<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1997
REGISTRATION NO. 333-19585
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
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 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 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, 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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 JANUARY 16, 1997
PROSPECTUS 5,500,000 Shares
LOGO AMERICAN GENERAL HOSPITALITY CORPORATION
Common Stock
--------
American General Hospitality Corporation (collectively with its subsidiaries,
the "Company") is a self-administered real estate investment trust ("REIT")
that owns sixteen hotels in eleven states containing an aggregate of 3,858
guest rooms (the "Current Hotels"). In addition, the Company has entered into
contracts to purchase four additional hotels containing an aggregate of 775
guest rooms (the "Proposed Acquisition Hotels"). The Company's portfolio
consists primarily of full-service hotels located in major metropolitan
markets. Ten of the Current Hotels are currently undergoing product and brand
repositioning that is expected to result in the conversion of such hotels to
leading franchise brands. To enable the Company to qualify as a REIT, the
Company leases the Current Hotels to AGH Leasing, L.P. (the "Lessee"), which is
owned in part by certain executive officers of the Company, under participating
leases that are designed to allow the Company to achieve substantial
participation in any future growth of revenues generated at the Current Hotels.
See "AGHI, the Lessee and Other Operators."
All the shares of Common Stock offered hereby are being offered by the
Company. The Company has paid regular quarterly distributions on the Common
Stock since its initial public offering in July 1996. The Common Stock is
listed on the New York Stock Exchange, Inc. (the "NYSE") under the symbol
"AGT." On January 15, 1997, the last reported sale price of the Common Stock on
the NYSE was $24 3/8 per share. See "Price Range of Common Stock and
Distribution Policy." The Company's Charter limits 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 16 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
--------
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 $2,235,000, which are payable by
the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 825,000 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 , 1997 at
the offices of Smith Barney Inc., 333 West 34th Street, New York, New York
10001.
--------
Smith Barney Inc.
Legg Mason Wood Walker
Incorporated
Montgomery Securities
Prudential Securities Incorporated
The Robinson-Humphrey Company, Inc.
, 1997
<PAGE>
The text "American General Hospitality Corporation" and the Company's symbol
appear on the upper left hand corner of the page. A map of the United States
showing the location of the Initial Hotels, the Acquired Hotels and the Proposed
Acquisition Hotels appears on the top half of the page.
Below the map appears the key to the map which lists the names of each of the
Hotels, both before and after any planned brand conversions, and the location
of each of the Hotels. Beside the name of any Hotel scheduled to undergo a
brand conversion as well as all of the Proposed Acquisition Hotels appears an
asterisk which references a footnote at the bottom of the page which reads:
"There can be no assurance that any of the proposed brand conversions or
proposed hotel acquisitions will occur."
At the bottom of the page appears a box containing the legend: "American General
Hospitality Corporation is a New York Stock Exchange listed real estate
investment trust with a current portfolio of 16 hotels containing 3,858 guest
rooms. The Company is focused on adding value to its portfolio through
acquisitions and product and brand repositionings." Two asterisks appear at the
end of the legend referencing a footnote which reads: "There can be no assurance
that such objective will be achieved."
<PAGE>
The text "American General Hospitality Corporation" and the Company's symbol
appear on the upper left hand corner of the page. There are four pictures on
this page which appear counter clockwise as follows:
1) A photograph of the exterior of the French Quarter Suites Hotel.
2) A photograph of the interior atrium of the French Quarter Suites Hotel.
Between pictures 1) and 2) appears the text "Doubletree Guest Suites;
Atlanta, GA (Currently French Quarter Suites Hotel) (Proposed
Acquisition Hotel)".
3) A photograph of the Radisson Hotel Arlington Heights with the text
"Radisson Hotel; Arlington Heights, IL (Proposed Acquisition Hotel)"
appearing beside the picture.
4) A photograph of the Holiday Inn Resort - Monterey with the text "Hilton
Hotel; Monterey, CA (Currently Holiday Inn Resort)" appearing beside
the picture.
<PAGE>
There are four pictures on this page which appear counter-clockwise as follows:
1) A photograph of the Days Inn Lake Buena Vista with the text "Wyndham Royal
Safari; Lake Buena Vista, FL (Currently Days Inn)" appearing below the
picture.
2) A photograph of the Sheraton Key Largo.
3) A photograph of the pool area at the Sheraton Key Largo.
The text "Westin Resort; Key Largo FL (Currently Sheraton Key Largo)
(Proposed Acquisition Hotel)" appears between pictures 2) and 3).
4) A photograph of the Hilton Hotel - Durham with the text "Hilton Hotel;
Durham, NC" appearing beside the picture.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN
THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 1
The Company.............................................................. 1
Risk Factors............................................................. 3
Developments Since the Initial Public Offering........................... 4
The Hotels............................................................... 7
AGHI, the Lessee and Other Operators..................................... 9
Formation Transactions and Benefits to Related Parties................... 10
Distribution Policy...................................................... 10
Tax Status............................................................... 11
The Offering............................................................. 11
Summary Financial Information............................................ 12
RISK FACTORS.............................................................. 16
Risk That Proposed Acquisition Hotels Will Not Be Acquired............... 16
Risks Associated with the Company's Acquisition of a Substantial Number
of Additional Hotels.................................................... 16
Conflicts of Interest.................................................... 16
Dependence on Lessee and Payments Under the Participating Leases......... 17
Lack of Control Over Operations of the Hotels............................ 18
Hotel Industry Risks..................................................... 18
Contingent Liabilities of Selling Partnerships........................... 19
Risks of Leverage; No Limits on Indebtedness............................. 19
Lack of Operating History or Revenues; History of Losses................. 20
Possible Adverse Effects of Shares Available for Future Sale Upon Market
Price of Common Stock................................................... 20
Competition for Management Time.......................................... 21
Real Estate Investment Risks............................................. 21
Tax Risks................................................................ 23
ERISA.................................................................... 25
Risks of Operating Hotels Under Franchise Agreements; Approval for Brand
Conversions............................................................. 25
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Potential Anti-Takeover Effect of Certain Provisions of Maryland Law and
of the Company's Charter and Bylaws..................................... 25
Reliance on Board of Directors and Management............................ 27
Contingent Obligation to Construct Additional Hotel Rooms................ 27
Ability of Board to Change Policies...................................... 27
Adverse Effect of Increase in Market Interest Rates on Price of Common
Stock................................................................... 27
THE COMPANY............................................................... 28
General.................................................................. 28
Growth Strategies........................................................ 30
Acquisitions............................................................. 30
Development.............................................................. 31
Internal Growth.......................................................... 31
Other Operators.......................................................... 33
Financing Strategy....................................................... 34
The Operating Partnership................................................ 34
Developments Since the Initial Public Offering........................... 35
USE OF PROCEEDS........................................................... 38
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION POLICY....................... 39
CAPITALIZATION............................................................ 40
SELECTED FINANCIAL INFORMATION............................................ 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 46
Overview................................................................. 46
Results of Operations.................................................... 47
Results of Operations of AGH Predecessor Hotels.......................... 48
The Lessee............................................................... 49
Liquidity and Capital Resources.......................................... 51
Renovations and Other Capital Improvements............................... 52
Inflation................................................................ 53
Seasonality.............................................................. 53
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE HOTEL INDUSTRY......................................................... 54
THE HOTELS................................................................. 55
Descriptions of Hotels.................................................... 58
Initial Hotels............................................................ 58
Acquired Hotels........................................................... 62
Proposed Acquisition Hotels............................................... 64
The Participating Leases.................................................. 66
The Management Agreements................................................. 76
Mortgage Indebtedness..................................................... 77
Line of Credit............................................................ 78
Ground Leases............................................................. 79
Franchise Conversions and Other Capital Improvements...................... 80
Franchise Agreements...................................................... 80
Employees................................................................. 83
Environmental Matters..................................................... 83
Options to Purchase and Rights of First Refusal........................... 84
Competition............................................................... 84
Insurance................................................................. 84
Legal Proceedings......................................................... 85
FORMATION TRANSACTIONS..................................................... 86
Benefits to the Officers and the Primary Contributors..................... 87
Valuation of Interests.................................................... 88
Transfer of Initial Hotels................................................ 88
MANAGEMENT................................................................. 89
Directors and Executive Officers.......................................... 89
Board of Directors and Committees......................................... 91
Compensation Committee Interlocks and Insider Participation............... 91
Executive Compensation.................................................... 91
Option Grants............................................................. 92
Employment Agreements..................................................... 92
Compensation of Directors................................................. 93
Stock Incentive Plans..................................................... 93
Limitation of Liability and Indemnification............................... 97
Indemnification Agreements................................................ 97
CERTAIN RELATIONSHIPS AND TRANSACTIONS..................................... 99
Relationships Among Officers and Directors................................ 99
Acquisition of Interests in Certain of the Initial Hotels................. 99
Shared Services and Office Space Agreement................................ 99
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Options to Purchase and Rights of First Refusal......................... 99
Employment Agreements and Stock Incentive Plans......................... 100
Purchase of Personal Property........................................... 100
The Participating Leases................................................ 100
The Management Agreements............................................... 100
The Beverage Corporations............................................... 101
AGHI, THE LESSEE AND OTHER OPERATORS..................................... 101
PRINCIPAL STOCKHOLDERS................................................... 104
DESCRIPTION OF CAPITAL STOCK............................................. 106
General................................................................. 106
Common Stock............................................................ 106
Power to Issue Additional Shares of Common Stock........................ 106
Restrictions on Transfer................................................ 107
Transfer Agent and Registrar............................................ 109
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND
BYLAWS.................................................................. 110
Number of Directors; Classification of the Board of Directors........... 110
Removal; Filling Vacancies.............................................. 110
Limitation of Liability and Indemnification............................. 110
Business Combinations................................................... 111
Control Share Acquisition Statute....................................... 112
Amendment to the Charter................................................ 112
Dissolution of the Company.............................................. 113
Advance Notice of Director Nominations and New Business................. 113
Meetings of Stockholders................................................ 113
Operations.............................................................. 113
Anti-Takeover Effect of Certain Provisions of Maryland Law and of the
Charter and Bylaws..................................................... 113
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES............... 114
Investment Policies..................................................... 114
Financing............................................................... 114
Hotel Operator Policy................................................... 115
Conflict of Interest Policies........................................... 116
Policies with Respect to Other Activities............................... 117
Working Capital Reserves................................................ 117
SHARES AVAILABLE FOR FUTURE SALE......................................... 118
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PARTNERSHIP AGREEMENT...................................................... 120
Management................................................................ 120
Transferability of Interests.............................................. 120
Capital Contribution...................................................... 120
Exchange Rights........................................................... 121
Registration Rights....................................................... 121
Operations................................................................ 121
Distributions and Allocations............................................. 122
Term...................................................................... 122
Tax Matters............................................................... 122
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 123
Requirements for Qualification as a REIT.................................. 123
Failure to Qualify as a REIT.............................................. 131
Taxation of the Company................................................... 131
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Taxation of Stockholders.................................................. 132
Tax-exempt Stockholders................................................... 133
Statement of Stock Ownership.............................................. 135
Tax Aspects of the Operating Partnership.................................. 135
Income Taxation of the Operating Partnership and Its Partners............. 137
Other Tax Considerations.................................................. 138
UNDERWRITING............................................................... 141
EXPERTS.................................................................... 142
LEGAL MATTERS.............................................................. 142
ADDITIONAL INFORMATION..................................................... 142
GLOSSARY................................................................... 144
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WHEN USED IN THIS PROSPECTUS, THE WORDS "BELIEVES," "ANTICIPATES,"
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN THIS
PROSPECTUS PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "RISK
FACTORS" AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES
OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
iii
<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) an
offering price (the "Offering Price") per share of Common Stock of $24 3/8
(which was the last reported sale price of the Common Stock on the New York
Stock Exchange, Inc. (the "NYSE") on January 15, 1997) and (ii) 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. The offering of
the Common Stock pursuant to this Prospectus is referred to herein as the
"Offering." 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 is a self-administered real estate investment trust ("REIT") that
owns sixteen hotels containing an aggregate of 3,858 guest rooms located in
eleven states (the "Current Hotels"). The Current Hotels consist of fourteen
full-service hotels and two limited-service hotels located primarily in major
metropolitan markets. For the twelve months ended September 30, 1996, the
Current Hotels had a weighted average occupancy of 72.8% and a weighted average
daily room rate ("ADR") of $73.08. Ten of the Current Hotels are currently
undergoing significant renovations and refurbishments that will allow the
Company to convert such hotels to leading franchise brands and reposition them
for future revenue growth. Upon completion of the planned franchise
conversions, the Current Hotels will consist of three Wyndham Hotels(R), two
Crowne Plazas(R), three Hilton Hotels(R), one Courtyard by Marriott(R), three
Holiday Inn Selectssm (the premium Holiday Inn brand), one Holiday Inn(R), two
Hampton Inns(R) and one independent luxury hotel. However, there can be no
assurance that such brand conversions and hotel repositionings will occur as
planned.
Since the Company's initial public offering in July 1996 (the "IPO"), the
Company has acquired three hotels with an aggregate of 846 guest rooms (the
"Acquired Hotels") located in Orlando, Florida, Monterey, California and
Durham, North Carolina, for an aggregate purchase price of approximately $58.0
million. In addition, the Company has entered into contracts to purchase four
additional hotels with an aggregate of 775 guest rooms located in Atlanta,
Georgia, Marietta, Georgia (located in metropolitan Atlanta), Arlington
Heights, Illinois (located in metropolitan Chicago) and Key Largo, Florida (the
"Proposed Acquisition Hotels," and together with the Current Hotels, the
"Hotels") for purchase prices aggregating approximately $70.6 million. The
Company's purchase of each of the Proposed Acquisition Hotels is subject to the
satisfaction of various closing conditions and, therefore, no assurances can be
given that these acquisitions will be completed. See "Developments Since the
Initial Public Offering--Proposed Acquisition Hotels." If the Proposed
Acquisition Hotels are acquired, the Company will have invested approximately
$128.6 million since the IPO in hotel acquisitions, and will own 20 hotels
containing approximately 4,600 guest rooms. This represents a more than 50%
increase in the Company's portfolio since the IPO based upon the number of
guest rooms.
The Company was formed for the purpose of continuing and expanding the hotel
acquisition, development and repositioning operations of American General
Hospitality, Inc. and certain of its affiliates ("AGHI"). AGHI, which manages
the Current Hotels and will manage three of the Proposed Acquisition Hotels,
was founded in 1981 by Steven D. Jorns, the Company's Chairman of the Board,
Chief Executive Officer and President. 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 expects to continue to capitalize on AGHI's expertise
to achieve revenue growth at the Company's hotels. The Company does not have
any economic interest in AGHI's hotel management operations.
1
<PAGE>
In order to qualify as a REIT, the Company may not operate hotels. As a
result, the Company leases the Current Hotels and will lease the Proposed
Acquisition Hotels to AGH Leasing, L.P. (the "Lessee"), which is owned in part
by certain executive officers of the Company, pursuant to separate
participating leases (the "Participating Leases"). The Participating Leases are
designed to allow the Company to achieve substantial participation in any
future growth of revenues generated at the Current Hotels. The Lessee, in turn,
has entered into separate management agreements (the "Management Agreements")
with AGHI to operate the Current Hotels. See "AGHI, the Lessee and Other
Operators."
The Company intends to selectively seek other qualified hotel management
companies, in addition to the Lessee and AGHI, to lease and/or manage certain
of the Company's future hotel acquisitions. The Company intends to seek
operational relationships with independent hotel operators that, in the
Company's judgment, have demonstrated one or more of the following
characteristics: (i) certain unique knowledge of the hotel or the market in
which such hotel operates, (ii) a proven track record for implementing product,
brand and operational repositioning strategies, (iii) a significant national or
regional lodging industry reputation or (iv) substantial financial resources.
The Company believes that the use of a flexible lessee or manager structure,
coupled with the continued expansion of its brand and franchise relationships,
will result in additional acquisition opportunities for the Company. The Lessee
has advised the Company that it expects to retain Wyndham Hotel Corporation as
the manager of one of the Proposed Acquisition Hotels following its purchase by
the Company. See "The Company--Other Operators."
The Current Hotels have achieved significant growth in occupancy, ADR and
total revenue per available room ("REVPAR") as shown in the following chart:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- ----------------
1993(1) 1994(1) 1995(1) 1995(1) 1996(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Occupancy........................... 71.0% 71.9% 73.0% 75.5% 75.2%
ADR................................. $58.58 $62.06 $67.76 $67.57 $74.42
REVPAR.............................. $41.60 $44.65 $49.49 $51.00 $55.97
</TABLE>
- --------
(1) For comparative 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 nine months ended September 30, 1995 and
1996 were as follows: occupancy: 63.0%, 64.7%, 65.5%, 67.1% and 67.6%,
respectively; ADR: $61.93, $64.24, $67.34, $67.07 and $71.48, respectively;
and REVPAR: $39.01, $41.56, $44.11, $45.00 and $48.31, 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 Current Hotels managed and operated by AGHI prior to and after the IPO
reflects the successful repositioning, renovation and marketing strategies of
AGHI as well as AGHI's superior management and operational capabilities. See
"The Hotels." The Company also attributes the successful operating performance
of the Current Hotels to the slowing in recent years of new hotel construction
nationally and improved economic conditions, both of which followed an extended
period of unprofitable industry performance during the late 1980's and early
1990's. The Company believes these improved lodging market fundamentals have
created a favorable environment for continued internal growth at the Current
Hotels and for hotel 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 grow and as
business and leisure travel activity increases. The Company continues to target
the full-service segment of the hotel industry due, in part, to its belief that
the
2
<PAGE>
approximate three- to five-year lead time from conception to completion of the
development of a full-service hotel represents a significant barrier to entry
that will lessen near-term competition resulting from a new supply of guest
rooms. Management also believes that the full-service segment of the market
continues 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 markets that the Company believes have
attractive economic characteristics. In order to enhance its acquisition
capabilities, the Company expects to continue to utilize borrowings available
under its $100 million revolving line of credit (the "Line of Credit") to
purchase hotels. The Company has received a commitment from its Line of Credit
lenders that will permit the Company, following the consummation of the
Offering, to increase its borrowing limit from $100 million to $150 million.
See "Developments Since the Initial Public Offering--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:
. Risks that the purchase of one or more of the Proposed Acquisition Hotels
will not be consummated, which may adversely affect the Company's Cash
Available for Distribution (as defined in "Summary Financial
Information") after the Offering;
. Risks associated with the Company's rapid growth through the acquisition
and planned acquisition of a substantial number of additional hotels
since the IPO;
. Conflicts of interest between the Company and certain of its executive
officers who own interests in the Lessee and AGHI that could lead to
decisions that do not reflect solely the interests of the Company's
stockholders, including 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;
. 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 in an amount sufficient to permit the
Company to make distributions to its stockholders, the failure or delay
in making rent payments, the failure of the Lessee, AGHI and any third
party managers to effectively operate and manage the Hotels, the failure
to meet the obligations under the franchise licenses relating to the
franchised Hotels and the limited operating history of the Lessee as a
recently organized entity;
. Risks associated with the Company's lack of control over the operations
of the Hotels due to tax restrictions that prevent REITs from operating
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 potential 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;
. Risks affecting the real estate industry generally, including economic
and other conditions that may adversely affect real estate investments,
including the Hotels, and the Lessee's ability to make rent
3
<PAGE>
payments from the operations of the 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 Hotels experienced net
losses in recent years; accordingly, there can be no assurance that the
Company will not experience net losses in the future;
. The risk that the planned renovations at certain of the 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;
. Potential loss of franchise licenses relating to the franchised Hotels
and varying capital requirements of franchisors that may affect the
Company's return on its investment in the 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.
