encumbrances, debts, liabilities or obligations, direct or
indirect, contingent or non-contingent, known or unknown, and matured or
unmatured (collectively, "Liabilities") with respect to any such entities that
are not reflected, reserved against or described on such Financial Statements
which are required to be reflected as liabilities therein under generally
accepted accounting principles.
1.10 Financial Condition. Since the date of
-------------------
the Financial Statements, there has been no material adverse change in the
condition (financial or otherwise), earnings, business, affairs or business
prospects of any Owned Hotel or Managed Hotel, or Asset Entity or, to the
knowledge of the Indemnitors, any Acquisition Hotel, except as disclosed on
Schedule 1.10 attached hereto. No Transferor, Asset Entity, or to the knowledge
- -------------
of the Indemnitors, any seller of a Managed Hotel or Acquisition Hotel (i) is in
receivership or dissolution, (ii) has made an assignment for the benefit of
creditors or admitted in writing its inability to pay its debts as they mature,
or (iii) has filed a petition in voluntary bankruptcy or a petition or answer
seeking reorganization or an arrangement with creditors under the
5
<PAGE>
Federal bankruptcy law or any other similar law or statute of the United States
or any jurisdiction and, to the knowledge of the Indemnitors, no such petition
has been filed against any such party.
1.11 Contracts. Except for (i) agreements
---------
relating to mortgage financing to be assumed by the Operating Partnership or to
be repaid in connection with the Formation Transactions as described in the
Registration Statement, (ii) agreements relating to other indebtedness for
borrowed money disclosed in the Registration Statement, (iii) agreements that
the Company or the Operating Partnership have or will enter into, or (iv) the
leases referred to in Section 1.12 below, Schedule 1.11 attached hereto lists
-------------
all contracts or other understandings, written or oral, to which any Asset
Entity is a party or by which any Asset Entity or Managed Hotel is bound, or
that to the knowledge of the Indemnitors, relate to an Acquisition Hotel or that
would otherwise become binding on the Company or the Operating Partnership or
any subsidiary of either following consummation of the Formation Transactions
(collectively, the "Contracts") which (a) singly or in combination with any
other contract purporting to address the same matter for such Hotel could
require payments in excess of $10,000 in any year and (b) would not be
terminable without cost on 60 days' notice or less by such Asset Entity or the
Operating Partnership without violating the terms thereof. Each of the
Contracts is valid and binding on the Asset Entity that is a party thereto, as
applicable, and is in full force and effect in all material respects. No Asset
Entity, nor to the knowledge of the Indemnitors, any other party to any
Contract, has breached or defaulted under the terms of any Contract, nor has
there occurred any event which, with the passage of time or the giving of
notice, or both, could give rise to such a breach or default, except for such
breaches or defaults that would not, singly or in the aggregate, have a material
adverse effect on the business or operations of any Asset Entity, any Hotel or,
following the consummation of the Formation Transactions, the Operating
Partnership or the Company.
1.12 Permits. There exists for each Owned
-------
Hotel and Managed Hotel, and to the knowledge of the Indemnitors, each
Acquisition Hotel (and will continue to exist immediately following the
consummation of the Formation Transactions) all certificates, licenses
(including, without limitation, liquor licenses), permits and other
authorizations from governmental or political subdivisions or regulatory
authorities (collectively "Permits") as are necessary for the ownership, use,
operation and licensing of such Hotel as it is currently being operated, except
for such Permits for which the failure to possess would not have a material
adverse effect on the condition (financial or otherwise) earnings, business,
affairs or business prospects of such Hotel. All such Permits are valid and in
full force and effect and no such Permit has been violated in any material
respect.
1.13 Litigation; Moratoria, Etc. Except for
--------------------------
the matters identified on Schedule 1.13 attached hereto, there are no claims,
-------------
actions, suits, proceedings or investigations pending or, to the knowledge of
the Indemnitors, threatened against any Transferor, any Asset Entity or any of
the properties or rights of any of them (including, without limitation, any
Hotel), or, to the knowledge of the Indemnitors, any Managed Hotel
6
<PAGE>
or Acquisition Hotel or any seller of any Managed Hotel or Acquisition Hotel,
before or by any court or administrative, governmental or regulatory authority
or body, domestic or foreign, arising in connection with the Formation
Transactions or consents required or sought in connection with the Formation
Transactions or otherwise arising in connection with the Operating Partnership,
the Company or the Offering, or that would have a material adverse effect on the
condition (financial or otherwise), earnings, business, affairs or business
prospects of any Hotel, any such Transferor, any such Asset Entity, any such
seller or following consummation of the Formation Transactions, the Operating
Partnership or the Company, whether or not covered by insurance. No Transferor,
Asset Entity or Owned Hotel or, to the knowledge of the Indemnitors, any Managed
Hotel or Acquisition Hotel or any seller of any Managed Hotel or Acquisition
Hotel, is subject to any order, judgment, injunction or decree of any court,
tribunal or other governmental authority (other than generally applicable laws,
rules and regulations) that would have a material adverse effect on the business
or condition (financial or otherwise), earnings, business, affairs or business
prospects of such party or any Hotel. Except as disclosed in the Registration
Statement, there is no pending or, to the knowledge of the Indemnitors,
threatened litigation, moratorium, condemnation proceedings, zoning change, or
other similar proceeding or action that is likely to in any manner affect the
size of, use of, improvements on, construction on, access to or availability of
utilities or other necessary services to any Owned Hotel or Managed Hotel or, to
the knowledge of the Indemnitors, any Acquisition Hotel, except such proceedings
or actions that would not, singly or in the aggregate, have a material adverse
effect on the condition (financial or otherwise), or on the earnings, assets,
business, affairs or business prospects of or with respect to such Hotel or of
any Asset Entity or, following the consummation of the Formation Transactions,
the Company or the Operating Partnership.
1.14 Compliance with Laws, Etc. Except as
-------------------------
set forth in Schedule 1.14, no Owned Hotel or Managed Hotel or, to the knowledge
-------------
of the Indemnitors, any Acquisition Hotel, is in violation in any material
respect of any zoning code, law, regulation or ordinance or any recorded
covenants applicable to such Hotel which would have a material adverse effect on
the condition (financial or otherwise), earnings, business, affairs or business
prospects of any Asset Entity or Hotel or, following the consummation of the
Formation Transactions, the Operating Partnership or the Company. No Asset
Entity or Managed Hotel or proper representative thereof, nor to the knowledge
of the Indemnitors, any Acquisition Hotel, has received any written or other
notice of any violation of any applicable zoning code, law, regulation or
ordinance, or of any employment, environmental, or other regulatory law, order,
regulation, or requirement relating to a Hotel (the "Hotel Regulations") which
remains uncured, and there are no violations of Hotel Regulations which,
individually or in the aggregate, would have a material adverse effect on the
condition (financial or otherwise), earnings, business, affairs or business
prospects of any Asset Entity or Hotel or, following the consummation of the
Formation Transactions, the Operating Partnership or the Company.
1.15 Taxes, Utilities, Etc. Except for such
---------------------
matters that in the aggregate would not result in a material adverse effect on
the condition (financial or otherwise),
7
<PAGE>
earnings, business, affairs or business prospects of any Transferor, Asset
Entity or Hotel, or following consummation of the Formation Transactions, the
Operating Partnership or the Company, or as set forth on Schedule 1.15, (i) all
-------------
tax or information returns required to be filed on or before the date hereof by
or on behalf of any Transferor or Asset Entity have been filed through the date
hereof or will be filed on or before the closing of the Offering in accordance
with all applicable laws, and (ii) there is no action, suit or proceeding
pending against, or with respect to, any Transferor, Asset Entity or any Owned
Hotel or Managed Hotel or, to the knowledge of the Indemnitors, any Acquisition
Hotel in respect of any tax (other than tax abatement proceedings) nor is any
claim for additional tax asserted by any such authority. No amounts due and
owing with respect to any such Hotel in connection with utilities, insurance,
assessments or other charges customarily prorated in real estate transactions
have been outstanding more than 30 days. Schedule 1.15 attached hereto shows
-------------
all tax abatements to which any Hotel is entitled as of the date hereof and for
ensuing tax periods.
1.16 Insurance. Each Asset Entity, Owned
---------
Hotel and Managed Hotel and, to the knowledge of the Indemnitors, each
Acquisition Hotel, currently has in place and has had in place for the past five
years, and the Operating Partnership will have in place upon consummation of the
Formation Transactions, public liability, casualty and other insurance coverage
with respect to the Hotel as is required by any applicable mortgage to be
assumed by the Company or the Operating Partnership or to be placed by the
Company or the Operating Partnership on any Hotel (as described in the
Registration Statement) or as would otherwise customarily be carried by owners
or operators of projects similar to the Hotels in the markets in which such
Hotels are located. Each of the insurance policies with respect to the Owned
Hotels and Managed Hotels, and, to the knowledge of the Indemnitors, the
Acquisition Hotels, is in full force and effect and all premiums due and payable
thereunder have been fully paid when due. None of the Indemnitors and
Transferor nor any Asset Entity nor any Managed Hotel, nor to the knowledge of
the Indemnitors, the owners of the Acquisition Hotel, has received from any
insurance company notice of any material defects or deficiencies affecting the
insurability of any Hotel or any notice of cancellation or intent to cancel any
such insurance or of any claim which is not covered by such insurance.