DEVELOPMENTS SINCE THE INITIAL PUBLIC OFFERING
Set forth below is a summary of the significant developments involving the
Company since the IPO:
ACQUIRED HOTELS
The Company has invested approximately $58.0 million in the purchase of the
Acquired Hotels, representing a more than 28% increase in the Company's
portfolio since the IPO, based upon the number of guest rooms. Set forth below
are summary descriptions of the Acquired Hotels:
Days Inn(R) Lake Buena Vista--Lake Buena Vista, Florida
On October 22, 1996, the Company acquired the 490-room Days Inn Lake Buena
Vista for an aggregate purchase price of approximately $30.5 million that was
paid as follows: (i) $30.0 million in cash and (ii) $500,000 through the
issuance of 25,397 shares of restricted Common Stock. In connection with the
acquisition, the Company also paid an aggregate of approximately $2.4 million
to acquire a license and an association membership related to the hotel's
African royal safari theme (as described below) and for certain hotel related
design services. The Days Inn Lake Buena Vista was developed in 1985 and is
located approximately one-quarter mile south of Walt Disney World's Lake Buena
Vista entrance. The hotel contains 94 suites and approximately 4,200 square
feet of meeting and convention space. The Company has budgeted approximately
$9.3 million to complete an extensive renovation program to upgrade the entire
hotel and to reposition the hotel as a Wyndham Hotel during the fourth quarter
of 1997. The renovations will include the addition of approximately 9,000
square feet of convention space and the redesign of the exterior of the hotel
to reflect an African royal safari theme that will tie in with Disney's Animal
Kingdom theme park, which is expected to open in 1998.
4
<PAGE>
Holiday Inn Resort Monterey--Monterey, California
On November 21, 1996, the Company acquired the 204-room Holiday Inn Resort
Monterey for approximately $15.5 million in cash. This hotel, which was
constructed in 1971, is located in the major tourist destination city of
Monterey, California. The Company has budgeted approximately $3.9 million in
renovations to upgrade the hotel's guest rooms and public areas in order to
reposition the hotel as a Hilton Hotel during the fourth quarter of 1997.
Hilton Hotel-Durham--Durham, North Carolina
On January 8, 1997, the Company acquired the 152-room Hilton Hotel-Durham for
approximately $12.1 million in cash. The hotel, which was constructed in 1987,
is located in northwest Durham, one mile from Duke University, Duke Medical
Center and Research Triangle Park. During 1997 the Company expects to add 42
guest rooms to the hotel at an anticipated cost of approximately $2.4 million.
See "Risk Factors--Conflicts of Interest--Conflicts Related to Continued
Ownership of Other Hotel Properties."
PROPOSED ACQUISITION HOTELS
The Company has entered into contracts to purchase the Proposed Acquisition
Hotels for purchase prices aggregating approximately $70.6 million. The closing
of the purchase of each of the Proposed Acquisition Hotels is subject to
satisfactory completion of various closing conditions. Accordingly, no
assurance can be given that the Company will acquire any or all of the Proposed
Acquisition Hotels. See "Risk Factors--Risk That Proposed Acquisition Hotels
Will Not Be Acquired." If the Proposed Acquisition Hotels are acquired, the
Company will have invested approximately $128.6 million in hotel acquisitions
since the IPO and will own 20 hotels containing approximately 4,600 guest
rooms. This represents more than a 50% increase in the Company's portfolio
since the IPO based upon the number of guest rooms. Set forth below are summary
descriptions of the Proposed Acquisition Hotels:
Portfolio Purchase. In December 1996, the Company entered into a series of
agreements to acquire a portfolio of hotels, including the Four Points by
Sheraton, the Sheraton Key Largo and the French Quarter Suites Hotel for
purchase prices aggregating approximately $59.1 million (the "Portfolio
Purchase"). The purchase price for the Portfolio Purchase will be payable as
follows: (i) approximately $49.5 million in cash and (ii) the assumption of
approximately $9.6 million of mortgage indebtedness secured by the French
Quarter Suites Hotel.
Four Points by Sheraton(R)--Marietta, Georgia
In December 1996, the Company entered into an agreement to acquire the Four
Points by Sheraton as part of the Portfolio Purchase. The Company has allocated
a cash purchase price of $17.0 million to the Four Points by Sheraton. The 219-
room hotel was built in 1985 and is located in Marietta, a northwestern suburb
of Atlanta. During 1997, the Company expects to invest approximately $2.8
million to renovate the hotel and to reposition the hotel to operate as a
Wyndham Garden Hotel(R). The Company expects to lease the hotel to the Lessee
which, in turn, is expected to retain Wyndham Hotel Corporation to manage the
hotel.
Sheraton(R) Key Largo--Key Largo, Florida
In December 1996, the Company entered into an agreement to acquire the
Sheraton Key Largo as part of the Portfolio Purchase. The Company has allocated
a cash purchase price of $26.1 million to the Sheraton Key Largo. This hotel,
which is located on US Highway 1 in Key Largo and was developed in 1985, is a
200-room resort complex situated on a private beach on the western coastline of
the Florida Keys. During 1997, the Company expects to invest approximately $3.0
million in improvements to the hotel and to reposition the hotel to operate as
a Westin Resort(R). The Company expects that the hotel will be leased to the
Lessee and managed by AGHI.
5
<PAGE>
French Quarter Suites(R) Hotel--Atlanta, Georgia
In December 1996, the Company entered into an agreement to acquire the French
Quarter Suites Hotel as part of the Portfolio Purchase. The Company has
allocated a $16.0 million purchase price to the French Quarter Suites Hotel
that will be payable as follows: (i) approximately $6.4 million in cash and
(ii) the assumption of approximately $9.6 million in mortgage indebtedness,
which bears interest at the rate of 9.75% per annum. The French Quarter Suites
Hotel is located in the Cumberland/Galleria area of northwest Atlanta. The
hotel was constructed in 1985 and contains a total of 155 guest rooms, of which
144 are suites. During 1997, the Company plans to invest approximately $2.8
million to complete an extensive renovation of the hotel and to reposition the
hotel to operate as a DoubleTree Guest Suites(R). The Company expects that the
hotel will be leased to the Lessee and managed by AGHI.
Radisson Hotel(R) Arlington Heights--Arlington Heights, Illinois
In January 1997, the Company entered into a contract to purchase the Radisson
Hotel Arlington Heights for approximately $11.5 million that will be payable as
follows: (i) $3.3 million in cash and (ii) the assumption of a one-year, $8.2
million first mortgage note, which bears interest at the rate of 7.5% per
annum. In addition, commencing on the earlier of the fourth anniversary of the
completion of initial renovations of the hotel or January 1, 2003, the seller
will have the right to receive from the Company a 25% profits interest in the
net cash flow and the net proceeds from certain capital transactions generated
at the hotel. The Company has the option to purchase this profits interest for
an amount equal to 25% of the fair market value of the hotel less the aggregate
of $11.2 million plus the costs related to any additional expansion of the
hotel at any time after the fourth anniversary of the completion of the initial
renovations of the hotel (subject to a 30 month extension in certain
circumstances). If the Company exercises its option to acquire the profits
interest, the profits interest will terminate immediately upon acquisition. See
"The Hotels--Proposed Acquisition Hotels--Radisson Hotel Arlington Heights."
This future cash flow right was granted in order to compensate the sellers for
the expected improvement in the hotel's performance that is not fully reflected
in the historical operating results. The Radisson Hotel Arlington Heights,
which is currently managed by AGHI, is a 201-room full-service hotel
constructed in 1981. It is located in suburban northwest Chicago approximately
8.5 miles from O'Hare International Airport. During 1998, the Company intends
to complete a $6.0 million renovation of the hotel, which is expected to
include the addition of at least 31 guest rooms. The Company expects that the
hotel will be leased to the Lessee and continue to be managed by AGHI.
In addition to the Proposed Acquisition Hotels, as part of its ongoing
business, the Company continually engages in discussions with public and
private real estate entities regarding possible portfolio or single asset
acquisitions.
WYNDHAM ALLIANCE
On January 9, 1997, the Company entered into an agreement with Wyndham Hotel
Corporation and its affiliates (collectively, "Wyndham") relating to a
strategic alliance (the "Wyndham Alliance") between Wyndham and the Company.
Pursuant to the Wyndham Alliance, (i) in connection with the conversion of a
hotel owned by the Company to the Wyndham brand, Wyndham will acquire, as
directed by the Company, Common Stock or OP Units (the "Alliance Securities")
in an amount equal to nine times the estimated franchise fee payable to Wyndham
during the first twelve months such hotel is operated as a Wyndham brand, (ii)
Wyndham will have the non-exclusive right to franchise new hotel acquisitions
that the Company has determined should undergo a brand conversion and (iii) the
Company will be given the opportunity to bid on any hotels to be acquired by
Wyndham that it intends to sell to a REIT or any hotel with respect to which
Wyndham intends to enter into a sale or leaseback arrangement with a REIT
simultaneously with the hotel's purchase. Wyndham's purchase of the Alliance
Securities pursuant to the Wyndham Alliance is subject to the satisfaction of
certain conditions, including the consent of Wyndham's lenders, and will be at
a price per share of Common Stock or OP Unit equal to the average closing sale
price of the Common Stock on the NYSE for the 30 trading days
6
<PAGE>
preceding the earlier of (i) the date on which Wyndham consents to the
conversion of a Company hotel to a Wyndham brand or (ii) the date on which the
Company publicly announces its proposed acquisition of a hotel that is to be
converted to a Wyndham brand. Any such purchase of Alliance Securities will
occur within 30 days after a Company hotel is converted to a Wyndham brand. No
purchase of Alliance Securities will occur in connection with the planned
conversion of the Best Western(R) Albuquerque Airport Hotel, the Days Inn Lake
Buena Vista and the Four Points by Sheraton to Wyndham brands. See "The
Company--Wyndham Alliance." Within 30 days after the conversion of the Le Baron
Airport Hotel to the Wyndham Hotel brand, Wyndham has agreed, subject to
certain conditions, to purchase 112,969 shares of Common Stock at a negotiated
price of $22.13 per share. The Wyndham Alliance will expire on December 31,
1999.
CAPITAL IMPROVEMENTS, RENOVATIONS AND BRAND CONVERSIONS
The Company believes a regular program of capital improvements, including
replacement and refurbishment of FF&E at the Current Hotels, as well as the
renovation and redevelopment of selected hotels, is essential to maintaining
the competitiveness of the hotels and maximizing revenue growth. Consistent
with this strategy, as of December 31, 1996, the Company had invested
approximately $10.7 million (an average of approximately $2,800 per guest room)
in capital improvements and renovations at the Current Hotels. The Company has
budgeted for 1997 approximately $33.3 million (an average of approximately
$8,600 per guest room) for additional renovations and capital improvements at
these hotels. In addition, the Company has budgeted approximately $14.6 million
(an average of approximately $19,000 per guest room) to be spent on renovations
and capital improvements at the four Proposed Acquisition Hotels. The Company
attempts to schedule renovations and improvements during traditionally lower
occupancy periods in an effort to minimize disruptions to the hotel's
operations. In addition, the Company has agreements in place that will permit
the Company to convert, by the first quarter of 1998, ten of the Current Hotels
to new brand affiliations with nationally recognized hotel companies.
LINE OF CREDIT
The Company has received a commitment from its Line of Credit lenders to
increase the borrowing limit under the Line of Credit from $100 million to $150
million and to make certain other modifications thereto that would increase the
financial flexibility of the Company. This commitment to increase the maximum
amount available under the Line of Credit is subject to the consummation of the
Offering and the satisfaction of other customary conditions. Accordingly, there
can be no assurance that these modifications to the Line of Credit will occur.
THE HOTELS
The sixteen Current Hotels are diversified by five different national hotel
brands and include fourteen full-service hotels and two limited-service hotels.
In addition, the Company plans to reposition, by the first quarter of 1998, ten
of the Current Hotels (six Holiday Inns, two Days Inns and two independent
hotels), through an upgrade and conversion, into hotels that operate under the
Wyndham Hotel, Hilton 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 any or all of 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
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.
7
<PAGE>
The following table sets forth certain information with respect to the
Hotels, including their current brand affiliations. The Lessee is obligated to
pay to the Company annually the greater of fixed weekly base rent payments
("Base Rent") or monthly participating rent payments based on a percentage of
revenues (the "Participating Rent") at each of the Current Hotels.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30, 1996
-----------------------------------------------------------------------
PRO
PRO FORMA
NUMBER YEAR PRO PRO FORMA LESSEE
OF BUILT/ FORMA FORMA PARTICI- NET
GUEST RENO- TOTAL BASE PATING INCOME REVPAR
HOTELS LOCATION ROOMS VATED(1) REVENUE RENT(2) RENT(2) (LOSS)(3) OCCUPANCY ADR (4)
------ -------- ------ --------- ------------ ----------- ----------- --------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL
HOTELS(5):
Holiday Inn
Dallas DFW
Airport
West(6).......... Bedford, TX 243 1974/1995 $5,286,322 $ 827,000 $ 1,542,313 $(3,691) 66.4% $65.49 $43.49
Courtyard by
Marriott-
Meadowlands(6)... Secaucus, NJ 165 1989/1994 4,886,754 946,000 1,859,318 (4,450) 79.0 89.38 70.62
Hampton Inn
Richmond
Airport(6)....... Richmond, VA 124 1987/1995 2,090,079 530,000 952,411 (2,279) 72.2 59.63 43.08
Hotel Maison de
Ville(6)......... New Orleans, LA 23 1788/1994 1,937,038 274,000 454,022 (1,087) 65.1 239.36 155.71
Hilton Hotel-
Toledo(6)........ Toledo, OH 213 1987/1994 5,978,346 832,000 1,314,825 (3,146) 69.5 63.45 44.08
Holiday Inn
Dallas DFW
Airport
South(6)(7)(8)... Irving, TX 409 1974/1995 12,028,095 2,410,000 4,049,496 (9,691) 75.4 74.78 56.42
Holiday Inn New
Orleans
International
Airport(6)(7)(8). Kenner, LA 304 1973/1994 8,421,215 2,099,000 3,479,622 (8,327) 76.9 77.59 59.63
Days Inn Ocean
City(6)(8)(9).... Ocean City, MD 162 1989/1994 2,443,358 719,000 1,256,174 (3,006) 50.7 77.60 39.33
Holiday Inn
Select-
Madison(8)(10)... Madison, WI 227 1987/1995 7,971,543 1,597,000 2,856,621 (6,836) 77.3 81.01 62.65
Holiday Inn Park
Center
Plaza(8)(10)..... San Jose, CA 231 1975/1990 7,930,550 1,091,000 2,273,039 (5,440) 78.0 83.29 64.99
Best Western
Albuquerque
Airport
Hotel(8)(11)..... Albuquerque, NM 266 1972/1994 6,440,475 1,202,000 2,051,165 (4,909) 81.8 54.62 44.67
Le Baron Airport
Hotel(8)(11)..... San Jose, CA 327 1973/1995 9,937,556 1,323,000 3,082,142 (7,376) 73.8 73.07 53.95
Holiday Inn
Mission
Valley(7)(8)..... San Diego, CA 318 1970/1995 6,893,159 1,542,000 2,293,999 (5,490) 68.4 66.86 45.77
ACQUIRED HOTELS:
Days Inn Lake
Buena
Vista(8)(11)(12). Lake Buena Vista, FL 490 1985/1994 10,256,496 5,044,000 5,223,324 0 73.3 58.78 43.07
Holiday Inn
Resort
Monterey(8)(13).. Monterey, CA 204 1971/1996 6,104,448 1,279,000 1,937,791 (49,590) 65.5 100.08 65.50
Hilton Hotel-
Durham........... Durham, NC 152 1987/1995 5,235,689 1,133,000 1,578,567 (40,397) 74.8 81.80 61.20
----- ------------ ----------- ----------- -------- ---- ------ ------
Totals/Weighted
Average--All
Current
Hotels........... 3,858 103,841,123 22,848,000 36,204,829 (155,715) 72.8% $73.08 $53.18
----- ------------ ----------- ----------- -------- ---- ------ ------
PROPOSED
ACQUISITION
HOTELS:
Four Points by
Sheraton(8)(14).. Marietta, GA 219 1985/1996 $ 5,803,428 $ 1,350,000 $ 1,951,920 $233,888 65.2% $81.41 $53.11
Sheraton Key
Largo(8)(15)..... Key Largo, FL 200 1985/1996 9,236,761 2,184,000 2,613,727 (9,924) 77.3 116.70 90.19
French Quarter
Suites
Hotel(8)(16)..... Atlanta, GA 155 1985/1996 5,669,531 1,373,000 2,345,137 (8,903) 73.6 107.00 78.70
Radisson Hotel
Arlington
Heights(6)....... Arlington Heights, IL 201 1981/1995 4,517,794 922,000 1,539,616 (9,346) 69.9 74.52 52.08
----- ------------ ----------- ----------- -------- ---- ------ ------
Totals/Weighted
Average--All
Proposed
Acquisition
Hotels........... 775 25,227,514 5,829,000 8,450,400 205,715 71.2% $94.86 $67.56
----- ------------ ----------- ----------- -------- ---- ------ ------
TOTALS/WEIGHTED
AVERAGES--ALL
HOTELS........... 4,633 $129,068,637 $28,677,000 $44,655,229 $ 50,000 72.5% $76.65 $55.58
===== ============ =========== =========== ======== ==== ====== ======
</TABLE>
8
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- --------
(1) Year renovated reflects the calendar year in which management deems that a
significant renovation was completed at that hotel.
(2) 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 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 commencing January 1, 1997. See "The Hotels--The
Participating Leases."
(3) After pro forma management fees of approximately $1.9 million payable to
AGHI and Wyndham Hotel Corporation. Excludes fees forfeited by AGHI of
approximately $1.2 million. Such management fees are subordinate to
Participating Lease payments to the Company. See "Selected Financial
Information," "AGHI, the Lessee and Other Operators" and "The Hotels--The
Management Agreements."
(4) REVPAR is determined by dividing total room revenue by total available
rooms for the applicable period.
(5) The "Initial Hotels" consist of the thirteen initial hotels acquired by
the Company in connection with the IPO (the "Initial Hotels").
(6) This hotel was operated and managed by AGHI prior to its acquisition by
the Company.
(7) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Holiday Inn Select brand.
(8) There can be no assurance that the brand conversion and repositioning of
this hotel will occur as planned.
(9) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Hampton Inn brand.
(10) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Crowne Plaza brand.
(11) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Wyndham Hotel brand.
(12) Pro forma Participating Rent is calculated on a quarterly basis. For the
quarter ended December 31, 1995, Base Rent is greater than Participating
Rent for this hotel. Therefore, the total pro forma Participating Rent has
been increased by $447 to reflect the excess of Base Rent over
Participating Rent for such quarter.
(13) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Hilton Hotel brand.
(14) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Wyndham Garden Hotel brand.
(15) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Westin Resort brand.
(16) The Company plans to reposition this hotel and convert it to a hotel that
operates under the DoubleTree Guest Suites brand.
AGHI, THE LESSEE AND OTHER OPERATORS
American General Hospitality, Inc.
AGHI was founded in 1981 by Mr. Jorns, the Company's Chairman of the Board,
Chief Executive Officer and President. As of December 31, 1996, AGHI's
management portfolio consisted of 64 hotels containing in excess of 11,200
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 the number of hotels under management. 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 has no economic interest in AGHI's hotel management operations. The
Lessee has contracted with AGHI to manage the Current Hotels under an incentive
compensation structure. The Lessee has advised the Company that it will retain
AGHI to manage three of the Proposed Acquisition Hotels pursuant to the same
incentive compensation structure. See "The Hotels--The Management Agreements."
Two executive officers of the Company, Mr. Jorns and Bruce G. Wiles, the
Company's Executive Vice President, own collectively approximately 21.0% of
AGHI. The remaining interests in AGHI are owned by persons unaffiliated with
the Company, who also hold interests in the Lessee. See "AGHI, the Lessee and
Other Operators" and "Formation Transactions."
AGH Leasing, L.P.
The Company leases each Current Hotel, and expects to lease each of the
Proposed Acquisition Hotels, to the Lessee pursuant to a separate Participating
Lease. In addition, selected hotels acquired by the Company in the future may
be leased by the Company to the Lessee. Messrs. Jorns and Wiles, executive
officers of the Company, and Kenneth E. Barr, the Company's Executive Vice
President and Chief Financial Officer, own collectively approximately 23.0% of
the Lessee, and Mr. Jorns is currently the sole director of the Lessee's
9
<PAGE>
corporate general partner. See "AGHI, the Lessee and Other Operators." The
remaining interests in the Lessee are owned by persons unaffiliated with the
Company, who also hold interests in AGHI. Each Participating Lease has a term
of twelve years from the inception of the lease, subject to earlier termination
upon the occurrence of certain events. Under the Participating Leases, the
Lessee is obligated to pay the Company fixed weekly Base Rent and monthly
Participating Rent based on a percentage of revenues. 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, the
Lessee and Other Operators," "The Hotels--The Participating Leases" and "--The
Management Agreements."
Other Operators
The Company intends to selectively seek other qualified hotel brand
owner/operators and hotel management companies, in addition to the Lessee and
AGHI, to lease and/or manage certain of the Company's future hotel
acquisitions. The Company, with the consent of its Line of Credit lenders,
anticipates that it will lease hotels to independent hotel operators or, as a
condition to entering into a Participating Lease with the Lessee, will require
the Lessee to retain an independent hotel manager in connection with selected
acquisitions. The Company will seek lessee or management relationships with
hotel operating companies that have demonstrated, in the Company's judgment,
(i) certain unique knowledge of the hotel or the market in which such hotel
operates, (ii) a proven track record for implementing product, brand and
operational repositioning strategies, (iii) a significant national or regional
lodging industry reputation or (iv) substantial financial resources. The
Company believes that the use of a flexible lessee or manager structure,
coupled with the continued expansion of its brand and franchise relationships,
will result in additional acquisition opportunities for the Company. The Lessee
has advised the Company that it expects to retain Wyndham Hotel Corporation to
manage the Four Points by Sheraton hotel following its acquisition by the
Company. According to public filings, Wyndham Hotel Corporation is a NYSE
listed company which, as of December 31, 1996, operated or franchised in excess
of 75 hotels. See "The Company--Developments Since the Initial Public
Offering--Wyndham Alliance."
FORMATION TRANSACTIONS AND BENEFITS TO RELATED PARTIES
The Company was formed to own hotel properties and to continue and expand the
hotel acquisition, development and repositioning operations of AGHI. Certain
investors in the entities that owned the Initial Hotels acquired by the Company
in connection with the IPO, including members of management, received certain
benefits in connection with the IPO and the transactions described elsewhere in
this Prospectus under "Formation Transactions."
DISTRIBUTION POLICY
On December 18, 1996, the Board of Directors of the Company declared a
quarterly distribution of $0.4075 per share of Common Stock payable on January
30, 1997 to stockholders of record on December 30, 1996, which on an annualized
basis represents a distribution rate of $1.63 per share. While future
distributions paid by the Company will be at the discretion of the Board of
Directors of the Company and will depend on the actual cash flow of the
Company, its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), and such other factors as the Board of Directors may deem
relevant, it is the present intention of the Company to pay regular quarterly
distributions. See "Tax Status" below and "Price Range of Common Stock and
Distribution Policy."
10
<PAGE>
TAX STATUS
The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Code, commencing with its 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 alternative 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 has not requested a ruling from the Internal Revenue Service (the
"IRS") as to its REIT status, the Company has received 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 has adopted 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
All of the shares of Common Stock offered hereby are being sold by the
Company. None of the Company's stockholders are selling any shares of Common
Stock in the Offering.
<TABLE>
<S> <C>
Common Stock offered hereby....5,500,000.shares...........
Common Stock to
be outstanding
after the Of-
fering......... 15,685,837 shares(1)
Use of Pro- To reduce the amounts outstanding under the Line of
ceeds.......... Credit, to pay fees and expenses incurred in connection
with the increase in the Company's borrowing limit
under the Line of Credit, to pay a substantial portion of
the cash part of the purchase price of the Proposed
Acquisition Hotels and for general corporate and
working capital purposes. See "Use of Proceeds."
NYSE symbol..... AGT
</TABLE>
- --------
(1) Includes (i) 1,896,996 shares of Common Stock to be issuable after July 31,
1997 at the Company's option upon the exchange of OP Units issued in the
Formation Transactions (other than to AGH GP and AGH LP), (ii) 162,405
shares of restricted Common Stock issued in connection with the acquisition
of certain of the Current Hotels, (iii) 50,000 shares of restricted Common
Stock granted to the Company's executive officers as stock awards that are
subject to certain vesting rights and (iv) 1,436 shares of restricted
Common Stock issued on October 1, 1996 to certain of the Company's
directors under the American General Hospitality Corporation Non-Employee
Directors' Incentive Plan (the "Directors' Plan"). Excludes 850,000
reserved but unissued shares of Common Stock under the American General
Hospitality Corporation 1996 Incentive Plan (the "1996 Plan"), including
360,000 shares as to which options are outstanding, and 98,564 reserved but
unissued shares of Common Stock under the Directors' Plan, including 40,000
shares as to which options are outstanding. See "Management--Stock
Incentive Plans," "Formation Transactions" and "Partnership Agreement--
Exchange Rights."
11
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables set forth summary historical and pro forma consolidated
financial data for the Company and summary historical and pro forma financial
data for the Lessee. This financial information should be read in conjunction
with the financial statements and notes thereto that are contained elsewhere in
this Prospectus. The pro forma statements of operations and other data are
presented as if the IPO and related Formation Transactions, the acquisition of
all Hotels and the consummation of the Offering and the application of the net
proceeds therefrom had occurred on January 1, 1995 and therefore incorporate
certain assumptions that are included in the notes to the Pro Forma Statements
of Operations included elsewhere in the Prospectus. The pro forma balance sheet
data is presented as if the acquisition of the Acquired Hotels and the Proposed
Acquisition Hotels and the consummation of the Offering and the application of
the net proceeds therefrom had occurred on September 30, 1996. The pro forma
statements of operations do not include interest income on pro forma cash and
cash equivalents, in accordance with the rules and regulations of the
Securities and Exchange Commission.
AMERICAN GENERAL HOSPITALITY CORPORATION
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA (1)
------------------------------------------------------
HISTORICAL TWELVE MONTHS NINE MONTHS NINE MONTHS
JULY 31, 1996 YEAR ENDED ENDED ENDED ENDED
THROUGH DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
SEPTEMBER 30, 1996 1995 1996 1995 1996
------------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Participating Lease
revenue(2)............. $5,218,526 $39,969,440 $44,655,229 $30,470,441 $35,156,230
Interest income......... 32,227 31,500 31,500 23,625 23,625
---------- ----------- ----------- ----------- -----------
Total revenue........ 5,250,753 40,000,940 44,686,729 30,494,066 35,179,855
---------- ----------- ----------- ----------- -----------
Depreciation............ 1,008,874 11,056,724 9,736,862 8,292,543 7,238,403
Amortization............ 116,572 1,075,459 1,075,459 805,032 805,032
Real estate and personal
property taxes and
property insurance..... 511,115 4,527,256 4,727,617 3,283,773 3,434,043
General and
administrative(3)...... 194,226 1,700,000 1,700,000 1,275,000 1,275,000
Ground lease expense.... 218,000 881,217 962,993 660,913 722,245
Amortization of unearned
officers'
compensation(4)........ 14,792 88,750 88,750 66,563 66,563
Interest expense........ 347,622 3,119,220 3,119,220 2,334,447 2,334,447
---------- ----------- ----------- ----------- -----------
Total expenses....... 2,411,201 22,448,626 21,410,901 16,718,271 15,875,733
---------- ----------- ----------- ----------- -----------
Income before minority
interest............... 2,839,552 17,552,314 23,275,828 13,775,795 19,304,122
Minority interest(5).... 545,102 2,122,916 2,815,163 1,666,154 2,334,794
---------- ----------- ----------- ----------- -----------
Net income applicable to
common stockholders.... $2,294,450 $15,429,398 $20,460,665 $12,109,641 $16,969,328
========== =========== =========== =========== ===========
Net income per common
share.................. $ 0.29 $ 1.12 $ 1.48 $ 0.88 $ 1.23
========== =========== =========== =========== ===========
Weighted average number
of shares of Common
Stock outstanding...... 8,002,331 13,787,405 13,787,405 13,787,405 13,787,405
========== =========== =========== =========== ===========
</TABLE>
See notes on page 14.
12
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
SEPTEMBER 30, SEPTEMBER 30,
1996 1996
------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 4,186,235 $ 10,153,108
Investment in hotel properties, net................. 175,613,813 307,447,568
Total assets........................................ 187,860,092 328,052,720
Debt................................................ 19,297,508 37,076,073
Minority interest in Operating Partnership.......... 29,303,428 34,121,019
Stockholders' equity................................ 127,399,398 247,870,870
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA(1)
---------------------------------------------------------
HISTORICAL TWELVE MONTHS NINE MONTHS NINE MONTHS
JULY 31, 1996 YEAR ENDED ENDED ENDED ENDED
THROUGH DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
SEPTEMBER 30, 1996 1995 1996 1995 1996
------------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Funds From
Operations(6).......... $ 3,109,620 $ 25,148,258 $ 29,019,367 $ 19,398,786 $ 23,331,884
Cash Available for
Distribution(7)........ 2,737,710 21,895,602 25,504,654 16,904,574 20,575,614
Net cash provided by
operating
activities(8).......... 4,687,875 29,773,247 34,176,899 29,751,060 27,414,121
Net cash used in
investing
activities(9).......... (130,226,886) (4,864,614) (5,162,745) (3,709,152) (4,007,283)
Net cash provided by
(used in) financing
activities(10)......... 129,725,146 (26,222,705) (26,222,705) (19,667,028) (19,667,028)
Weighted average number
of shares of Common
Stock and of OP Units
outstanding............ 9,899,327 15,684,401 15,684,401 15,684,401 15,684,401
</TABLE>
See notes on page 14.
13
<PAGE>
LESSEE
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA (1)(11)
------------------------------------------------------
HISTORICAL TWELVE MONTHS NINE MONTHS NINE MONTHS
JULY 31, 1996 YEAR ENDED ENDED ENDED ENDED
THROUGH DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
DECEMBER 31, 1996 1995 1996 1995 1996
----------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue............ $11,185,140 $ 86,924,872 $ 94,322,228 $67,087,557 $ 74,484,913
Food and beverage
revenue................ 2,982,331 27,119,189 27,167,284 20,133,742 20,181,837
Other revenue........... 623,824 7,571,300 7,579,125 5,507,498 5,515,323
----------- ------------ ------------ ----------- ------------
Total revenue........ 14,791,295 121,615,361 129,068,637 92,728,797 100,182,073
Hotel operating
expenses............... 9,360,407 81,347,270 83,876,691 61,044,842 64,128,628
Depreciation and
amortization........... 10,500 63,000 63,000 47,250 47,250
Interest expense........ 5,250 31,500 31,500 23,625 23,625
Other expenses.......... 17,448 154,151 392,217 35,659 273,725
Participating Lease
expenses(2)............ 5,218,526 39,969,440 44,655,229 30,470,441 35,156,230
----------- ------------ ------------ ----------- ------------
Net income.............. $ 179,164 $ 50,000 $ 50,000 $ 1,106,980 $ 552,615
=========== ============ ============ =========== ============
</TABLE>
- --------
(1) The pro forma information does not purport to represent what the Company's
financial position or the Company's and the Lessee's results of operations
would actually have been if the IPO and related Formation Transactions, the
acquisition of all Hotels and the consummation of the Offering and the
application of the net proceeds therefrom had, in fact, occurred on such
dates, or to project the Company's financial position or the Company's and
Lessee's results of operations at any future date or for any future period.
(2) Pro forma amounts represent lease payments from the Lessee to the Operating
Partnership pursuant to the Participating Leases calculated on a pro forma
basis by applying the rent provisions of the Participating Leases to the
revenues of the Hotels. The departmental revenue thresholds in the
Participating Leases are seasonally adjusted for interim periods and
certain of the Participating Lease formulas adjust beginning in January
1997 and January 1998. See "The Hotels--The Participating Leases."
(3) Pro forma amounts represent salaries and wages, professional fees,
directors' and officers' insurance, allocated rent, supplies and other
operating expenses to be paid by the Company. These amounts are based on
historical general and administrative expenses as well as probable 1997
expenses.
(4) Represents amortization of unearned officers' compensation represented by
an aggregate of 50,000 shares of restricted Common Stock issued to the
Company's executive officers, 10% of which shares vested at the date of
grant (5,000 shares at $17.75 per share, the price per share of Common
Stock issued in the IPO).
(5) Calculated as 19.2% for the historical period from July 31, 1996 through
September 30, 1996. Calculated as 12.1% of income before minority interest
for all pro forma periods presented.
(6) Represents Funds From Operations of the Company. The items added back to
net income applicable to common stockholders have been adjusted by the
Company's ownership percentage in the Operating Partnership of 80.8% for
the historical period from July 31, 1996 through September 30, 1996 and
87.9% for all pro forma periods presented. The following table computes
Funds From Operations under the 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 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 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 Hotels.
Notes continued on following page.
14
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA(1)
------------------------------------------------------
TWELVE MONTHS NINE MONTHS NINE MONTHS
JULY 31, 1996 YEAR ENDED ENDED ENDED ENDED
THROUGH DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
SEPTEMBER 30, 1996 1995 1996 1995 1996
------------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net income applicable to
common stockholders.... $2,294,450 $15,429,398 $20,460,665 $12,109,641 $16,969,328
Depreciation............ 815,170 9,718,860 8,558,702 7,289,145 6,362,556
---------- ----------- ----------- ----------- -----------
Funds From Operations... $3,109,620 $25,148,258 $29,019,367 $19,398,786 $23,331,884
========== =========== =========== =========== ===========
Weighted average number
of shares of Common
Stock outstanding...... 8,002,331 13,787,405 13,787,405 13,787,405 13,787,405
</TABLE>
(7) Cash Available for Distribution represents Funds From Operations of the
Company plus the Company's ownership percentage in the Operating
Partnership of 80.8% for the historical period from July 31, 1996 through
September 30, 1996 and 87.9% for all pro forma periods presented multiplied
by the sum of amortization of deferred financing costs, franchise transfer
costs and unearned officers' compensation. This amount is then reduced by
the Company's same percentage share of the sum of 4.0% of total revenue for
each of the Hotels that is required to be set aside by the Operating
Partnership for refurbishment and replacement of FF&E, capital expenditures
and other non-routine items as required by the terms of the Participating
Leases. Cash Available for Distribution does not include the interest
expense associated with borrowings under the Line of Credit that are
expected to be made in order to fund capital expenditures at the Hotels. In
addition, Cash Available for Distribution does not include the effects of
any revenue increases expected to result from capital expenditures at the
Hotels.
(8) Pro forma amounts represent net income plus minority interest,
depreciation, amortization, and amortization of unearned officers'
compensation. There are no pro forma adjustments for changes in working
capital items.
(9) Pro forma amounts represent cash used in investing activities and includes
the Operating Partnership's obligation to make available to the Lessee an
amount equal to 4.0% of total revenue for each of the Hotels for the
periodic replacement or refurbishment of FF&E, capital expenditures and
other non-routine items as required by the Participating Leases. The
Company intends to cause the Operating Partnership to spend amounts in
excess of such obligated amounts to comply with the reasonable requirements
of any franchise license and otherwise to the extent that the Company deems
such expenditures to be in the best interest of the Company. See "The
Hotels--The Participating Leases."
(10) Pro forma amounts represent pro forma initial distributions to be paid
based on the current annual distribution rate of $1.63 per share of Common
Stock and OP Unit and an aggregate of 15,684,401 shares of Common Stock
and OP Units outstanding plus the debt service on the indebtedness
collateralized by the Holiday Inn Dallas DFW Airport South, Courtyard by
Marriott-Meadowlands, French Quarter Suites Hotel and the Radisson Hotel
Arlington Heights.
(11) 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 owned all of the
Hotels as of January 1, 1995.
15
<PAGE>
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.
RISK THAT PROPOSED ACQUISITION HOTELS WILL NOT BE ACQUIRED
The Company has entered into contracts to acquire the four Proposed
Acquisition Hotels. The purchase of each of the Proposed Acquisition Hotels is
subject to the satisfaction of a number of conditions (certain of which are
material and beyond the control of the Company and, unless satisfied, could
result in one or more of such hotels not being acquired), and should any of
these purchases not occur, for whatever reason, a portion of the net proceeds
of the Offering will not have any specific designated use. There can be no
assurance that the Company will be able to locate and acquire sufficient
additional hotels meeting the Company's acquisition criteria to utilize any
such undesignated net proceeds and, in such event, the Company's anticipated
Cash Available for Distribution could be adversely affected.
RISKS ASSOCIATED WITH THE COMPANY'S ACQUISITION OF A SUBSTANTIAL NUMBER OF
ADDITIONAL HOTELS
The Company is currently experiencing a period of rapid growth. Since the
IPO, the Company has spent approximately $58.0 million to purchase the three
Acquired Hotels, increasing its room portfolio by approximately 28%.
Additionally, the Company has entered into contracts to purchase the four
Proposed Acquisition Hotels for an aggregate purchase price of approximately
$70.6 million. Assuming completion of the acquisition of the Proposed
Acquisition Hotels, the Company will have increased its guest room portfolio
by more than 50% since the IPO. The Company's ability to manage its growth
effectively will require it to select companies to lease and manage newly
acquired hotels. There can be no assurance that the Company, the Lessee, AGHI
or other hotel management companies and/or operators will be able to manage
these additional hotels effectively.
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 ongoing lease, acquisition, disposition, operation and management of the
Hotels. Accordingly, the interests of the Company's stockholders 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
The terms of the Participating Leases, the Management Agreements, and the
Option Agreements (as defined in "The Hotels--Options to Purchase and Rights
of First Refusal") relating to the Option Hotels (as defined in "The Company--
Development") and the agreements related to the Beverage Subleases (as defined
in "Formation Transactions") were not negotiated on an arm's-length basis. In
the event revenues from the 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 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 does 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 an inherent 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, the Lessee and Other Operators."