1.17 Employees. Except as disclosed on
---------
Schedule 1.17, no Asset Entity has any employees or has ever had any employees.
- -------------
1.18 Environmental. To the knowledge of the
-------------
Indemnitors, except for conditions specifically described in the environmental
reports prepared for the Hotels or enumerated in Schedule 1.18 (the
-------------
"Environmental Reports"):
(A) no Hazardous Substances (as defined below) are present in the
Environment (as defined below) at any Hotel in violation of any
Environmental Law (defined below);
8
<PAGE>
(B) no Asset Entity or Transferor has caused or allowed any
discharging or disposal of any Hazardous Substance or pollutant into the
Environment at any Hotel in violation of any Environmental Law (as defined
below);
(C) except as set forth on Schedule 1.18, no testing, assessment,
-------------
report, notice, filing, remediation, or other action is required under any
Environmental Law by reason of any Hazardous Substance at any Hotel and no
remediation is required under any Environmental Law of any properties
within one half mile of any Hotel;
(D) no Asset Entity or Transferor or AGHI, as manager of the Owned
Hotels and the Managed Hotels, nor, to the knowledge of the Indemnitors,
any owner of an Acquisition Hotel has received any notice of a claim under
or pursuant to any Environmental Law applicable to a Hotel pertaining to
Hazardous Substances on the Hotel or pertaining to other property at which
Hazardous Substances generated at the Hotel have come to be located;
(E) no Asset Entity, Transferor, AGHI, or any owner of any Managed
Hotel or Acquisition Hotel has received any notice from any Governmental
Authority (as defined below) claiming any violation of any Environmental
Law at any Hotel that is uncured or unremediated as of the date hereof;
(F) each Hotel is in compliance in all respects with every
Environmental Law applicable to the Hotel, its property and its operations;
(G) no Hotel (1) is included on the National Priorities List issued
pursuant to CERCLA (as defined below) by the United States Environmental
Protection Agency (the "EPA") or on the Comprehensive Environmental
Response, Compensation and Liability Information System database maintained
by the EPA or (2) is included on any similar list of potentially
contaminated sites pursuant to any other applicable Environmental Law, and
no predecessor to any Asset Entity has received any written notice from the
EPA or any other Governmental Authority proposing the inclusion of any
Owned Hotel on such list; and
(H) there are no underground storage tanks located at any Hotel or on
any property associated therewith.
As used herein, "HAZARDOUS SUBSTANCE" shall mean oil, petroleum, or petroleum-
derived substances or waste, lead-based paint, asbestos, polychlorinated
biphenals, radioactive materials, flammable explosives and any hazardous
substance, hazardous material, toxic substance, or hazardous waste, listed or
regulated under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended (42 U.S.C. (S)(S) 9601 et seq.) ("CERCLA"), the
Resource Conservation and Recovery Act, as amended (42 U.S.C. (S)(S) 6901, et
seq.) ("RCRA"), the Clean Water Act, as amended (33 U.S.C. (S)(S) 1251 et. seq.)