16
<PAGE>
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 a
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 a Hotel that do not reflect solely the
interests of the Company's stockholders. See "The Hotels--The Participating
Leases."
Conflicts Relating to Continued Management of Hotels
AGHI, in which Messrs. Jorns and Wiles own collectively a 21.0% interest,
manages hotels for third parties. There are no restrictions in either the
Participating Leases or the Management Agreements that 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 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
AGHI continues to own three hotel properties (including one hotel currently
under development). One of these hotels, a Ramada Limited(R) located in
Madison, Wisconsin, was not transferred to the Company in connection with the
IPO because at the time of the IPO it was being offered for sale for its land
value due to its location in a prime retail area. Currently, AGHI plans to
continue to operate that hotel and to renovate and reposition the hotel to
operate as a Holiday Inn by February 1998. The Company is currently
negotiating with AGHI regarding the purchase of that hotel, which purchase
will be subject to approval by a majority of the Independent Directors of the
Company. The other two hotels owned by AGHI (the "Option Hotels"), are
Courtyards by Marriott (one of which is still under development) that were not
transferred to the Company in connection with the IPO because construction of
those hotels had not been completed at that time. The Company holds an option
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 during the two-year period following their respective openings
(the Option Hotel located in Boise, Idaho was opened in October 1996). See
"The Hotels--Options to Purchase and Rights of First Refusal." The Option
Hotel located in Durham, North Carolina (the "Durham Option Hotel"), remains
under development and is located approximately one mile from the Hilton Hotel-
Durham, an Acquired Hotel. The Durham Option Hotel is expected to compete with
the Hilton Hotel-Durham.
DEPENDENCE ON LESSEE AND PAYMENTS UNDER THE PARTICIPATING LEASES
The Company's ability to make distributions to its stockholders depends
solely upon the ability of the Lessee to make rent payments under the
Participating Leases (which will be dependent primarily on the ability of AGHI
and other potential operators to generate sufficient revenues from the 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 Hotels or in the net operating income
of the Lessee or otherwise. The Lessee is a recently organized limited purpose
entity; accordingly, it has limited assets. At September 30, 1996, the Lessee
had a net worth of approximately $680,000 and the partners of the Lessee had
pledged 275,000 OP Units to the Company to secure the Lessee's obligations
under the Participating Leases (the "Lessee Pledge"). 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) gives the Company the non-
exclusive right to terminate such lease, repossess the applicable property and
enforce the payment obligations under the lease and the Lessee Pledge (as
defined in "The Company--Participating Leases Structure"), the Company would
then be required to find another lessee to lease such hotel. 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.
17
<PAGE>
LACK OF CONTROL OVER OPERATIONS OF THE HOTELS
The Company is dependent on the ability of the Lessee, AGHI and other
operators of hotels to operate and manage the Hotels. To maintain its status
as a REIT, the Company will not be able to operate the 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, food and beverage operations and certain similar matters.
HOTEL INDUSTRY RISKS
Operating Risks
The Hotels are 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 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
Hotels and pay for periodic replacement or refurbishment of FF&E. The Company
controls 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
Hotels through the first quarter of 1998. 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.
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
18
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the year. Seasonal variations in revenue at the 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.
CONTINGENT LIABILITIES OF SELLING PARTNERSHIPS
In connection with the Formation Transactions, the Company acquired all the
partnership interests in the entities that owned eight of the Initial Hotels,
and since the IPO the Company acquired all the partnership interests in the
entity that owned the Days Inn Lake Buena Vista. As a result, 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.
RISKS OF LEVERAGE; NO LIMITS ON INDEBTEDNESS
Upon completion of the Offering and the purchase of the Proposed Acquisition
Hotels, the Company expects that it will have approximately $10.2 million of
outstanding indebtedness under the Line of Credit and will have outstanding
mortgage indebtedness encumbering four of the Hotels of approximately $36.9
million. Neither the Company's Bylaws nor its Charter limits the amount of
indebtedness the Company may incur. In addition, in connection with the
planned capital improvements and renovations at the Current Hotels, the
Company has budgeted to borrow during 1997 an additional approximate $33.3
million under the Line of Credit and also intends to borrow under the Line of
Credit appproximately $14.6 million for capital improvements and renovations
at the Proposed Acquisition Hotels. The Company intends to continue 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 Line of Credit
has been used to fund the acquisition and renovation of certain Current
Hotels, to pay certain costs in connection with the closing of the IPO and for
working capital. The Line of Credit is currently 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 is
secured by a first mortgage lien on fourteen of the Current Hotels. Two of the
Proposed Acquisition Hotels, as well as other hotels acquired in the future,
may be added as security for the Line of Credit. The Line of Credit requires
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 and managers for such hotels. The Company has received
a committment from its Line of Credit lenders to increase its borrowing limit
from $100 million to $150 million. 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 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 any Hotels that secure the Line
of Credit or other indebtedness, 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 the
Company 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,
which may result in a financial loss to the Company.
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LACK OF OPERATING HISTORY OR REVENUES; HISTORY OF LOSSES
The Company has been recently organized and has limited operating history.
There can be no assurance that the Company will be able to generate sufficient
Cash Available for Distribution to continue to make distributions to its
stockholders. The Company is subject to the risks generally associated with
the formation of any new business. Certain of the Hotels experienced net
losses in recent years. Accordingly, there can be no assurance that the
Company will not experience net losses in the future.
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. In connection with the Formation Transactions, (i) the Operating
Partnership issued to persons other than the Company an aggregate of 1,896,996
OP Units, and (ii) the Company issued 137,008 shares of restricted Common
Stock. In connection with the acquisition of the Days Inn Lake Buena Vista,
the Company issued 25,397 shares of restricted Common Stock. Commencing July
31, 1997, the OP Units issued in the Formation Transactions may be exchanged
pursuant to the Exchange Agreement (as defined in "Partnership Agreement--
Exchange Rights") for cash based on their fair market value or, at the
Company's sole 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. In
addition, the officers and directors of the Company, certain other persons 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)
until July 31, 1997 (the "Lock-up Period") without the prior written consent
of the Company and/or Smith Barney Inc. The Registration Rights Agreements (as
defined in "Partnership Agreement--Registration Rights") requires the Company
to register all restricted shares of Common Stock under the Securities Act of
1933, as amended (the "Securities Act"), including shares issuable upon the
exchange of OP Units. As a result, at the conclusion of the Lock-up Period,
all shares of Common Stock issued in connection with the Formation
Transactions, acquired upon exchange of OP Units or issued to acquire the Days
Inn Lake Buena Vista may be sold in the public market. In addition, 850,000
shares of Common Stock (exclusive of stock awards issued under the 1996 Plan
as described below) are reserved for issuance pursuant to the 1996 Plan and
98,564 shares of Common Stock (exclusive of the 1,436 shares of restricted
Common Stock issued under the Directors' Plan) are 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, of which 5,000 have
vested, and options to purchase 360,000 shares of Common Stock, of which
90,000 are currently exercisable, have been granted to the Company's executive
officers under the 1996 Plan, and 1,436 shares of restricted Common Stock, and
options to purchase 40,000 shares of Common Stock, of which 13,332 are
currently exercisable, have been granted to the Company's directors under the
Directors' Plan. The Company has filed a Registration Statement on Form S-8 to
register the shares of Common Stock reserved for issuance under the 1996 Plan
and the Directors' Plan. Moreover, in connection with the Wyndham Alliance,
the Company has agreed to issue, and Wyndham has agreed to purchase,
restricted shares of Common Stock or OP Units in an amount equal to nine times
the estimated franchise fee that is payable to Wyndham during the first twelve
months following the conversion of a Company hotel to a Wyndham brand. During
1997, the Company estimates that Wyndham will acquire 112,969 shares of Common
Stock pursuant to the Wyndham Alliance upon conversion of the Le Baron Airport
Hotel to the Wyndham Hotel brand. This purchase right will not apply to the
planned conversion to Wyndham brands of the Best Western Albuquerque Airport
Hotel, the Days Inn Lake Buena Vista and the Four Points by Sheraton. Subject
to certain limited exceptions, Wyndham has agreed not to offer, sell, contract
to sell or otherwise dispose of any Alliance Securities for a period of six
months after their acquisition without the prior written consent of the
Company. Any OP Units issued to Wyndham may be exchanged for cash based on
their fair market value or, at the Company's sole option, for shares of Common
Stock on a one-for-one basis commencing one year after their issuance. The
Company is obligated to register under the Securities Act all restricted
shares of Common Stock and shares issuable upon the exchange of OP Units that
are issued to Wyndham pursuant to the
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Wyndham Alliance. See "Management--Stock Incentive Plans," "Shares Available
for Future Sale" and "Underwriting."
COMPETITION FOR MANAGEMENT TIME
Messrs. Jorns, Wiles, Barr and Valentine are employed both as executive
officers of the Company and AGHI and are thus necessarily 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 are 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,
AGHI and any third party operators to operate the Hotels in a manner
sufficient to maintain or increase revenues and to generate sufficient revenue
in excess of operating expenses to make rent payments under the Participating
Leases. Income from the 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 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,
hurricanes, floods 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 Current Hotels are located throughout the United States, but 16.9% and
14.5% of the total number of the guest rooms of the Current Hotels
(representing 15.4% and 15.0%, respectively, of the Company's pro forma
estimated Participating Rent revenues for the twelve months ended September
30, 1996) are located at the Dallas/Fort Worth Airport and in the San Jose
area, respectively. The Company's cash flow, ability to make distributions to
its stockholders and the value of the Common Stock will be affected, to a
significant degree, by economic conditions and the demand for hotel rooms in
the Dallas/Fort Worth and San Jose markets in which these four 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. 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 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 Current Hotel is 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 Hotels
The Best Western Albuquerque Airport Hotel, the Courtyard by Marriott-
Meadowlands, the Le Baron Airport Hotel and the Hilton Hotel-Toledo are each
subject to ground leases, the Hotel Maison de Ville is
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subject to a space lease for its restaurant facilities and certain of its
guest rooms and the Sheraton Key Largo is subject to a bay bottom lease for
certain offshore property at the resort, each with third-party lessors. In
addition, the Radisson Hotel Arlington Heights is subject to a space lease
with respect to its restaurant facilities until January 1998. Any proposed
sale of such hotels by the Company or any proposed assignment of the Company's
leasehold interest in the ground leases, the space lease and the bay bottom
lease, as well as the subletting to the Lessee 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 Hotels
in the future, even if such transactions may be in the best interests of the
stockholders of the Company.
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 use the property, sell the property or borrow by using such
real property as collateral. Persons who arrange for the disposal or treatment
of hazardous or toxic substances may also be liable for the costs of removal
or remediation of such substances at the disposal or treatment facility,
whether or not such facility is or ever was owned or operated by such person.
Certain environmental laws and common law principles could be used to impose
liability for releases of hazardous materials, including asbestos-containing
materials ("ACMs"), into the environment, and third parties may seek recovery
from owners or operators of real properties for personal injury associated
with exposure to released ACMs or other hazardous materials.
Environmental laws also may impose restrictions on the manner in which a
property may be used or transferred or in which businesses may be operated,
and these restrictions may require expenditures. In connection with the
ownership of the 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 Hotels by qualified independent environmental
engineers. The purpose of Phase I ESAs is to identify potential sources of
contamination for which the 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 Current 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
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similar provisions. However, there are certain types of losses, generally of a
catastrophic nature, such as those caused by earthquakes, hurricanes 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.
Acquisition and Development Risks
The Company intends to pursue acquisitions of additional hotels (including
the Proposed Acquisition 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 provides 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 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 operates in a manner designed to permit it to qualify as a REIT
for federal income tax purposes.
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 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 has
received an opinion of Battle Fowler LLP, counsel to the Company ("Counsel"),
to the effect that, based on various assumptions relating to the operation of
the Company and representations made by the Company as to certain factual
matters, the Company meets the requirements for qualification and taxation as
a REIT. Such legal opinion is not 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
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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 operates 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 has made distributions to its stockholders to comply with the
distribution provisions of the Code and to avoid federal income taxes and the
non-deductible 4.0% excise tax. The Company's income consists primarily of its
share of the income of the Operating Partnership, and the Company's cash flow
consists 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 non-deductible capital expenditures,
the creation of reserves or required debt amortization payments could in the
future 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 are determined by its sole
general partner, a wholly owned subsidiary of the Company and are dependent on
a number of factors, including the amount of Cash Available for Distribution,
the Operating Partnership's financial condition, any decision by the Company's
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 avoid corporate income taxation on the earnings that it
distributes. See "Federal Income Tax Considerations--Requirements for
Qualification as a REIT--Annual Distribution Requirements."
Consequences of Failure to Qualify as Partnerships
The Operating Partnership has received 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,
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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 not be an appropriate investment for an ERISA Plan, a
Qualified Plan or an IRA. In deciding whether to purchase Common 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
Thirteen of the Current Hotels and three of the Proposed Acquisition Hotels
are subject to franchise agreements with nationally recognized hotel
companies. In addition, two of the Current Hotels which are not currently
subject to franchise agreements are expected to become subject to franchise
agreements during the second quarter of 1997. 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, AGHI or third party operators
could result in a breach of such standards or other terms and conditions of
the franchise agreements and could result in the loss or cancellation of a
franchise license. 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 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 ten of the Current Hotels and three of the
Proposed Acquisition Hotels that either operate under one franchise brand or
do not operate under a franchise brand 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 and, in
turn, Cash Available for Distribution.
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,
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if any partner 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 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."
Staggered Board
The Board of Directors is 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 elected 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. 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."
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 Stockholder") or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. 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 Stockholder for its
shares. 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 statute 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 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
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
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<PAGE>
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. See "Certain Provisions of Maryland Law and of
the Company's Charter and Bylaws--Control Share Acquisition Statute."
RELIANCE ON BOARD OF DIRECTORS AND MANAGEMENT
Stockholders 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 are responsible for directing the management
of the business and affairs of the Company. The Company relies upon the
services and expertise of its management for strategic business direction. The
Company has in effect employment agreements with Steven D. Jorns, Chairman of
the Board, Chief Executive Officer and President; Bruce G. Wiles, Executive
Vice President; Kenneth E. Barr, Executive Vice President and Chief Financial
Officer; and Russ C. Valentine, Senior Vice President--Acquisitions, which
currently provide for base salary at below market rates for comparable
positions. Accordingly, the loss of services of any such officer may require
the Company to hire a replacement officer at a salary greater than the Company
is currently obligated to pay, which, in turn, would increase the Company's
operating costs and reduce Cash Available for Distribution.
CONTINGENT OBLIGATION TO CONSTRUCT ADDITIONAL HOTEL ROOMS
Pursuant to the terms of the ground lease relating to the Best Western
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 September 30, 1996, the occupancy rate at
the hotel was 81.8%.
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, are determined by its Board of Directors. The Board of
Directors may amend or revise these and other policies at any time and from
time to time at the Board's discretion 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.
27
<PAGE>
THE COMPANY
GENERAL
The Company is a self-administered REIT that owns sixteen hotels containing
an aggregate of 3,858 guest rooms located in eleven states. The Current Hotels
consist of fourteen full-service hotels and two limited-service hotels located
primarily in major metropolitan markets. For the twelve months ended September
30, 1996, the Current Hotels had a weighted average occupancy of 72.8% and an
ADR of $73.08. Ten of the Current Hotels are currently undergoing significant
renovations and refurbishments that will allow the Company to convert such
hotels to leading franchise brands and reposition them for future revenue
growth. Upon completion of the planned franchise conversions, the Current
Hotels will consist of three Wyndham Hotels, two Crowne Plazas, three Hilton
Hotels, one Courtyard by Marriott, three Holiday Inn Selects (the premium
Holiday Inn brand), one Holiday Inn, two Hampton Inns and one independent
luxury hotel. However, there can be no assurance that such brand conversions
and hotel repositionings will occur as planned. Certain of the Current 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.
Since the Company's IPO in July 1996, the Company has acquired three hotels
with an aggregate of 846 guest rooms located in Orlando, Florida, Monterey,
California and Durham, North Carolina, for an aggregate purchase price of
approximately $58.0 million. In addition, the Company has entered into
contracts to purchase four additional hotels with an aggregate of 775 guest
rooms located in Atlanta, Georgia, Marietta, Georgia (located in metropolitan
Atlanta), Arlington Heights, Illinois (located in metropolitan Chicago) and
Key Largo, Florida for purchase prices aggregating approximately $70.6
million. The Company's purchase of each of the Proposed Acquisition Hotels is
subject to the satisfaction of various closing conditions and, therefore, no
assurances can be given that these acquisitions will be completed. See
"Developments Since the Initial Public Offering--Proposed Acquisition Hotels."
If the Proposed Acquisition Hotels are acquired, the Company will have
invested approximately $128.6 million since the IPO in hotel acquisitions, and
will own 20 hotels containing approximately 4,600 guest rooms. This represents
a more than 50% increase in the Company's portfolio since the IPO based upon
the number of guest rooms.
The Company was formed for the purpose of continuing and expanding the hotel
acquisition, development and repositioning operations of AGHI and certain of
its affiliates. AGHI, which manages the Current Hotels and will manage three
of the Proposed Acquisition Hotels, was founded in 1981 by Steven D. Jorns,
the Company's Chairman of the Board, Chief Executive Officer and President. As
of December 31, 1996, AGHI operated and managed 64 hotels in 24 states
containing in excess of 11,200 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 expects to continue to capitalize on
AGHI's expertise to achieve revenue growth at the Company's hotels. The
Company does not have any economic interest in AGHI's hotel management
operations.
In order to qualify as a REIT, the Company may not operate hotels. As a
result, the Company leases the Current Hotels and will lease the Proposed
Acquisition Hotels to the Lessee, which is owned in part by certain executive
officers of the Company, pursuant to separate 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
Current Hotels. The Lessee, in turn, has entered into separate Management
Agreements with AGHI to operate the Current Hotels. See "AGHI, the Lessee and
Other Operators."
The Company intends to selectively seek other qualified hotel management
companies, in addition to the Lessee and AGHI, to lease and/or manage certain
of the Company's future hotel acquisitions. The Company intends to seek
operational relationships with independent hotel operators that, in the
Company's judgment, have demonstrated one or more of the following
characteristics: (i) certain unique knowledge of the hotel or the market
28
<PAGE>
in which such hotel operates, (ii) a proven track record for implementing
product, brand and operational repositioning strategies, (iii) a significant
national or regional lodging industry reputation or (iv) substantial financial
resources. The Company believes that the use of a flexible lessee or manager
structure, coupled with the continued expansion of its brand and franchise
relationships, will result in additional acquisition opportunities for the
Company. The Lessee has advised the Company that it expects to retain Wyndham
Hotel Corporation as the manager of one of the Proposed Acquisition Hotels
following its purchase by the Company. See "The Company--Other Operators."
The Company believes that the growth in occupancy, ADR and REVPAR at the
eight Current Hotels managed and operated by AGHI prior to and after the IPO
reflects the successful repositioning, renovation and marketing strategies of
AGHI as well as AGHI's superior management and operational capabilities. See
"The Hotels." The Company attributes the success of the Hotels, in part, 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
Hotels and for acquisitions. The following table compares occupancy, ADR, and
REVPAR at the Current 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>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER
------------------------- --------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
OCCUPANCY
Current Hotels(1).................... 71.0% 71.9% 73.0% 75.5% 75.2%
All Midscale Hotels(2)............... 63.0 64.1 64.6 66.7 66.5
All Lower Upscale Hotels(2).......... 67.3 69.9 70.2 71.6 72.2
All U.S. Hotels(2)................... 63.0 64.7 65.5 67.1 67.6
ADR(3)
Current Hotels(1).................... $ 58.58 $ 62.06 $ 67.76 $67.57 $74.42
All Midscale Hotels(2)............... 54.55 56.23 58.97 59.13 62.63
All Lower Upscale Hotels(2).......... 71.98 74.72 78.81 78.72 84.21
All U.S. Hotels(2)................... 61.93 64.24 67.34 67.07 71.48
REVPAR(4)
Current Hotels(1).................... $ 41.60 $ 44.65 $ 49.49 $51.00 $55.97
All Midscale Hotels(2)............... 34.36 36.04 38.08 39.44 41.65
All Lower Upscale Hotels(2).......... 48.44 52.21 55.36 56.36 60.80
All U.S. Hotels(2)................... 39.01 41.56 44.11 45.00 48.31
</TABLE>
- --------
(1) The occupancy, ADR and REVPAR calculations for the Current Hotels are
derived from room revenue that is included in the audited financial data
relating to each of the Current 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 or the Company (such date is
set forth in parentheses): the Hilton Hotel-Durham (January 1997), the
Holiday Inn Resort Monterey (November 1996), 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 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) 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. Two of the Current Hotels are
currently within the "Lower Upscale" category and ten of the Current
Hotels are currently within the "Midscale" category. The Company expects
that upon completion of its subsequent product and brand repositioning
program, eight of the Current Hotels will be within the "Lower Upscale"
category and seven of the Current Hotels will be within the "Midscale"
category.
(3) Determined by dividing total room revenue by total rooms sold.
(4) Determined by dividing total room revenue by total available rooms.
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<PAGE>
Management believes that the full-service hotel segment, in particular, has
potential for improved performance as the economy continues to grow, and as
business and leisure travel activity increases. The Company targets 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 the
development of a full-service hotel 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
offers 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 markets that the Company believes have attractive
economic characteristics. In order to enhance its acquisition capabilities,
the Company expects to continue to utilize borrowings available under the Line
of Credit to purchase hotels. The Company has received a commitment from its
Line of Credit lenders that will permit the Company, following the
consummation of the Offering, to increase its borrowing limit from $100
million to $150 million. See "Developments Since the Initial Public Offering--
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 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 continue 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. As an example of
the benefits of this relationship, the Company's proposed acquisition of the
Radisson Hotel Arlington Heights arose out of AGHI's position as manager of
that hotel. In addition, the Company expects the adoption of a flexible lessee
and/or manager structure will result in additional acquisition opportunities
for the Company. The Company employs four professionals devoted exclusively to
hotel acquisitions.
The Company seeks to acquire additional hotels that meet one or more of the
following investment criteria:
. full-service hotels located in major metropolitan markets, including
hotels that are in close proximity to the airports that serve such
markets, as well as selective prominent hotels in major tourist areas;
. hotels that are underperforming and are candidates for implementation of
market repositioning, franchise conversion and turnaround strategies;
. hotels where the Company believes that necessary renovation or
redevelopment can be completed expeditiously and will result in an
immediate improvement in the hotel's revenues and an attractive return on
its renovation or redevelopment investment;
. hotels with sound operating fundamentals that are performing below their
potential because they are owned or controlled by financially distressed
owners or involuntary owners that may have acquired hotels through
foreclosure, including owners that lack the financial resources or the
commitment to make capital improvements appropriate for such hotels;
. hotels in attractive locations that the Company believes would benefit
significantly by changing franchises to a recognized brand affiliation
that is capable of increasing penetration in a particular market;
. nationally franchised hotels in locations with a relatively high demand
for rooms, relatively low supply of competing hotels and high barriers to
entry; and
30
<PAGE>
. 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 continue to make acquisitions will depend, in part,
on its ability to access debt and equity financing. The Company expects to
continue to fund its acquisitions by utilizing funds available under its Line
of Credit, through the issuance of equity and OP Units and, subject to the
consent of the Line of Credit lenders, the assumption or issuance of debt.
Although as a public company the Company may have available alternative
sources of financing, no commitments relating to such financing currently
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 seven hotel
properties, with an aggregate development cost of approximately $70 million,
and has completed redevelopment or repositioning projects at approximately 70
hotel properties, including both full- and limited-service hotels. Recently,
AGHI completed development of a 167-room Courtyard by Marriott in Boise, Idaho
and currently has one hotel under development, 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 the Option Hotels for a two-year period
following the opening of each such hotel. See "The Hotels--Options to Purchase
and Rights of First Refusal." The Company anticipates that most of the hotels
it develops in the future will be in the full-service market segment. 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
Current Hotels, the strength of the Company's and AGHI's existing management
teams and the structure of the Participating Leases, the Current Hotels
provide the Company with the opportunity for significant revenue growth. The
Company believes that it has structured its business relationships with AGHI
and the Lessee to provide incentives to operate and maintain the Current
Hotels in a manner that will increase revenue and the Cash Available for
Distribution. See "The 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.
31
<PAGE>
The Company believes there is significant potential to increase revenues at
the Hotels and increase Participating Lease payments by continuing to employ
the following strategies:
.product repositioning through renovation and refurbishment of the hotels;
.brand repositioning through conversion to leading national franchise
affiliations;
.operational repositioning through property-level management and marketing;
and
. use of Participating Leases designed to capture increased revenues
attributable to improved marketing and yield management techniques that
AGHI will continue to employ at the Current Hotels and any additional
hotels acquired by the Company and managed by AGHI.
Product Repositioning. The Company believes that a regular program of
capital improvements, including replacement and refurbishment of FF&E at the
Current Hotels, as well as the renovation and redevelopment of selected
Hotels, is essential to maintaining the competitiveness of the hotels and
maximizing revenue growth. Consistent with this strategy, as of December 31,
1996, the Company had invested approximately $10.7 million (an average of
approximately $2,800 per guest room) in capital improvements and renovations
at the Current Hotels. The Company has budgeted for 1997 approximately $33.3
million (an average of approximately $8,600 per guest room) for additional
capital improvements and renovations at these hotels. In addition, the Company
has budgeted approximately $14.6 million (an average of approximately $19,000
per guest room) to be spent on capital improvements and renovations at the
four Proposed Acquisition Hotels (see "Brand Repositioning" below).
The Participating Leases require the Company to establish reserves of 4.0%
of total revenue for each of the Current Hotels (which, on a consolidated pro
forma basis for the twelve months ended September 30, 1996, represented
approximately 5.4% 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 Current 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, Hilton,
Holiday Inn, Holiday Inn Select, Wyndham and Westin brands, in order to
improve the operating performance at these hotels. Ten of the Current Hotels
are anticipated to undergo brand conversions during the next twelve months. It
is expected that the Holiday Inn Park Center Plaza will be converted 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 Wyndham Hotel, the Holiday Inn New
Orleans International Airport will be converted to a Holiday Inn Select, the
Holiday Inn Dallas DFW Airport South will be converted to a Holiday Inn
Select, the Holiday Inn Mission Valley will be converted to a Holiday Inn
Select, the Best Western Albuquerque Airport Hotel will be converted to a
Wyndham Hotel, the Days Inn Lake Buena Vista will be converted to a Wyndham
Hotel and the Holiday Inn Resort Monterey will be converted to a Hilton Hotel.
Three of the Proposed Acquisition Hotels are expected to undergo brand
conversions upon their purchase by the Company. The French Quarter Suites
Hotel will be converted to a DoubleTree Guest Suites, the Four Points by
Sheraton will be converted to a Wyndham Garden Hotel, and the Sheraton Key
Largo will be converted to a Westin Resort. 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."
32
<PAGE>
The Company's ability to utilize its brand repositioning strategies will
depend on its ability to access financing. The Company plans to use funds
available under the Line of Credit to implement its conversion and brand
repositioning strategy at certain of the Hotels. Substantial renovations of
hotels often disrupt the operations of those hotels due to hotel guest rooms
and common areas being out of service for extended periods. The Company,
however, attempts to schedule renovations and improvements during
traditionally lower occupancy periods in an effort to minimize disruption to
the hotels' operations. 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 AGHI's marketing and yield
management techniques contribute to maximizing revenues at the hotels managed
by it, thereby increasing the rent payable to the Company by the Lessee under
the Participating Leases. While the rent provisions of the Participating
Leases are revenue-based, such provisions have been developed with
consideration of the fixed and variable nature of hotel operating expenses and
changes in operating margins typically associated with increases in revenues.
See "The 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 (i) capitalized the Lessee with $500,000
in cash and (ii) pledged 275,000 OP Units 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 include an incentive fee of up
to 2.0% of gross revenues based upon reaching certain gross revenue
targets at the Hotels;
. management fees payable by the Lessee to AGHI are 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, have agreed 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 established a Leasing Committee,
consisting entirely of Independent Directors, that reviews not less
frequently than annually the Lessee's compliance with the terms of the
Participating Leases and reviews and approves the terms of each new
Participating Lease between the Company and the Lessee.
OTHER OPERATORS
The Company intends to selectively seek other qualified hotel brand
owner/operators and hotel management companies, in addition to the Lessee and
AGHI, to lease and/or manage certain of the Company's future hotel
acquisitions. The Company anticipates that it will lease hotels to independent
hotel operators or, as a condition
33
<PAGE>
to entering into a Participating Lease with the Lessee, will require the
Lessee to retain an independent hotel manager in connection with selected
acquisitions, provided such lessee or manager has demonstrated, in the
Company's judgment, (i) certain unique knowledge of the hotel or the market in
which the hotel operates, (ii) a proven track record for implementing product,
brand and operational repositioning strategies, (iii) a significant national
or regional lodging industry reputation or (iv) substantial financial
resources. In addition, the Company will seek to develop lessee or management
relationships with operators that are capable of providing the Company with
attractive acquisition opportunities that satisfy its investment criteria. The
Company believes that the use of a flexible lessee or manager structure,
coupled with the continued expansion of its brand and franchise relationships,
will result in additional acquisition opportunities for the Company.
Consistent with this strategy, the Lessee has advised the Company that it
expects to retain Wyndham Hotel Corporation to manage the Four Points by
Sheraton hotel following its acquisition by the Company. According to public
filings, Wyndham Hotel Corporation is a NYSE listed company which, as of
December 31, 1996, operated or franchised in excess of 75 hotels. The
engagement of a lessee or manager other than the Lessee or AGHI to operate the
Company's hotels is subject to the approval of the Line of Credit lenders. See
"The Hotels--The Management Agreements--Wyndham."
FINANCING STRATEGY
Upon completion of this Offering and the purchase of the Proposed
Acquisition Hotels, the Company will have approximately $10.2 million of
outstanding indebtedness under the Line of Credit and will have outstanding
mortgage indebtedness encumbering four of the Hotels of approximately $36.9
million. In addition, in connection with the planned capital improvements and
renovations at the Current Hotels, the Company has budgeted to borrow
approximately $33.3 million under the Line of Credit and also intends to
borrow under the Line of Credit approximately $14.6 million for capital
improvements and renovations at the Proposed Acquisition Hotels. 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 continue 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--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 has 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
Line of Credit is currently 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 is currently secured by a
first mortgage lien on fourteen of the Current Hotels and is expected to be
secured by two of the Proposed Acquisition 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. The Company has received a commitment from its Line of Credit lenders
to increase the borrowing limit under the Line of Credit from $100 million to
$150 million and to make certain other modifications thereto that would
increase the financial flexibility of the Company. This commitment to increase
the maximum amount available under the Line of Credit is subject to the
consummation of the Offering and the satisfaction of other customary
conditions. Accordingly, there can be no assurance that these modifications to
the Line of Credit will occur. See "The Hotel--Line of Credit."
THE OPERATING PARTNERSHIP
The Company owns an approximate 81.4% interest in the Operating Partnership,
a Delaware limited partnership. The Company holds its interest in the
Operating Partnership through two wholly owned subsidiaries, AGH GP and AGH
LP. AGH GP is the sole general partner of the Operating Partnership and owns a
1.0% general partnership interest in the Operating Partnership. Through AGH
GP, the Company controls the Operating Partnership and its assets. AGH LP is
one of the Operating Partnership's limited partners (the "Limited Partners")
and owns an approximate 80.4% limited partnership interest in the Operating
Partnership. In their
34
<PAGE>
capacity as such, the Limited Partners have no authority to transact business
for, or participate in the management, activities or decisions of, the
Operating Partnership. The Operating Partnership owns, directly or through one
or more subsidiary partnerships or limited liability companies (the
"Subsidiary Partnerships"), all of the Current Hotels and leases such hotels
to the Lessee. The Operating Partnership owns, directly or indirectly, a 99.9%
interest in each Subsidiary Partnership. Upon completion of the Offering, the
Company will own indirectly through AGH GP and AGH LP an approximate 87.9%
interest in the Operating Partnership, consisting of a 1.0% general
partnership interest and an approximate 86.9% limited partnership interest.
DEVELOPMENTS SINCE THE INITIAL PUBLIC OFFERING
Set forth below is a summary of the significant developments involving the
Company since the IPO:
Acquired Hotels
The Company has invested approximately $58.0 million in the purchase of the
Acquired Hotels containing an aggregate 846 guest rooms, representing a more
than 28% increase in the Company's portfolio since the IPO, based upon the
number of guest rooms. Set forth below are summary descriptions of the
Acquired Hotels:
Days Inn Lake Buena Vista--Lake Buena Vista, Florida
On October 22, 1996, the Company acquired the 490-room Days Inn Lake Buena
Vista for an aggregate purchase price of approximately $30.5 million that was
paid as follows: (i) $30.0 million in cash and (ii) $500,000 through the
issuance of 25,397 shares of restricted Common Stock. In connection with the
acquisition, the Company also paid an aggregate of approximately $2.4 million
to acquire a license and an association membership related to the hotel's
African royal safari theme (as described below) and for certain hotel related
design services. The Days Inn Lake Buena Vista was developed in 1985 and is
located approximately one-quarter mile south of Walt Disney World's Lake Buena
Vista entrance. The hotel contains 94 suites and approximately 4,200 square
feet of meeting and convention space. The Company has budgeted approximately
$9.3 million to complete an extensive renovation program to upgrade the entire
hotel and to reposition the hotel as a Wyndham Hotel during the fourth quarter
of 1997. The renovations will include the addition of approximately 9,000
square feet of convention space and the redesign of the exterior of the hotel
to reflect an African royal safari theme that will tie in with Disney's Animal
Kingdom theme park, which is expected to open in 1998.
Holiday Inn Resort Monterey--Monterey, California
On November 21, 1996, the Company acquired the 204-room Holiday Inn Resort
Monterey for approximately $15.5 million in cash. This hotel, which was
constructed in 1971, is located in the major tourist destination of Monterey,
California. The Company has budgeted approximately $3.9 million in renovations
to upgrade the hotel's guest rooms and public areas in order to reposition the
hotel as a Hilton Hotel during the fourth quarter of 1997.
Hilton Hotel-Durham--Durham, North Carolina
On January 8, 1997, the Company acquired the 152-room Hilton Hotel--Durham
for approximately $12.1 million in cash. The hotel, which was constructed in
1987, is located in northwest Durham, one mile from Duke University, Duke
Medical Center and Research Triangle Park. During 1997 the Company expects to
add 42 guest rooms to the hotel at an anticipated cost of approximately $2.4
million. However, there can be no assurance that such hotel expansion will
occur. See "Risk Factors--Conflicts of Interest--Conflicts Relating to
Continued Ownership of Other Hotel Properties."
Proposed Acquisition Hotels
The Company has entered into contracts to purchase the Proposed Acquisition
Hotels for purchase prices aggregating approximately $70.6 million. The
closing of the purchase of each of the Proposed Acquisition Hotels is subject
to satisfactory completion of various closing conditions. Accordingly, no
assurance can be given that the Company will acquire any or all of the
Proposed Acquisition Hotels. See "Risk Factors--Risk That Proposed Acquisition
Hotels Will Not Be Acquired." If the Proposed Acquisition Hotels are acquired,
the Company will have invested approximately $128.6 million in hotel
acquisitions since the IPO and will own 20 hotels containing approximately
4,600 guest rooms. This represents a more than 50% increase in the Company's
portfolio since
35
<PAGE>
the IPO based upon the number of guest rooms. Set forth below are summary
descriptions of the Proposed Acquisition Hotels:
Portfolio Purchase. In December 1996, the Company entered into a series of
agreements to acquire a portfolio of hotels, including the Four Points by
Sheraton, the Sheraton Key Largo and the French Quarter Suites Hotel for
purchase prices aggregating approximately $59.1 million. The purchase price
for the Portfolio Purchase will be payable as follows: (i) approximately $49.5
million in cash and (ii) the assumption of approximately $9.6 million of
mortgage indebtedness secured by the French Quarter Suites Hotel.
Four Points by Sheraton--Marietta, Georgia
In December 1996, the Company entered into an agreement to acquire the Four
Points by Sheraton as part of the Portfolio Purchase. The Company has
allocated a cash purchase price of $17.0 million to the Four Points by
Sheraton. The 219-room hotel was built in 1985 and is located in Marietta, a
northwestern suburb of Atlanta. During 1997, the Company expects to invest
approximately $2.8 million to renovate the hotel and to reposition the hotel
to operate as a Wyndham Garden Hotel. The Company expects to lease the hotel
to the Lessee which, in turn, is expected to retain Wyndham Hotel Corporation
to manage the hotel.
Sheraton Key Largo--Key Largo, Florida
In December 1996 the Company entered into an agreement to acquire the
Sheraton Key Largo as part of the Portfolio Purchase. The Company has
allocated a cash purchase price of $26.1 million to the Sheraton Key Largo.
This hotel, which is located on US Highway 1 in Key Largo, and was developed
in 1985, is a 200-room resort complex situated on a private beach on the
western coastline of the Florida Keys. The Company intends to invest
approximately $3.0 million in improvements to the hotel and to reposition the
hotel to operate as a Westin Resort. The Company expects that the hotel will
be leased to the Lessee and managed by AGHI.
French Quarter Suites Hotel--Atlanta, Georgia
In December 1996, the Company entered into an agreement to acquire the
French Quarter Suites Hotel as part of the Portfolio Purchase. The Company has
allocated a $16.0 million purchase price to the French Quarter Suites Hotel
that will be payable as follows: (i) approximately $6.4 million in cash and
(ii) the assumption of approximately $9.6 million in mortgage indebtedness,
which bears interest at the rate of 9.75% per annum. The French Quarter Suites
Hotel is located in the Cumberland/Galleria area of northwest Atlanta. The
hotel was constructed in 1985 and contains a total of 155 guest rooms, of
which 144 are suites. During 1997, the Company plans to invest approximately
$2.8 million to complete an extensive renovation of the hotel and to
reposition the hotel to operate as a DoubleTree Guest Suites. The Company
expects that the hotel will be leased to the Lessee and managed by AGHI.