(the "Clean Water Act"), or any other similar federal, state or local laws,
rules, regulations
9
<PAGE>
and orders affecting the Hotels; "ENVIRONMENT" shall mean any ambient air,
surface water, ground water, land surface, or subsurface strata located at, on,
or under any Hotel; "ENVIRONMENTAL LAW" shall mean any and all laws relating to
or imposing liability or standards of conduct concerning Hazardous Substances or
environmental protection as in effect on the date hereof or at any time in the
past, including, without limitation, CERCLA, RCRA, the Clean Water Act or the
Clean Air Act, as amended (42 U.S.C. (S)(S) 7401 et seq.), together with all
rules, regulations and orders promulgated thereunder and all other similar
federal, state and local laws, together with all rules, regulations, ordinances,
permits, licenses, other authorizations and orders, promulgated or issued
thereunder; "GOVERNMENTAL AUTHORITY" shall mean any federal, state or local
governmental office, agency or authority having the duty or authority to
promulgate, implement or enforce any Environmental Law;
1.19 Condition of Property; No Alterations. To the knowledge of the
-------------------------------------
Indemnitors, except for conditions specifically described in the structural
reports prepared for the Hotels and enumerated in Schedule 1.19(a) attached
----------------
hereto, there is no material defect in the condition of any Hotel, the
improvements thereon, the structural elements thereof, or the mechanical systems
therein, nor any material damage from casualty or other cause, nor any soil
condition of any Hotel that will not support all of the improvements thereon
without the need for unusual or new subsurface excavations, fill, footings,
caissons or other installations. Except as disclosed on Schedule 1.19(b)
----------------
attached hereto, there have been no alterations to the exteriors of any of the
buildings or other improvements on any Owned Hotel or Managed Hotel or to the
knowledge of the Indemnitors, any Acquisition Hotel, that would render any of
the surveys referred to on Schedule 1.19(c) inaccurate in any material respect.
----------------
1.20 Transfer Taxes. All transfer taxes, mortgage recording taxes,
--------------
controlling interest transfer taxes and similar taxes or impositions occasioned
by reason of the Formation Transactions have been paid in full and the amounts
thereof are as set forth in Schedule 1.20 attached hereto.
-------------
1.21 Real Estate Taxes and Assessments. The only Hotels that will be
---------------------------------
subject to increased real estate taxes and assessments by reason of the
Formation Transactions are as set forth on Schedule 1.21 attached hereto.
-------------
1.22 Management Contracts. Except as disclosed on Schedule 1.22, upon
-------------------- -------------
consummation of the Formation Transactions, all of the contracts or other
understandings, written or oral, to which any Asset Entity is a party or by
which any Asset Entity, Owned Hotel or Managed Hotel or, to the knowledge of the
Indemnitors, any Acquisition Hotel is bound, including all amendments thereto,
for the management of the Hotels shall be terminated without liability on the
part of the Operating Partnership and the Company effective no later than the
consummation of the Formation Transactions.
1.23 Historical Districts. Except as listed on Schedule 1.23, neither
-------------------- -------------
the Hotels nor any portion thereof, are (i) listed, or eligible to be listed, in
any national, state or local register of historic places or areas, or (ii)
located within any designated district or area
10
<PAGE>
in which the permitted uses of land located therein are restricted by
regulations, rules or laws other than those specified under local, state and
federal generally applicable zoning ordinances, statutes, laws and regulations.
1.24 Occupancy; Average Daily Room Rate; Revenue Per Available Room.
--------------------------------------------------------------
The occupancy and average daily room rate and revenue per available room with
respect to each Owned Hotel and Managed Hotel and, to the knowledge of the
Indemnitors, each Acquisition Hotel, as described in the Registration Statement
or Form S-11 and any amendments thereto (the "Registration Statement") of the
Company filed with the Securities and Exchange Commission hereto are true and
accurate in all material respects.
1.25 Space Leases. Except as set forth on Schedule 1.25, with respect
------------ -------------
to the Owned Hotels and Managed Hotels and, to the knowledge of the Indemnitors,
with respect to the Acquisition Hotel (i) there are no leases for space, other
than guest rooms, conference rooms, banquet rooms and similar facilities; (ii)
there are no material uncured defaults with respect to such space leases; (iii)
no lessee under any such space lease is entitled to any material rebate or free
rent for any period after the consummation of the Formation Transactions or has
the right to unilaterally terminate any such space lease; (iv) true and correct
copies of such space leases have been provided to the Company or the Operating
Partnership, and to Smith Barney (as defined below) or its counsel; and (v) none
of the rentals from any such space leases has been assigned or encumbered
pursuant to assignments or encumbrances that will not be released at the closing
of the Formation Transactions.
1.26 Franchise Licenses. Except as disclosed on Schedule 1.26, with
------------------ -------------
respect to each Hotel that is subject to a franchise license, (i) the consent of
the franchisor to the transfer (whether by assignment or by the execution of a
new franchise agreement) of the franchise agreement to AGH Leasing L.P. (the
"Lessee") has been obtained; (ii) upon such transfer, the franchise agreement
will be a valid and binding obligation of the Lessee, and to the knowledge of
the Indemnitors, the franchisor; and (iii) such Hotel is in compliance in all
material respects with all provisions and requirements of the governing
franchise agreement and any other agreements with the franchisor. Except as set
forth on Schedule 1.26 hereto or disclosed in the Registration Statement,
-------------
neither the Company nor the Operating Partnership is, or following consummation
of the Formation Transactions will be, responsible for any expenses relating to
the transfer of the franchise agreements or the expenses for property
improvement plans with respect to any Hotel.
1.27 Sufficiency of Certain Items. Each Hotel contains and will
----------------------------
contain upon consummation of the Formation Transactions, sufficient equipment,
furnishings, and other personal property to efficiently and adequately conduct
its operations.
2. Additional Representations and Warranties with Respect to the
-------------------------------------------------------------
Indemnitors. Each Indemnitor hereby further represents and warrants to the
- -----------
Company and the Operating Partnership as follows:
11
<PAGE>
2.1 Authority Relative to this Agreement. All action of such
------------------------------------
Indemnitor necessary to authorize the execution, delivery and performance of
this Agreement by such Indemnitor has been taken, and no other proceedings on
the part of such Indemnitor are necessary to authorize the execution and
delivery by such Indemnitor of this Agreement and the consummation by such
Indemnitor of the transactions hereunder. Neither the execution and delivery of
this Agreement by such Indemnitor, nor the consummation by such Indemnitor of
the transactions contemplated hereunder, nor compliance by such Indemnitor with
any of the provisions of this Agreement will (i) result in a violation or breach
of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, cancellation or acceleration)
under any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or obligation
to which such Indemnitor is a party or by which such Indemnitor may be bound, or
(ii) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to such Indemnitor, except for violations, breaches or defaults which
would not in the aggregate have a material adverse effect on the financial
condition of such Indemnitor.
2.2 Binding Obligation. This Agreement has been duly and validly
------------------
executed and delivered by such Indemnitor and constitutes a valid and binding
agreement of such Indemnitor, enforceable against such Indemnitor in accordance
with its terms, except that such enforcement may be subject to bankruptcy,
conservatorship, receivership, insolvency, moratorium or similar laws affecting
creditors' rights generally and to general principles of equity.
2.3 Registration Statement. Each Indemnitor has reviewed the
----------------------
Registration Statement and represents and warrants that each Preliminary
Prospectus, on the date of filing thereof with the Commission, and the
Prospectus and any amendment or supplement thereto, on the date of filing
thereof with the Commission and at the date of consummation of the Formation
Transactions conformed or will conform in all material respects with the
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
and the rules and regulations of the Commission; the Registration Statement,
when it became or becomes effective, did not or will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading; each
Preliminary Prospectus, on the date of filing thereof with the Commission, and
the Prospectus and any amendment or supplement thereto, on the date of filing
thereof with the Commission and at the Final Closing, did not or will not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; except that the foregoing shall not apply to statements in or
omissions from any such document in reliance upon, and in conformity with,
written information furnished to the Company by Smith Barney Inc. ("Smith
Barney"), or by any underwriter through Smith Barney, specifically for use in
the preparation thereof. Each Indemnitor acknowledges that the name of the
Underwriters appearing on the cover page and the back cover page of the
Prospectus, the legend with respect to overallotments and stabilization on the
inside front cover, the list of Underwriters
12
<PAGE>
and their respective allotments appearing under the caption "Underwriting" and
the statements in the first and third paragraphs under the caption
"Underwriting" in the Prospectus constitute the only information relating to any
underwriter furnished in writing to the Company by Smith Barney or any other
Underwriter specifically for use in the preparation of the Registration
Statement and the Prospectus. The Registration Statement does not and is not
required to register any securities issued or to be issued in a roll-up
transaction (as defined in Item 901(c) of Regulation S-K of the rules and
regulations of the Commission) or in a roll-up transaction (as defined in the
Limited Partnership Rollup Reform Act of 1993). The Formation Transactions do
not involve the issuance of any securities with respect to which there has been
filed, is proposed to be filed or is required to be filed under the Securities
Act, any other registration statement.