Radisson Hotel Arlington Heights--Arlington Heights, Illinois
In January 1997, the Company entered into a contract to purchase the
Radisson Hotel Arlington Heights for approximately $11.5 million that will be
payable as follows: (i) $3.3 million in cash and the (ii) assumption of a one-
year $8.2 million first mortgage note, which bears interest at the rate of
7.5% per annum. In addition, commencing on the earlier of the fourth
anniversary of the completion of initial renovations of the hotel or January
1, 2003, the seller will have the right to receive from the Company a 25%
profits interest in the net cash flow and the net proceeds from certain
capital transactions generated at the hotel. The Company has the option to
purchase this profits interest, for an amount equal to 25% of the fair market
value of the hotel less the aggregate of $11.2 million plus the costs related
to any additional expansion of the hotel, at any time after the fourth
anniversary of the completion of the initial renovations at the hotel (subject
to a 30 month extension in certain circumstances). If the Company exercises
its option to acquire the profits interest, the profits interest will
terminate immediately upon acquisition. See "The Hotels--Proposed Acquisition
Hotels--Radisson Hotel Arlington Heights." This future cash flow right was
granted in order to compensate the sellers for the expected improvement in the
hotel's performance that is not fully reflected in the historical operating
results. The Radisson Hotel Arlington Heights, which is currently managed by
AGHI, is a 201-room full-service hotel constructed in 1981. It is located in
suburban northwest Chicago approximately 8.5 miles from O'Hare International
Airport. During 1998, the Company
36
<PAGE>
intends to complete a $6.0 million renovation of the hotel, which is expected
to include the addition of at least 31 guest rooms. The Company expects that
the hotel will be leased to the Lessee and continue to be managed by AGHI.
In addition to the planned purchase of the Proposed Acquisition Hotels, as
part of its ongoing business, the Company continually engages in discussions
with public and private real estate entities regarding possible portfolio or
single asset acquisitions.
Wyndham Alliance
On January 9, 1997, the Company entered into an agreement with Wyndham
relating to a strategic alliance between Wyndham and the Company. Pursuant to
the Wyndham Alliance, (i) in connection with the conversion of a hotel owned by
the Company to the Wyndham brand, Wyndham will acquire, as directed by the
Company, Common Stock or OP Units in an amount equal to nine times the
estimated franchise fee payable to Wyndham during the first twelve months such
hotel is operated as a Wyndham brand, (ii) Wyndham will have the non-exclusive
right to franchise new hotel acquisitions that the Company has determined
should undergo a brand conversion and (iii) the Company will be given the
opportunity to bid on any hotels to be acquired by Wyndham that it intends to
sell to a REIT or any hotel with respect to which Wyndham intends to enter into
a sale or leaseback arrangement with a REIT simultaneously with the hotel's
purchase. Wyndham's purchase of the Alliance Securities pursuant to the Wyndham
Alliance is subject to the satisfaction of certain conditions, including the
consent of Wyndham's lenders, and will be at a price per share of Common Stock
or OP Unit equal to the average closing sale price of the Common Stock on the
NYSE for the 30 trading days preceding the earlier of (i) the date on which
Wyndham consents to the conversion of a Company hotel to a Wyndham brand or
(ii) the date on which the Company publicly announces its proposed acquisition
of a hotel that is to be converted to a Wyndham brand. Any such purchase of
Alliance Securities will occur within 30 days after a Company hotel is
converted to a Wyndham brand. No purchase of Alliance Securities will occur in
connection with the planned conversion of the Best Western Albuquerque Airport
Hotel, the Days Inn Lake Buena Vista and the Four Points by Sheraton to Wyndham
brands. See "The Company--Wyndham Alliance." Within 30 days after the
conversion of the Le Baron Airport Hotel to the Wyndham Hotel brand, Wyndham
has agreed, subject to certain conditions, to purchase 112,969 shares of Common
Stock at the consent of a negotiated price of $22.13 per share. The Wyndham
Alliance will expire on December 31, 1999.
Capital Improvements, Renovations and Brand Conversions
The Company believes a regular program of capital improvements, including
replacement and refurbishment of FF&E at the Current Hotels, as well as the
renovation and redevelopment of selected Hotels, is essential to maintaining
the competitiveness of the Hotels and maximizing revenue growth. Consistent
with this strategy, as of December 31, 1996, the Company had invested
approximately $10.7 million (an average of approximately $2,800 per guest room)
for capital improvements and renovations at the Current Hotels. The Company has
budgeted for 1997 approximately $33.3 million (an average of approximately
$8,600 per guest room) for additional renovations and capital improvements at
these hotels. In addition, the Company has budgeted approximately $14.6 million
(an average of approximately $19,000 per guest room) to be spent on renovations
and capital improvements at the four Proposed Acquisition Hotels. The Company
attempts to schedule renovations and improvements during traditionally lower
occupancy periods in an effort to minimize disruptions to the hotel's
operations. In addition, the Company has agreements in place that will permit
the Company to convert, by the first quarter of 1998, ten of the Current Hotels
to new brand affiliations with nationally recognized hotel companies.
Line of Credit
The Company has received a commitment from its Line of Credit lenders to
increase the borrowing limit under the Line of Credit from $100 million to $150
million and to make certain other modifications thereto that would increase the
financial flexibility of the Company. This commitment to increase the maximum
amount available under the Line of Credit is subject to the consummation of the
Offering and the satisfaction of other customary conditions. Accordingly, there
can be no assurance that these modifications to the Line of Credit will occur.
37
<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 $124.8 million (approximately $143.8 million if the
Underwriters' overallotment is exercised in full). The Company will contribute
the net proceeds from the Offering to the Operating Partnership in exchange
for additional interests therein, and following such contribution will own an
approximate 87.9% interest in the Operating Partnership (an approximate 91.5%
interest if the Underwriters' overallotment option is exercised in full). The
Operating Partnership intends to use such net proceeds as follows: (i)
approximately $80.0 million to repay indebtedness borrowed under the Line of
Credit; (ii) approximately $700,000 to pay fees and expenses incurred in
connection with the anticipated modifications to the Line of Credit, which
include an increase in the borrowing limit to $150 million; (iii)
approximately $44.1 million to pay a substantial portion of the cash part of
the purchase price of the Proposed Acquisition Hotels; and (iv) the balance,
if any, for general corporate and working capital purposes. The Company's
borrowings under the Line of Credit, with accrued interest, totalled
approximately $57.5 million as of December 31, 1996, which amounts have been
borrowed principally to purchase the Acquired Hotels and to make renovations
and capital improvements to certain of the Current Hotels. The estimated $80.0
million balance under the Line of Credit at the time of the closing of the
Offering consists of the approximately $57.5 million of outstanding borrowings
at December 31, 1996 plus approximately $12.4 million of borrowings in
connection with the Company's January 8, 1997 acquisition of the Hilton Hotel-
Durham and $10.1 million of borrowings expected to be incurred during January
1997 in connection with the Company's capital improvement program. Borrowings
under the Line of Credit bear interest at a 30-day, 60-day or 90-day LIBOR
(5.50%, 5.53% and 5.56% at December 31, 1996), at the option of the Company,
plus 1.85% per annum, and mature on July 31, 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
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>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION POLICY
The Company's Common Stock began trading on the NYSE on July 26, 1996 under
the symbol "AGT." On January 15, 1997, the last reported sale price per share
of Common Stock on the NYSE was $24 3/8 and there were 54 holders of record of
the Company's Common Stock. The following table sets forth the quarterly high
and low closing sale prices per share of Common Stock reported on the NYSE and
the cash distributions declared per share by the Company with respect to each
such period.
<TABLE>
<CAPTION>
PRICE RANGE
---------------
CASH
DISTRIBUTIONS
DECLARED
HIGH LOW PER SHARE
---- ------- -------------
<S> <C> <C> <C>
1996
Third Quarter, from July 26, 1996.............. $19 $17 1/2 $0.2476(1)
Fourth Quarter................................. 23 3/4 18 7/8 $0.4075(2)
1997
First Quarter (through January 15, 1997)....... 25 1/8 23 1/4 N/A
</TABLE>
- --------
(1) Represents a pro rata distribution of the Company's initial quarterly
distribution of $0.4075 per share of Common Stock, based on a partial
calendar quarter beginning on July 31, 1996 (the closing date of the IPO)
through September 30, 1996.
(2) On December 18, 1996, the Company declared a distribution of $0.4075 per
share relating to the fourth quarter of 1996 that is payable on January
30, 1997 to stockholders of record as of December 30, 1996. Purchasers of
Common Stock in the Offering will not receive the fourth quarter 1996
dividend in respect of the shares of Common Stock offered hereby.
Future distributions by the Company will be at the discretion of the Board
of Directors and will depend on the Company's financial condition, its capital
requirements, the annual distribution requirements under the REIT provisions
of the Code and such other factors as the Board of Directors deems relevant.
There can be no assurance that any such distributions will be made by the
Company. For a discussion of the tax treatment of distributions to holders of
shares of Common Stock, see "Federal Income Tax Considerations."
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to stockholders as ordinary dividend income. Distributions in excess of
current and accumulated earnings and profits will be treated as a non-taxable
reduction of the stockholder's basis in its shares of Common Stock to the
extent thereof, and thereafter as taxable gain. Distributions that are treated
as a reduction of the stockholder's basis in its shares of Common Stock will
have the effect of deferring taxation until the sale of the stockholder's
shares. The Company has determined that, for federal income tax purposes,
approximately 18% of the $0.6551 per share distribution paid for 1996
represented a return of capital to the stockholders. No assurances can be
given regarding what portion of future distributions will constitute return of
capital for federal income tax purposes.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 on a historical basis and on a pro forma basis, assuming
completion of the Offering and the use of the net proceeds from the Offering
as described in "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
HISTORICAL PRO FORMA
------------ ------------
<S> <C> <C>
Long-term debt..................................... $ 21,297,508 $ 37,076,073
Minority interest in Operating Partnership(1)...... 29,303,428 34,121,019
Stockholders' equity:
Common Stock, $0.01 par value per share,
100,000,000 shares authorized, 8,262,008 shares
issued and outstanding, and 13,787,405 shares
issued and outstanding, as adjusted(2).......... 82,620 137,874
Additional paid-in capital....................... 128,163,784 248,580,002
Unearned officers' compensation.................. (872,708) (872,708)
Earnings in excess of distributions.............. 25,702 25,702
------------ ------------
Total stockholders' equity..................... 127,399,398 247,870,870
------------ ------------
Total Capitalization........................... $178,000,334 $319,067,962
============ ============
</TABLE>
- --------
(1) At September 30, 1996, the Company owned an approximate 81.4% interest in
the Operating Partnership. If the acquisition of the Acquired Hotels, the
consummation of the Offering and related transactions had occurred on
September 30, 1996, the Company would have owned an approximate 87.9%
interest in the Operating Partnership.
(2) Includes (i) 162,405 shares of restricted Common Stock issued in
connection with the acquisition of certain of the Current Hotels, (ii)
50,000 shares of restricted Common Stock granted to the Company's
executive officers as stock awards that are subject to certain vesting
requirements and (iii) 1,436 shares of restricted Common Stock issued on
October 1, 1996 to certain of the Company's directors under the Directors'
Plan. Excludes (i) 1,896,996 shares of Common Stock to be issuable at the
Company's option upon the exchange of OP Units issued in the Formation
Transactions, (ii) 850,000 reserved but unissued shares of Common Stock
under the 1996 Plan, including 360,000 shares as to which options are
outstanding and (iii) 98,564 reserved but unissued shares of Common Stock
under the Directors' Plan, including 40,000 shares as to which options are
outstanding. See "Management--Stock Incentive Plans," "Formation
Transactions" and "Partnership Agreement--Exchange Rights."
40
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth (1) selected historical financial data for
the Company as of September 30, 1996 and for the period from July 31, 1996
through September 30, 1996 and selected pro forma consolidated financial data
for the Company as of and for the year ended December 31, 1995, the twelve
months ended September 30, 1996 and the nine months ended September 30, 1996
and 1995, (2) selected historical combined financial data for the Initial
Hotels for each of the years in the five-year period ended December 31, 1995,
(3) selected historical financial data for the Lessee for the period from July
31, 1996 through September 30, 1996 and pro forma financial data for the
Lessee for the year ended December 31, 1995, the twelve months ended September
30, 1996 and the nine months ended September 30, 1996 and 1995, (4) selected
historical combined financial data for the AGH Predecessor Hotels (as defined
in the Glossary) for each of the years in the three-year period ended December
31, 1995, and the period from January 1, 1996 through July 30, 1996 and (5)
selected historical combined financial data for the Other Initial Hotels for
each of the years in the five-year period ended December 31, 1995 and the
period from January 1, 1996 through June 30, 1996. The selected historical
combined financial data of the AGH Predecessor Hotels for the periods
presented and the selected historical combined financial data of the Other
Initial Hotels (as defined in the Glossary) for each of the years in the
three-year period ended December 31, 1995 have been derived from the
historical financial data of the Company, the selected historical combined
financial statements and notes thereto of the AGH Predecessor Hotels and the
Other Initial Hotels audited by Coopers & Lybrand L.L.P., independent
accountants, whose reports with respect thereto are included elsewhere in this
Prospectus. The selected historical financial data of the Lessee and the
selected historical combined financial data of the Other Initial Hotels for
each of the years in the two-year period ended December 31, 1992 have been
derived from unaudited internal statements of operations of the Lessee and the
Other Initial Hotels. In the opinion of management, the unaudited financial
data include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial information set forth
therein.
The pro forma and other data are presented as if the IPO and related
Formation Transactions, the acquisition of all Hotels and the consummation of
the Offering and the application of the net proceeds therefrom had occurred on
January 1, 1995 and therefore incorporate certain assumptions that are
included in the Notes to the Pro Forma Statements of Operations included
elsewhere in this Prospectus. The pro forma operating data for the 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 acquisition of the Acquired Hotels and the Proposed Acquisition Hotels and
the consummation of the Offering had occurred on September 30, 1996. The pro
forma statements of operations do not include income on the pro forma cash and
cash equivalents in accordance with the rules and regulations of the
Commission.
The pro forma information does not purport to represent what the Company's
financial position or the Company's or the Lessee's results of operations
would have been if the IPO and related Formation Transactions, the acquisition
of all Hotels and the consummation of the Offering had, in fact, occurred on
such dates, or to project the Company's or the 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 Other Initial 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 the Other Initial Hotels for these periods is unavailable.
Therefore, historical financial information for the Other Initial Hotels 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.
41
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA(1)
--------------------------------------------------------------
HISTORICAL TWELVE MONTHS NINE MONTHS NINE MONTHS
JULY 31, 1996 YEAR ENDED ENDED ENDED ENDED
THROUGH DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
SEPTEMBER 30, 1996 1995 1996 1995 1996
------------------ ------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Participating Lease
revenue(2)............. $ 5,218,526 $ 39,969,440 $ 44,655,229 $ 30,470,441 $ 35,156,230
Interest income......... 32,227 31,500 31,500 23,625 23,625
------------- ------------ ------------ ------------ ------------
Total revenue........ 5,250,753 40,000,940 44,686,729 30,494,066 35,179,855
------------- ------------ ------------ ------------ ------------
Depreciation............ 1,008,874 11,056,724 9,736,862 8,292,543 7,238,403
Amortization............ 116,572 1,075,459 1,075,459 805,032 805,032
Real estate and personal
property taxes and
property insurance..... 511,115 4,527,256 4,727,617 3,283,773 3,434,043
General and
administrative(3)...... 194,226 1,700,000 1,700,000 1,275,000 1,275,000
Ground lease expense.... 218,000 881,217 962,993 660,913 722,245
Amortization of unearned
officers'
compensation(4)........ 14,792 88,750 88,750 66,563 66,563
Interest expense........ 347,622 3,119,220 3,119,220 2,334,447 2,334,447
------------- ------------ ------------ ------------ ------------
Total expenses....... 2,411,201 22,448,626 21,410,901 16,718,271 15,875,733
------------- ------------ ------------ ------------ ------------
Income before minority
interest............... 2,839,552 17,552,314 23,275,828 13,775,795 19,304,122
Minority interest(5).... 545,102 2,122,916 2,815,163 1,666,154 2,334,794
------------- ------------ ------------ ------------ ------------
Net income applicable to
common stockholders.... $ 2,294,450 $ 15,429,398 $ 20,460,665 $ 12,109,641 $ 16,969,328
============= ============ ============ ============ ============
Net income per common
share.................. $ 0.29 $ 1.12 $ 1.48 $ 0.88 $ 1.23
============= ============ ============ ============ ============
Weighted average number
of shares of Common
Stock outstanding...... 8,002,331 13,787,405 13,787,405 13,787,405 13,787,405
============= ============ ============ ============ ============
<CAPTION>
HISTORICAL PRO FORMA(1)
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 4,186,235 $ 10,153,108
Investment in hotel
properties, net........ 175,613,813 307,447,568
Total assets............ 187,860,092 328,052,720
Debt.................... 19,297,508 37,076,073
Minority interest in
Operating Partnership.. 29,303,428 34,121,019
Stockholders' equity.... 127,399,398 247,870,870
<CAPTION>
PRO FORMA(1)
--------------------------------------------------------------
HISTORICAL NINE MONTHS NINE MONTHS
JULY 31, 1996 YEAR ENDED TWELVE MONTHS ENDED ENDED
THROUGH SEPTEMBER 30, ENDED SEPTEMBER 30, SEPTEMBER 30,
SEPTEMBER 30, 1996 1995 SEPTEMBER 30, 1996 1995 1996
------------------ ------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Funds From
Operations(6).......... $ 3,109,620 $ 25,148,258 $ 29,019,367 $ 19,398,786 $ 23,331,884
Cash Available for
Distribution(7) 2,737,710 21,895,602 25,504,654 16,904,574 20,575,614
Net cash provided by
operating
activities(8).......... 4,687,875 29,773,247 34,176,899 29,751,060 27,414,121
Net cash used in
investing
activities(9).......... (130,226,886) (4,864,614) (5,162,745) (3,709,152) (4,007,283)
Net cash provided by
(used in) financing
activities(10)......... 129,725,146 (26,222,705) (26,222,705) (19,667,028) (19,667,028)
Weighted average number
of shares of Common
Stock and of OP Units
outstanding............ 9,899,327 15,684,401 15,684,401 15,684,401 15,684,401
</TABLE>
See notes on page 44.