3. Indemnity; Limitations on Liability. Subject to the terms hereof,
-----------------------------------
each Indemnitor hereby agrees to indemnify and hold harmless the Company and the
Operating Partnership and their subsidiaries (each, a "Covered Party") from any
damage, expense, loss, cost, claim or liability (each a "Claim") suffered or
incurred by any Covered Party as a result of any breach, misrepresentation or
inaccuracy in any representation or warranty contained herein (each, a "Covered
Matter"). Notwithstanding anything to the contrary contained herein, (a) the
total liability of each Indemnitor hereunder shall not exceed the maximum
indemnification amount set forth opposite each indemnitor's name on Schedule 1-A
hereto; (b) in the event of any Claim for which a third party other than an
Indemnitor shall have liability under the applicable Transfer Agreement, the
Operating Partnership and the Company shall, as and to the extent provided in
Section 5 below, first make reasonable efforts to exhaust their remedies under
such indemnities against such third party prior to proceeding against the
Indemnitors hereunder; (c) no Indemnitor shall have no liability resulting from
any Claims, unless and until the aggregate amount of the Claims shall exceed, in
the aggregate, [ ]; and (d) each Indemnitor's Proportionate Share of
indemnification for each Claim shall equal the product of the percentage set
forth next to such Indemnitor's name on Schedule 1-A hereto multiplied by the
------------
dollar amount of the Claim. The liability of the Indemnitors hereunder is
expressly understood to include both out-of-pocket damages, expenses, losses,
costs and liabilities suffered or incurred by the Company or the Operating
Partnership (including, without limitation, reasonable attorneys' fees and
expenses and other reasonable costs incurred in defending against any adverse
claims) as a result of any matter referred to in this Section 3 and the amount
by which the consideration received by the Indemnitors exceeded the
consideration they otherwise would have received in the Transactions but for the
breach, misrepresentation, inaccuracy or other matter giving rise to such
indemnification hereunder, and no Indemnitor shall be liable to any Covered
Party under this Agreement for any indirect, special, consequential, loss of
profits, or similar speculative damages asserted or claimed by a Covered Party.
4. Survival; Agreements Regarding Certain Claims. It is the express
---------------------------------------------
intention and agreement of the parties hereto that the representations,
warranties and indemnities set forth in this Agreement shall survive the
consummation of the Formation Transactions for a period of one year from the
date of the consummation of the Formation Transactions and
13
<PAGE>
(except as specifically provided below in this Section 4) shall expire and be
terminated and extinguished forever at such time, except with respect to claims
asserted against any Indemnitor in good faith pursuant hereto by written notice
from any or all of the Covered Parties to such Indemnitor at any time within the
one-year period following the consummation of the Formation Transactions. Any
written notice given within such one-year period must set forth the nature and
details of the claim with specificity in order to constitute a valid notice
pursuant to the preceding sentence. Each Covered Party agrees that, in the
event that such Covered Party could reasonably make any claim with respect to a
matter covered by this Agreement under any existing policy of insurance or
against any Transferor under any Transfer Documents, such Covered Party shall,
prior to taking any action arising hereunder against any Indemnitor, make a
claim under such policy or against such Transferor and thereafter shall use
reasonable efforts to prosecute such claim to completion; provided, however,
-------- -------
that if such Covered Party believes in good faith that by the failure to take
action against such Indemnitor for such Claim such Covered Party could
irrevocably lose its rights to bring an action hereunder or to proceed against
any of the Collateral, such Covered Party may take actions against such
Indemnitor as are reasonably necessary to preserve such rights; and provided,
--------
further, that from and after (a) the time that notice is given to an Indemnitor
- -------
that a Claim exists but that coverage therefore is being sought from an insurer
or Transferor and that no action or (in accordance with the preceding proviso)
limited action is being taken against such Indemnitor, through and including (b)
30 days after the date of abandonment (by non-prosecution or otherwise) of such
Claim against such carrier or Transferor or, if earlier, the applicable
limitations period for such claim, such one year period (if applicable), with
respect to that Indemnitor and that Claim only and no other Claim (other than
other Claims satisfying the conditions of this proviso), shall be stayed, as
necessary, to preserve such Covered Party's rights against such Indemnitor under
this Agreement.
5. Miscellaneous.
-------------
5.1 Notices. All notices, demands, requests or other communications
-------
which may be or are required to be given or made either by the Indemnitors, on
the one hand, or the Company or the Operating Partnership, on the other hand,
pursuant to this Agreement shall be in writing and shall be hand delivered or
transmitted by certified mail, express overnight mail or delivery service,
telegram, telex or facsimile transmission to the parties to the following
addresses:
If to: Steven D. Jorns c/o American General Hospitality
Bruce G. Wiles Corporation
or 3860 West Northwest Highway
Kenneth B. Barr, to: Suite 300
Dallas, Texas 75220
If to: James E. Sowell, to: c/o Jim Sowell Company
3131 McKinney, Suite 200
Dallas, Texas 75204
14
<PAGE>
If to: Kenneth W. Shaw, to: 1313 Plantation Drive, N.