42
<PAGE>
LESSEE
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA(1)(11)
HISTORICAL ------------------------------------------------------
JULY 31, 1996 TWELVE MONTHS NINE MONTHS NINE MONTHS
THROUGH YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995 1996
------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Room revenue............ $11,185,140 $86,924,872 $94,322,228 $67,087,557 $74,484,913
Food and beverage
revenue................ 2,982,331 27,119,189 27,167,284 20,133,742 20,181,837
Other revenue........... 623,824 7,571,300 7,579,125 5,507,498 5,515,323
----------- ----------- ----------- ----------- -----------
Total revenue........ 14,791,295 121,615,361 129,068,637 92,728,797 100,182,073
Hotel operating
expenses............... 9,360,407 81,347,270 83,876,691 61,044,842 64,128,628
Depreciation and
amortization........... 10,500 63,000 63,000 47,250 47,250
Interest expense........ 5,250 31,500 31,500 23,625 23,625
Other expenses.......... 17,448 154,151 392,217 35,659 273,725
Participating Lease
expenses(2)............ 5,218,526 39,969,440 44,655,229 30,470,441 35,156,230
----------- ----------- ----------- ----------- -----------
Net income.............. $ 179,164 $ 50,000 $ 50,000 $ 1,106,980 $ 552,615
=========== =========== =========== =========== ===========
</TABLE>
INITIAL HOTELS
SELECTED HISTORICAL COMBINED FINANCIAL DATA(12)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- -----------
<S> <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
Food and beverage
revenue................ 13,526,143 13,597,748 15,453,080 16,378,861 17,717,760
Other revenue........... 2,434,535 2,528,364 4,680,010 3,392,275 4,147,900
----------- ----------- ----------- ----------- -----------
Total revenue........ 43,924,480 46,502,262 56,962,967 63,312,342 75,622,586
Hotel operating
expenses............... 32,251,012 35,083,148 40,130,782 44,349,278 51,198,375
Depreciation and
amortization........... 2,575,564 6,329,770 5,847,629 5,986,460 8,131,244
Interest expense........ 3,802,670 4,819,749 4,667,281 4,771,483 6,307,202
Other expenses.......... 1,946,193 617,334 2,543,235 2,996,568 3,132,865
----------- ----------- ----------- ----------- -----------
Revenues over (under)
expenses(13)........... $ 3,349,041 $ (347,739) $ 3,774,040 $ 5,208,553 $ 6,852,900
=========== =========== =========== =========== ===========
</TABLE>
AGH PREDECESSOR HOTELS
SELECTED HISTORICAL COMBINED FINANCIAL DATA(14)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SEVEN MONTHS
--------------------------------- ENDED
1993 1994 1995 JULY 30, 1996
-------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue................. $ 17,941 $3,431,654 $ 9,020,479 $6,770,568
Food and beverage revenue.... 6,158 552,697 1,293,238 1,175,807
Other revenue................ 1,448 223,211 568,415 432,750
-------- ---------- ----------- ----------
Total revenue............. 25,547 4,207,562 10,882,132 8,379,125
Hotel operating expenses..... 8,741 3,173,721 7,565,824 5,682,473
Depreciation and
amortization................ 46,982 364,513 2,480,054 645,195
Interest expense............. 430,535 1,572,244 1,129,060
Other expenses............... 831 525,287 754,193 443,295
-------- ---------- ----------- ----------
Net income (loss)......... $(31,007) $ (286,494) $(1,490,183) $ 479,102
======== ========== =========== ==========
</TABLE>
See notes on page 44.
43
<PAGE>
OTHER INITIAL HOTELS
SELECTED HISTORICAL COMBINED FINANCIAL DATA(15)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------------ JUNE 30,
1991 1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <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 $23,779,491
Food and beverage
revenue................ 13,526,143 13,597,748 15,446,922 15,826,164 16,424,522 8,260,931
Other revenue........... 2,434,535 2,528,364 4,678,562 3,169,064 3,579,485 1,827,603
----------- ----------- ----------- ----------- ----------- -----------
Total revenue........ 43,924,480 46,502,262 56,937,420 59,104,780 64,740,454 33,868,025
Hotel operating
expenses............... 32,251,012 35,083,148 40,122,041 41,175,557 43,632,551 22,175,694
Depreciation and
amortization........... 2,575,564 6,329,770 5,800,647 5,621,947 5,651,190 2,302,865
Interest expense........ 3,802,670 4,819,749 4,667,281 4,340,948 4,734,958 2,161,521
Other expenses.......... 1,946,193 617,334 2,542,404 2,471,281 2,378,672 1,592,414
----------- ----------- ----------- ----------- ----------- -----------
Revenues over (under)
expenses............... $ 3,349,041 $ (347,739) $ 3,805,047 $ 5,495,047 $ 8,343,083 $ 5,635,531
=========== =========== =========== =========== =========== ===========
</TABLE>
(1) The pro forma information does not purport to represent what the Company's
financial position or the Company's and the Lessee's results of operations
would actually have been if the IPO and related Formation Transactions,
the acquisitions of all Hotels and the consummation of the Offering and
the application of the net proceeds therefrom, in fact, occurred on such
dates, or to project the Company's financial position or the Company's and
Lessee's results of operations at any future date or for any future
period.
(2) Pro forma amounts represent lease payments from the Lessee to the
Operating Partnership pursuant to the Participating Leases calculated on a
pro forma basis by applying the rent provisions of the Participating
Leases to the revenues of the Hotels. The departmental revenue thresholds
in the Participating Leases are seasonally adjusted for interim periods
and certain of the Participating Lease formulas adjust beginning in
January 1997 or January 1998. See "The Hotels--The Participating Leases."
(3) Pro forma amounts represent salaries and wages, professional fees,
directors' and officers' insurance, allocated rent, supplies and other
operating expenses to be paid by the Company. These amounts are based on
historical general and administrative expenses as well as probable 1997
expenses.
(4) Represents amortization of unearned officer's compensation, represented by
an aggregate of 50,000 shares of restricted Common Stock issued to
executive officers, 10% of which shares vested at the date of grant (5,000
shares at $17.75 per share, the price per share of Common Stock issued in
the IPO).
(5) Calculated as 19.2% for the historical period from July 31, 1996 through
September 30, 1996. Calculated as 12.1% of income before minority interest
for all pro forma periods presented.
(6) Represents Funds From Operations of the Company. The items added back to
net income applicable to common stockholders have been adjusted by the
Company's ownership percentage in the Operating Partnership of 80.8% for
the historical period from July 31, 1996 through September 30, 1996 and
87.9% for all pro forma periods presented. The following table computes
Funds From Operations under the NAREIT definition. Funds From Operations
consists of net income applicable to common stockholders (computed in
accordance with generally accepted accounting principles) excluding gains
(losses) from debt restructuring and sales of property (including
furniture and equipment) plus real estate related depreciation and
amortization (excluding amortization of deferred financing costs) and
after adjustments for unconsolidated partnerships and joint ventures. The
Company considers Funds From Operations to be an appropriate measure of
the performance of an equity REIT. Funds From Operations should not be
considered as an alternative to net income or other measurements under
generally accepted accounting principles as an indicator of operating
performance or to cash flows from operating, investing or financing
activities as a measure of liquidity. Although Funds From Operations has
been calculated in accordance with the NAREIT definition, Funds From
Operations as presented may not be comparable to other similarly titled
measures used by other REITs. Funds From Operation does not reflect cash
expenditures for capital improvements or principal amortization of
indebtedness on the Hotels.
Notes continued on following page.
44
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA (1)
------------------------------------------------------
HISTORICAL
JULY 31, 1996 TWELVE MONTHS NINE MONTHS NINE MONTHS
THROUGH YEAR ENDED ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995(1) 1996(1) 1995 1996(1)
------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net income applicable to
common stockholders.... $2,294,450 $15,429,398 $20,460,665 $12,109,641 $16,969,328
Depreciation............ 815,170 9,718,860 8,558,702 7,289,145 6,362,556
---------- ----------- ----------- ----------- -----------
Funds From Operations... $3,109,620 $25,148,258 $29,019,367 $19,398,786 $23,331,884
========== =========== =========== =========== ===========
Weighted average number
of shares of Common
Stock outstanding...... 8,002,331 13,787,405 13,787,405 13,787,405 13,787,405
========== =========== =========== =========== ===========
</TABLE>
(7) Cash Available for Distribution represents Funds From Operations of the
Company plus the Company's ownership percentage in the Operating
Partnership of 80.8% for the historical period from July 31, 1996 through
September 30, 1996 and 87.9% for all pro forma periods presented
multiplied by the sum of amortization of deferred financing costs,
franchise transfer costs and unearned officers' compensation. This amount
is then reduced by the Company's same percentage share of the sum of 4.0%
of total revenue for each of the Hotels that is required to be set aside
by the Operating Partnership for refurbishment and replacement of FF&E,
capital expenditures and other non-routine items as required by the terms
of the Participating Leases. Cash Available for Distribution does not
include the interest expense allocated to borrowings under the Line of
Credit that are expected to be made in order to fund capital expenditures
at the Hotels. In addition, Cash Available for Distribution does not
include the effects of any revenue increases expected to result from
capital expenditures at the Hotels.
(8) Pro forma amounts represent net income plus minority interest,
depreciation, amortization, and amortization of unearned officers'
compensation. There are no pro forma adjustments for changes in working
capital items.
(9) Pro forma amounts represent cash used in investing activities and includes
the Operating Partnership's obligation to make available to the Lessee an
amount equal to 4.0% of total revenue for each of the Hotels for the
periodic replacement or refurbishment of FF&E, capital expenditures, and
other non-routine items as required by the Participating Leases. The
Company intends to cause the Operating Partnership to spend amounts in
excess of such obligated amounts to comply with the reasonable
requirements of any Franchise License and otherwise to the extent that the
Company deems such expenditures to be in the best interests of the
Company. See "The Hotels--The Participating Leases."
(10) Pro forma amounts represent pro forma initial distributions to be paid
based on the current annual distribution rate of $1.63 per share of
Common Stock and OP Unit and an aggregate of 15,684,401 shares of Common
Stock and OP Units outstanding plus the debt service on the indebtedness
collateralized by the Holiday Inn Dallas DFW Airport South, Courtyard by
Marriott--Meadowlands, French Quarter Suites Hotel and the Radisson Hotel
Arlington Heights.
(11) 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 owned all of the
Hotels as of January 1, 1995.
(12) The Initial Hotels' financial data is derived by adding selected
financial data of the AGH Predecessor Hotels and the Other Initial
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."
(13) Income taxes for the Other Initial Hotels have not been deducted in
calculating revenue over (under) expenses.
(14) Information is for the periods owned by AGHI.
(15) Includes information from each Other Initial 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 Other Initial Hotels was obtained from the owners of
the Other Initial Hotels and includes information for all periods.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
On July 31, 1996, the Company completed its IPO of 7,500,000 shares of
Common Stock and commenced operations. The Company contributed substantially
all of the net proceeds from the IPO in exchange for an approximate 80.2%
interest in the Operating Partnership.
The Operating Partnership used approximately $119.8 million of the net
proceeds from the IPO together with the proceeds of initial borrowings of
$10.0 million under the Line of Credit to acquire the thirteen Initial Hotels
and to repay existing mortgage indebtedness encumbering the Initial Hotels. In
addition, in connection with the IPO, the Company closed on its $100 million
Line of Credit that it utilizes primarily for the acquisition of hotels, the
renovation of certain hotels and for working capital.
On August 28, 1996, the Company sold an additional 575,000 shares of Common
Stock in connection with the exercise of the IPO underwriters' over-allotment
option. The Company contributed the net proceeds from the exercise of this
over-allotment option to the Operating Partnership in exchange for additional
partnership interests therein, thereby raising its aggregate percentage
interest in the Operating Partnership to approximately 81.3%. The Operating
Partnership utilized the net proceeds from the exercise of the IPO over-
allotment option to repay the initial $10.0 million of borrowings under the
Line of Credit.
Consistent with the Company's acquisition strategy, the Company has acquired
or has entered into binding agreements to purchase the following hotels for
the purchase prices (including closing costs) set forth below:
<TABLE>
<S> <C>
Acquired Hotels:
Days Inn Lake Buena Vista.................................... $ 31,850,000
Holiday Inn Resort Monterey.................................. 15,790,000
Hilton Hotel-Durham.......................................... 12,400,000
------------
Total/All Acquired Hotels.................................. 60,040,000
------------
Proposed Acquisition Hotels:
Radisson Hotel Arlington Heights............................. 11,818,755
Four Points by Sheraton...................................... 17,300,000
French Quarter Suites Hotel.................................. 16,300,000
Sheraton Key Largo........................................... 26,375,000
------------
Total/All Proposed Acquisition Hotels...................... 71,793,755
------------
Total/All Acquired and Proposed Acquisition Hotels......... $131,833,755
============
</TABLE>
Immediately following the closing of this Offering, the Company will
contribute all of the net proceeds of the Offering to the Operating
Partnership and, following such contribution, will own an approximate 87.9%
interest in the Operating Partnership. The Operating Partnership will use such
net proceeds (i) to repay amounts borrowed under the Line of Credit, (ii) to
pay fees and expenses in connection with the anticipated increase in the
borrowing limit under the Line of Credit, (iii) to fund a substantial portion
of the cash part of the purchase price of the Proposed Acquisition Hotels, and
(iv) for working capital purposes. See "Use of Proceeds."
In order for the Company to qualify as a REIT, neither the Company nor the
Operating Partnership can operate hotels; therefore, the Operating Partnership
leases the Current Hotels and expects to lease the Proposed Acquisition Hotels
to the Lessee. The principal source of revenue for the Operating Partnership
and the Company is lease payments paid by the Lessee under the Participating
Leases. Participating Rent is based upon the Current Hotels' gross revenues.
The Lessee's ability to make payments to the Company under the Participating
Leases is dependent on the ability of the Lessee, AGHI and any other lessees
or operators to generate cash flow from the operations of the Hotels. See
"Risk Factors--Dependence on Lessee and Payments Under the Participating
Leases."
46
<PAGE>
RESULTS OF OPERATIONS
Actual for the period July 31, 1996 through September 30, 1996
The Company earned $5,218,526 in Participating Lease revenue from the
Lessee. Depreciation of the Company's investment in hotel properties was
$1,008,874. Amortization, consisting primarily of deferred financing costs and
franchise transfer fees, was $131,364 and real estate and personal property
taxes and insurance was $511,115. Interest expense attributable to
indebtedness relating to the Holiday Inn Dallas DFW Airport South, Courtyard
by Marriott-Meadowlands and borrowings under the Line of Credit were $205,682,
$68,344, and $73,596, respectively. Interest expense relating to the Line of
Credit borrowings includes interest on borrowings of approximately $10,000,000
from July 31, 1996 to August 28, 1996, which were repaid with the proceeds
from the exercise of the overallotment option in connection with the IPO, and
borrowings of $3,000,000 from September 16, 1996 to September 30, 1996, which
were utilized for working capital purposes. The minority interest in income
was $545,102 and the resulting net income applicable to the common
stockholders was $2,294,450 for the period.
Funds from Operations, calculated using the NAREIT definition of Funds From
Operations, was $3,109,620, which is the sum of net income applicable to
common stockholders, and the Company's ownership percentage in the Operating
Partnership multiplied by depreciation.
Pro Forma Comparison of the Nine Months ended September 30, 1996 and 1995
Participating Lease revenue would have increased $4,685,789 or 15.4% from
$30,470,441 to $35,156,230 primarily due to ADR increases at many of the
hotels. Interest income for each period would have been $23,625 attributable
to the FF&E Note issued by the Lessee. Depreciation expense, accounting for
45.6% and 49.6% of the nine months ended September 30, 1996 and 1995 expenses
respectively, would have decreased $1,054,140 from $8,292,543 to $7,238,403.
Depreciation expense represents depreciation of the AGH Predecessor Hotels'
historical carryover cost basis plus depreciation of the new cost basis of the
Other Initial Hotels, Acquired Hotels and Proposed Acquisition Hotels. This
decrease is due to the accelerated depreciation recorded in 1995 on FF&E that
was replaced in connection with renovations at the AGH Predecessor Hotels.
General and administrative expenses would have been $1,275,000 for the nine
months ended September 30, 1996 and 1995 representing salaries and wages of
$688,500, professional fees of $334,500, directors and officers' insurance
expense of $94,500 and other expenses of $582,500. Interest expense for the
nine months ended September 30, 1996 and 1995 would have been $2,334,447 on
indebtedness totaling approximately $37.1 million. Debt includes approximately
$14.1 million of mortgage indebtedness relating to the Holiday Inn Dallas DFW
Airport South hotel (8.75% interest rate), $5.2 million of mortgage
indebtedness relating to the Courtyard by Marriott-Meadowlands (range of 7.5%
to 7.89% interest rate), $9.6 million of mortgage indebtedness relating to the
French Quarter Suites Hotel (9.75% interest rate), and $8.2 million of
mortgage indebtedness relating to the Radisson Hotel Arlington Heights (7.5%
interest rate).
Pro Forma Funds From Operations
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 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.
The following is a reconciliation of pro forma net income applicable to
common stockholders to Pro Forma Funds From Operations and illustrates the
difference in the two measures of operating performance:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1996
----------- -----------
<S> <C> <C>
Pro forma net income applicable to common
stockholders................................... $12,109,641 $16,969,328
Depreciation (Company share).................... 7,289,145 6,362,556
----------- -----------
Funds From Operations........................... $19,398,786 $23,331,884
=========== ===========
Weighted Average Number of shares of Common
Stock Outstanding.............................. 13,787,405 13,787,405
=========== ===========
</TABLE>
47
<PAGE>
RESULTS OF OPERATIONS OF AGH PREDECESSOR HOTELS
The accompanying discussion and analysis of financial condition and results
of operations is based on the consolidated historical financial statements of
the Company and the Lessee and the combined historical financial statements of
the AGH Predecessor 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 affiliates of
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 four AGH Predecessor Hotels were
combined into one set of financial statements since they were acquired by the
Company from a group of limited partnerships controlled by shareholders of
AGHI.
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
DECEMBER 31,
---------------
1994 1995
------ ------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Room revenue............................................. 81.6% 82.9%
Food and beverage revenue................................ 13.1 11.9
Other revenue............................................ 5.3 5.2
------ ------
Total revenue.......................................... 100.0 100.0
Hotel operating expenses................................. 75.4 69.6
Depreciation and amortization............................ 8.7 22.8
Interest expense......................................... 10.2 14.4
Other corporate expenses................................. 12.5 6.9
------ ------
Net loss............................................... (6.8%) (13.7%)
====== ======
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1994 1995
------ ------
<S> <C> <C>
KEY FACTORS:
Occupancy................................................ 71.1% 72.1%
ADR...................................................... $62.10 $73.26
REVPAR................................................... $44.14 $52.84
</TABLE>
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 year ended December 31, 1995 and 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
48
<PAGE>
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 such 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 and 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.
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.
THE LESSEE
Actual for the period from July 31, 1996 through September 30, 1996
The Lessee had room revenues of $11,185,140 from the Initial Hotels. The
Participating Lease payments and property operating costs and expenses were
$5,218,526 and $9,360,407, respectively. Net income for the period was
$179,164.