Colleyville, Texas 76034
If to: Lewis W. Shaw, to: c/o Jackson-Shaw Co.
3860 West Northwest Highway
Suite 350
Dallas, Texas 75220
If to the Company or the Operating
Partnership to: American General Hospitality Corporation
3860 West Northwest Highway
Suite 300
Dallas, Texas 75220
With a copy to: Battle Fowler, LLP
75 East 55th Street
Park Avenue Tower
New York, NY 10022
Attn: Steven L. Lichtenfeld, Esquire
or to such other address in the United States of America as the addressee may
indicate by written notice to the other party in conformance with this Section
5.1.
Each notice, demand, request or communication which shall be given or
made in the manner described above shall be deemed sufficiently given or made
for all purposes at such time as it is delivered to the addressee (with the
delivery receipt, the affidavit of messenger or (with respect to a telex or
facsimile transmission) the answer back being deemed conclusive but not
exclusive evidence of such delivery) or at such time as delivery is refused by
the addressee upon presentation.
5.2 Definition of Knowledge. As used herein, "to the knowledge" of
-----------------------
the Indemnitors means the best knowledge of the Indemnitors after due inquiry of
all appropriate individuals having responsibility for the subject matter of the
relevant representation and review of the due diligence material prepared and
obtained in connection with the purchase by the Operating Partnership of the
equity interests in the Asset Entities or the purchase of the Acquisition Hotels
and Managed Hotels.
5.3 Benefit and Assignment. No party hereto shall assign this
----------------------
Agreement, in whole or in part, whether by operation of law or otherwise,
without the prior written consent of the Indemnitors to be bound by such
assignment (if the assignor is the Operating Partnership or the Company) or of
the Operating Partnership and the Company (if the assignor is any Indemnitor),
which consent in either case shall not be unreasonably withheld; and any
purported assignment contrary to the terms hereof shall be null, void and of no
force and effect. This Agreement shall be binding upon and shall inure to the
benefit of the parties
15
<PAGE>
hereto and their respective successors and assigns as permitted hereunder. No
person or entity other than the parties hereto (which shall include any
subsidiary of the Company or the Operating Partnership) is or shall be entitled
to bring any action to enforce any provision of this Agreement against any of
the parties hereto, and the covenants and agreements set forth in this Agreement
shall be solely for the benefit of, and shall be enforceable only by, the
parties hereto or their respective successors and assigns as permitted
hereunder.
5.4 Entire Agreement; Amendment. This Agreement contains the final
---------------------------
and entire agreement between the parties hereto with respect to the subject
matter hereof and is intended to be an integration of all prior negotiations and
understandings. The parties to this Agreement shall not be bound by any terms,
conditions, statements, warranties or representations, oral or written, not
contained or referred to herein or therein. No change or modification of this
Agreement shall be valid unless the same is in writing and signed by the parties
hereto. Notwithstanding the foregoing, nothing contained herein shall be deemed
to supersede any representations, warranties or indemnities contained in any
Transfer Documents.
5.5 No Waiver. No delay or failure on the part of any party hereto
---------
in exercising any right, power or privilege under this Agreement or under any
other instrument or document given in connection with or pursuant to this
Agreement shall impair any such right, power or privilege or be construed as a
waiver of any default or any acquiescence therein. No single or partial
exercise of any such right, power or privilege shall preclude the further
exercise of such right, power or privilege. No waiver shall be valid against
any party hereto unless made in writing and signed by the party against whom
enforcement of such waiver is sought and then only to the extent expressly
specified therein.
5.6 Governing Law. This Agreement, the rights and obligations of the
-------------
parties hereto and any claims or disputes relating thereto shall be governed by
and construed under the laws of the State of Texas (but not including the choice
of law rules thereof).
5.7 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
16
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed and delivered on its behalf as of the date first
above written.
AMERICAN GENERAL HOSPITALITY OPERATING
PARTNERSHIP, L.P.
By: AGH GP, INC.
General Partner
By:_________________________________
Steven D. Jorns
Chairman of the Board, Chief Executive
Officer and President
AMERICAN GENERAL HOSPITALITY CORPORATION
By:_______________________________________
Steven D. Jorns
Chairman of the Board, Chief Executive Officer
and President
_______________________________________
Steven D. Jorns
----------------------------------------
Bruce W. Wiles
---------------------------------------
Kenneth E. Barr
---------------------------------------
James Sowell
---------------------------------------
Lewis W. Shaw
---------------------------------------
Kenneth M. Shaw
17
<PAGE>
SCHEDULE 1-A
------------
<TABLE>
<CAPTION>
PROPORTIONATE MAXIMUM INDEMNI-
INDEMNITOR SHARE FICATION AMOUNT
- ----------------- ----------------- ---------------
<S> <C> <C>
Kenneth E. Barr .86% $ [ ]
Steven D. Jorns 15.95% [ ]
Kenneth W. Shaw 15.82% [ ]
Lewis W. Shaw 15.95% [ ]
James E. Sowell 46.54% [ ]
Bruce G. Wiles 4.88% [ ]
------ -----------
Total 100.00% $ [ ]
====== ===========
</TABLE>
18
<PAGE>
SCHEDULE 1-B
------------
ASSET ENTITY OWNED HOTEL
------------ -----------
455 Meadowlands Associates, Ltd. Courtyard by Marriott-Meadowlands
Richmond Williamsburg Associates, Ltd. Hampton Inn-Richmond Airport
183 Hotel Associates, Ltd. Holiday Inn Dallas DFW Airport West
MPV Limited Partnership Hotel Maison de Ville
3100 Glendale Joint Venture Hilton Hotel - Toledo
19
<PAGE>
SCHEDULE 1-C
------------
ACQUISITION HOTELS
Holiday Inn Select-Madison Madison, Wisconsin
LeBarber Airport Hotel San Jose, California
Holiday Inn Mission Valley San Diego, California
Holiday Inn Park Center Plaza San Jose, California
Fred Haven Albuquerque Airport Hotel Albuquerque, New Mexico
20
<PAGE>
Schedule 1-D
------------
MANAGED HOTELS
Holiday Inn Dallas DFW Airport South Dallas, Texas
Days Inn Ocean City Ocean City, Maryland
Holiday Inn New Orleans International Airport Kenney, Louisiana
21
<PAGE>
Schedule 1-E
------------
(1) Letter Agreement between American General Hospitality, Inc. and American
General Hospitality Operating Partnership, L.P. relating to the
assignment of contract rights for the purchase of certain of the Initial
Hotels.
(2) Omnibus Option Agreement (OP Units) for Holiday Inn Dallas DFW Airport
South.
(3) Omnibus Option Agreement (Cash) for Holiday Inn Dallas DFW Airport South.
(4) Contribution Agreement (GP) for Holiday Inn Dallas DFW Airport South.
(5) Contribution Agreement (Primary Contributors) for Holiday Inn Dallas DFW
Airport South. Holiday Inn Dallas DFW Airport West, Courtyard by
Marriott-Meadowlands, Hampton Inn Richmond Airport and Hilton Hotel-
Toledo.
(6) Option Agreement for Holiday Inn Dallas DFW Airport West.
(7) Contribution Agreement for Holiday Inn New Orleans International Airport.
(8) Sale and Contribution Agreement for Holiday Inn Select-Madison.
(9) Purchase and Sale Agreement for Holiday Inn Park Center Plaza.
(10) Hotel Purchase Agreement for Fred Harvey Albuquerque Airport Hotel.
(11) Hotel Purchase Agreement for LeBaron Airport Hotel.
(12) Real Estate Sale Agreement for Days Inn Ocean City.
(13) Purchase and Sale Agreement and Escrow Instructions for Holiday Inn
Mission Valley.
(14) Omnibus Option Agreement (OP Units) for Hotel Maison de Ville.
(15) Omnibus Option Agreement (Cash) for Hotel Maison de Ville.
(16) Option Agreement for Hotel Maison de Ville.
(17) Option Agreement (the Plan) for Holiday Inn Dallas DFW Airport South,
Holiday Inn Dallas DFW Airport West, Courtyard by Marriott-Meadowlands,
Hampton Inn Richmond Airport and Hotel Maison de Ville.
22
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-11
(File No.333-4568) of our reports dated March 29, 1996, on our audits of the
combined financial statements and financial statement schedule of AGH
Predecessor Hotels; dated April 8, 1996, on our audits of the combined
financial statements and financial statement schedule of AGH Acquisition
Hotels; dated April 12, 1996, on our audit of the balance sheet of American
General Hospitality Corporation; and dated May 29, 1996 on our audit of the
balance sheet of AGH Leasing, L.P. We also consent to the reference to our
firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Dallas, Texas July 15, 1996