Pro Forma Operations
The following table sets forth pro forma financial information for the
Lessee, as a percentage of revenue, for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1995 1996
-------- --------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Room revenue.......................................... 72.3% 74.4%
Food and beverage revenue............................. 21.7 20.1
Other revenue......................................... 6.0 5.5
-------- --------
Total revenue....................................... 100.0 100.0
Hotel operating expenses.............................. 65.8 64.0
Other corporate expenses.............................. 0.1 0.3
Participating Lease expenses.......................... 32.9 35.1
-------- --------
Net Income.......................................... 1.2% 0.6%
======== ========
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1995 1996
-------- --------
<S> <C> <C>
Key Factors:
Occupancy........................................... 75.0% 74.8%
ADR................................................. $70.65 $78.18
REVPAR.............................................. $52.99 $58.50
</TABLE>
49
<PAGE>
The following table sets forth room revenue for each of the Hotels and the
percentage changes between the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
PERCENT
1995 1996 CHANGE
----------- ----------- -------
<S> <C> <C> <C>
INITIAL HOTELS:
Holiday Inn Dallas DFW
Airport West................................ $2,792,749 $3,069,720 9.9%
Courtyard by Marriott-Meadowlands............ 2,792,612 3,250,259 16.4
Hampton Inn Richmond Airport................. 1,444,733 1,555,913 7.7
Hotel Maison de Ville........................ 941,437 958,853 1.8
Hilton Hotel-Toledo.......................... 2,630,401 2,673,599 1.6
Holiday Inn Dallas DFW Airport South......... 6,194,350 6,491,623 4.8
Holiday Inn New Orleans International
Airport..................................... 4,919,684 4,990,643 1.4
Days Inn Ocean City.......................... 2,015,226 2,129,547 5.7
Holiday Inn Select-Madison................... 3,982,525 4,100,587 3.0
Holiday Inn Park Center Plaza................ 3,643,675 4,313,287 18.4
Best Western Albuquerque Airport Hotel....... 3,267,688 3,344,851 2.4
Le Baron Airport Hotel....................... 3,766,332 5,209,398 38.3
Holiday Inn Mission Valley................... 4,166,821 4,312,791 3.5
----------- ----------- ----
Subtotals/Percent change..................... 42,558,233 46,401,071 9.0
ACQUIRED HOTELS:
Days Inn Lake Buena Vista.................... 5,438,660 6,337,411 16.5
Holiday Inn Resort Monterey.................. 3,462,967 4,021,248 16.1
Hilton Hotel-Durham.......................... 2,326,615 2,648,478 13.8
----------- ----------- ----
Subtotals/Percent change..................... 11,228,242 13,007,137 15.8
PROPOSED ACQUISITION HOTELS:
Radisson Hotel Arlington Heights............. 2,330,786 2,976,613 27.7
Four Points by Sheraton...................... 2,978,257 3,343,064 12.2
French Quarter Suites Hotel.................. 3,246,097 3,438,215 5.9
Sheraton Key Largo........................... 4,745,942 5,318,813 12.1
----------- ----------- ----
Subtotals/Percent change..................... 13,301,082 15,076,705 13.3
----------- ----------- ----
Totals (All Hotels).......................... $67,087,557 $74,484,913 11.0%
=========== =========== ====
</TABLE>
Pro Forma Comparison for the nine months ended September 30, 1996 and 1995
Room revenue increased to $74,484,913 from $67,087,557, an increase of
$7,397,356 or 11.0%, principally resulting from: (i) an increase of $457,647
in Courtyard by Marriott-Meadowlands' room revenue due to a 15.1% increase in
REVPAR (resulting from an increase in ADR to $90.98 from $80.76 and an
increase in occupancy to 78.4% from 76.8%), (ii) an increase of $669,612 in
Holiday Inn Park Center Plaza's room revenue due to a 20% increase in REVPAR
(resulting from an increase in ADR to $86.94 from $80.40 and an increase in
occupancy to 78.4% from 70.6%), (iii) an increase in Le Baron Airport Hotel's
room revenues of $1,443,066 due to a 37.8% increase in REVPAR (resulting from
an increase in ADR to $74.47 from $63.35 and an increase in occupancy to 78.1%
from 66.6%), (iv) an increase of $276,971 in Holiday Inn Dallas DFW West's
room revenue due to an increase in ADR to $64.82 from $58.10, (v) an increase
of $898,751 in Days Inn Lake Buena Vista's room revenue due to an increase in
ADR to $61.44 from $49.01, (vi) an increase in Holiday Inn Resort Monterey's
room revenue due to a 15.7% increase in REVPAR (resulting from an increase in
ADR to $100.27 from $89.45 and an increase in occupancy from 69.5% to 71.8%),
and (vii) an increase in Radisson Hotel Arlington Heights' room revenue due to
a 27.7% increase in REVPAR (resulting from an increase in ADR to $76.36 from
$67.90 and occupancy to 71.0% from 62.6%) attributable to the completion of
road construction during 1995 that improved the access to the hotel.
Food and beverage revenue increased to $20,181,837 from $20,133,742, an
increase of $48,095 or 0.2%. Most of the hotels experienced slight increases
in food and beverage revenues with the exception of Holiday Inn
50
<PAGE>
Dallas DFW Airport West, which had a significant increase of $251,160. This
increase is mainly due to major renovations of the restaurant and the bar
during the fourth quarter of 1995.
Hotel operating expenses increased to $64,128,628 from $61,044,842, an
increase of $3,083,786 or 5.1%; however, as a percentage of total revenue,
expenses decreased to 63.4% from 65.6%, due primarily to revenue increases that
were not accompanied by corresponding increases in hotel operating expenses.
Participating Lease expenses increased to $35,156,230 from $30,470,441, an
increase of $4,685,789 or 15.4%. The increase is primarily due to increased
revenues at the hotels which resulted in increased Participating Rent payments
to the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to stockholders, is its share of the Operating
Partnership's cash flow from the Participating Leases. For the period from July
31, 1996 through September 30, 1996, cash flow provided by the operating
activities, consisting primarily of Participating Lease revenues, was
$4,687,875 and Funds from Operations was $3,109,620. The Lessee's obligations
under the Participating Leases are 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, are substantially dependent on the ability of the Lessee and AGHI
to generate sufficient cash flow from the operation of the Current Hotels and,
upon the Company's acquisition of the Proposed Acquisition Hotels, will be
dependent upon the Lessee's, AGHI's and Wyndham's operation of all the Hotels.
The Company has entered into contracts to acquire the four Proposed
Acquisition Hotels. The acquisitions are subject to various closing conditions
and there can be no assurance that any or all of the Proposed Acquisition
Hotels will be consummated. The Company currently intends to utilize proceeds
from this Offering as well as borrowings under its Line of Credit to acquire
these hotels. While no definitive agreements with respect to the acquisition of
any additional hotels has been entered into, the Company expects that during
1997 additional acquisitions will be completed and funded with borrowings under
the Line of Credit or permanent debt or equity financing. 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 investments in hotels.
Upon the consummation of the IPO, the Company closed on its $100 million Line
of Credit. The Company has received a commitment from its Line of Credit
lenders that, subject to the satisfaction of certain conditions, will permit
the Company to increase its borrowing limit to $150 million. At December 31,
1996 the Company had approximately $57.5 million outstanding under the Line of
Credit. Upon completion of the Offering and following the closing of the
acquisitions of the four Proposed Acquisition Hotels, the Company will have
approximately $10.2 million of outstanding indebtedness under the Line of
Credit. Upon the acquisition of the two Proposed Acquisition Hotels that are
not expected to be encumbered by mortgage indebtedness upon their acquisition
by the Company (Four Points by Sheraton and Sheraton Key Largo) and assuming
the increase in the Company's borrowing limit under the Line of Credit to $150
million, the Company anticipates that its borrowing capacity under the Line of
Credit will increase to approximately $106.9 million. Borrowings under the Line
of Credit bear interest at 30-day, 60-day or 90-day LIBOR (5.50%, 5.53% and
5.56% at December 31, 1996) at the option of the Company, plus 1.85% per annum,
payable monthly in arrears or one-half percent in excess of the prime rate.
Cash and cash equivalents as of September 30, 1996 were $4,186,235, including
capital improvement reserves of $425,710. Cash flow from operating activities
of the Company was $4,687,875 for the period from July 31, 1996 through
September 30, 1996, which primarily represents the collection of rents under
the Participating Leases, less the Company's operating expenses for the period.
Cash flow used in investing activities during that period in the amount of
$130,226,886 resulted from the purchase and improvements made to the Initial
Hotels. Cash flows from financing activities of $129,725,146 during this period
was primarily related to the receipt of proceeds from the IPO and borrowings on
the Line of Credit, net of principal payments on borrowings and payments for
deferred loan costs.
51
<PAGE>
RENOVATIONS AND OTHER CAPITAL IMPROVEMENTS
The Participating Leases require the Company to establish annual minimum
reserves equal to 4.0% of total revenue of the Current Hotels which will be
utilized by the Lessee for the replacement and refurbishment of FF&E and other
capital expenditures to enhance the competitive position of the Current
Hotels. The Company and the Lessee will jointly determine the use of funds in
this reserve, and the Company will have the right to approve the Lessee's
capital expenditure budgets. While the Company expects its reserve to be
adequate to fund recurring capital needs, including periodic renovations, the
Company may use Cash Available for Distribution in excess of distributions
paid 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.
The Company has budgeted $33.3 million to fund capital improvements and
renovations at the Current Hotels during 1997 and has budgeted approximately
$14.6 million to fund capital improvements and renovations at the Proposed
Acquisition Hotels. In certain circumstances such capital improvements are
being completed in connection with franchisor requirements. The following
table describes such renovations and improvements:
<TABLE>
<CAPTION>
DESCRIPTION OF
CURRENT HOTELS: RENOVATION/IMPROVEMENT BUDGETED AMOUNT
- --------------- ---------------------------------- ---------------
<S> <C> <C>
Holiday Inn Dallas DFW Upgrade of guest rooms and
Airport West............. corridors. $ 242,000
Hampton Inn Richmond Upgrade of public areas and 50,000
Airport.................. replacement of roof.
Hotel Maison de Ville..... Upgrade of selected guest rooms 26,000
and public areas.
Hilton Hotel-Toledo....... Upgrade of guest rooms and 341,000
renovation of public areas.
Holiday Inn Dallas DFW Upgrade of guest rooms, public 1,600,000
Airport South............ areas and hotel exterior in
connection with conversion to the
Holiday Inn Select brand.
Holiday Inn New Orleans Upgrade of guest rooms and public 1,100,000
International Airport.... areas in connection with
conversion to the Holiday Inn
Select brand and renovation of
roof.
Days Inn Ocean City....... Upgrade of guest rooms and public 990,000
areas in connection with
conversion to the Hampton Inn
brand.
Holiday Inn Select- Upgrade of guest rooms, public 870,000
Madison.................. areas and reservation equipment in
connection with conversion to the
Crowne Plaza brand.
Holiday Inn Park Center Upgrade of guest rooms and public 3,600,000
Plaza.................... areas and conversion of the ninth
floor to "club" level in
connection with conversion to the
Crowne Plaza brand.
Best Western Albuquerque Upgrade of guest rooms and public 3,600,000
Airport Hotel............ areas and convert meeting space to
additional guest rooms in
connection with conversion to the
Wyndham Hotel brand.
Le Baron Airport Hotel.... Upgrade of public areas and guest 5,000,000
rooms and convert ninth floor to
concierge floor in connection with
conversion to the Wyndham Hotel
brand.
Holiday Inn Mission Upgrade of guest rooms and public 1,800,000
Valley................... areas in connection with
conversion to the Holiday Inn
Select brand.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION OF
RENOVATION/IMPROVEMENT BUDGETED AMOUNT
---------------------------------- ---------------
<S> <C> <C>
Days Inn Lake Buena Upgrade and renovation of guest $ 7,500,000
Vista.................... rooms and public areas, including
the addition of approximately
9,000 square feet of convention
space as well as the addition of
extensive landscaping and
entertainment attractions to hotel
exterior in connection with
conversion to the Wyndham Hotel
brand.
Holiday Inn Resort- Upgrade and renovation of guest 3,900,000
Monterey................. rooms and public areas in
connection with conversion to the
Hilton Hotel brand.
Hilton Hotel-Durham....... Addition of 42 guest rooms and 2,650,000
renovation of guest rooms and -----------
public areas.
Current Hotels--subtotal: 33,269,000
-----------
PROPOSED ACQUISITION
HOTELS:
Four Points by Sheraton... Upgrade and renovation of guest 2,800,000
rooms, public areas and restaurant
in connection with conversion to
the Wyndham Hotel brand.
Sheraton Key Largo........ Upgrade and renovation of guest 3,000,000
rooms, public areas and exterior
in connection with conversion to
the Westin Resort brand.
French Quarter Suites Upgrade and renovation of guest 2,800,000
Hotel.................... rooms, atrium and public areas.
Radisson Hotel Arlington Upgrade and renovation of guest 6,000,000
Heights.................. rooms and public areas as well as -----------
addition of 31 guest rooms.
Proposed Acquisition Hotels-- 14,600,000
subtotal: -----------
All Hotels--Total: $47,869,000
===========
</TABLE>
There can be no assurance that the Company will be able to complete the
scheduled capital improvements within the expected time frames or that the
anticipated costs for the capital improvements will not exceed the amounts
budgeted for that purpose. 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. The Company attempts to schedule renovations and
improvements during traditionally lower occupancy periods in an effort to
minimize disruption to the hotels' operations.
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.
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 Hotels may cause
quarterly fluctuations in the Company's lease revenue. To the extent that cash
flow from operations may be insufficient during any quarter to pay
distributions at its current distribution rate due to temporary or seasonal
fluctuations in lease revenues, the Company expects to utilize other cash on
hand or borrowings under the Line of Credit to make such distributions.
53
<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 during the late 1980's and early 1990's. The Company
believes that this broad industry recovery will contribute to growth in
revenues at the 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.
Percentage Change in United States Hotel Room Supply vs. Demand
(1980-1995)
[BAR/LINE GRAPH APPEARS HERE]
The following is a list of figures depicted by the bar/line graph. The line
overlap on the graph depicts the hotel room percent occupancy for the years
1980-1995. The bars on the graph depict the % changes in hotel room supply and
demand for the years 1980-1995.
<TABLE>
<CAPTION>
Year: Percent Occupancy: Room Supply: Room Demand:
- ----- ------------------ ------------ ------------
<S> <C> <C> <C>
1980 70.6% 0.8% -1.0%
1981 67.9% 1.5% -2.4%
1982 66.7% 0.7% -1.2%
1983 64.4% 1.2% -2.3%
1984 64.0% 1.5% 0.9%
1985 63.2% 2.8% 1.5%
1986 62.5% 3.3% 2.1%
1987 61.9% 3.8% 2.8%
1988 62.3% 4.2% 4.9%
1989 63.2% 3.6% 5.1%
1990 62.4% 3.4% 2.1%
1991 60.9% 2.5% 0.1%
1992 62.1% 1.3% 3.3%
1993 63.0% 2.3% 3.7%
1994 64.7% 1.4% 4.1%
1995 65.4% 1.6% 2.9%
</TABLE>
54
<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 REVPAR 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
during 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 during the late 1980's and increasing the
prospect for continued growth of revenues in the hotel industry for the
foreseeable future.
THE HOTELS
The sixteen Current Hotels are diversified by five different national hotel
brands and include fourteen full-service hotels and two limited-service
hotels. In addition, the Company plans to reposition, by the first quarter of
1998, ten of the Current Hotels (six Holiday Inns, two Days Inns, and two
independent hotels) through upgrade and conversion into hotels that operate
under the Wyndham Hotel, Hilton 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 any or
all of 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 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 following table sets forth certain information with respect to the
Current Hotels and the Proposed Acquisition Hotels. The chart summarizes the
historical performance of the Hotels for each of the three years ended
December 31, 1995 and for the nine months ended September 30, 1995 and 1996.
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.
55
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ------------------------
YEAR NUMBER
OPENED/ OF GUEST % % %
HOTELS/LOCATION(1) RENOVATED(2) ROOMS 1993 1994 CHANGE 1995 CHANGE 1995 1996 CHANGE
------------------ ------------ -------- ------- ------- ------ ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL HOTELS:
Holiday Inn Dallas DFW
Airport West(3)
Bedford, Texas.......... 1974/1995 243
Occupancy.............. 74.2% 70.0% (5.7)% 69.4% (0.8)% 73.1% 70.5% (3.6)%
ADR.................... $ 46.37 $ 48.85 5.3 % $ 60.08 23.0 % $ 58.10 $ 64.82 11.6 %
REVPAR................. $ 34.41 $ 34.19 (0.6)% $ 41.70 22.0 % $ 42.48 $ 45.73 7.7 %
Courtyard by Marriott-
Meadowlands(3)
Secaucus, New Jersey.... 1989/1994 165
Occupancy.............. 74.8% 70.1% (6.3)% 77.8% 10.9 % 76.8% 78.4% 2.1 %
ADR.................... $ 65.63 $ 73.37 11.8 % $ 81.77 11.4 % $ 80.76 $ 90.98 12.7 %
REVPAR................. $ 49.09 $ 51.44 4.8 % $ 63.58 23.6 % $ 62.00 $ 71.37 15.1 %
Hampton Inn Richmond
Airport(3)
Richmond, Virginia...... 1987/1995 124
Occupancy.............. 75.9% 76.3% 0.6 % 70.8% (7.2)% 72.8% 74.6% 2.5 %
ADR.................... $ 46.71 $ 50.84 8.8 % $ 57.69 13.5 % $ 58.44 $ 60.92 4.2 %
REVPAR................. $ 35.45 $ 38.81 9.5 % $ 40.86 5.3 % $ 42.52 $ 45.46 6.9 %
Hotel Maison de Ville(3)
New Orleans, Louisiana.. 1788/1994 23
Occupancy.............. 64.1% 61.7% (3.8)% 66.5% 7.8 % 64.9% 63.0% (2.9)%
ADR.................... $188.18 $201.80 7.2 % $232.97 15.4 % $230.91 $239.65 3.8 %
REVPAR................. $120.65 $124.50 3.2 % $154.91 24.4 % $149.93 $151.05 0.7 %
Hilton Hotel-Toledo(3)
Toledo, Ohio............ 1987/1994 213
Occupancy.............. 66.7% 72.5% 8.8 % 72.8% 0.3 % 75.8% 71.4% (5.8)%
ADR.................... $ 52.29 $ 54.59 4.4 % $ 59.98 9.9 % $ 59.67 $ 64.16 7.5 %
REVPAR................. $ 34.87 $ 39.59 13.6 % $ 43.65 10.2 % $ 45.24 $ 45.81 1.3 %
Holiday Inn Dallas DFW
Airport South(3)(4)(5)
Irving, Texas........... 1974/1995 409
Occupancy.............. 76.0% 76.7% 0.9 % 76.9% 0.3 % 77.9% 76.0% (2.4)%
ADR.................... $ 51.82 $ 63.19 22.0 % $ 71.26 12.8 % $ 70.92 $ 75.56 6.5 %
REVPAR................. $ 39.39 $ 48.44 23.0 % $ 54.78 13.1 % $ 55.27 $ 57.44 3.9 %
Holiday Inn New Orleans
International
Airport(3)(4)(5)
Kenner, Louisiana....... 1973/1994 304
Occupancy.............. 80.8% 79.2% (1.9)% 81.2% 2.5 % 82.4% 76.5% (7.2)%
ADR.................... $ 60.61 $ 61.49 1.5 % $ 72.83 18.5 % $ 71.99 $ 78.30 8.8 %
REVPAR................. $ 48.94 $ 48.71 (0.5)% $ 59.16 21.5 % $ 59.28 $ 59.91 1.1 %
Days Inn Ocean
City(3)(5)(6)
Ocean City, Maryland.... 1989/1994 162
Occupancy.............. 45.9% 45.8% (0.3)% 49.3% 7.6 % 55.5% 57.3% 3.2 %
ADR.................... $ 64.72 $ 70.91 9.6 % $ 76.10 7.3 % $ 82.14 $ 83.70 1.9 %
REVPAR................. $ 29.71 $ 32.47 9.3 % $ 37.50 15.5 % $ 45.57 $ 47.98 5.3 %
Holiday Inn Select-Madi-
son(5)(7)
Madison, Wisconsin...... 1987/1995 227
Occupancy.............. 79.6% 78.7% (1.2)% 79.3% 0.8 % 81.4% 78.6% (3.4)%
ADR.................... $ 74.47 $ 78.25 5.1 % $ 78.46 0.3 % $ 78.99 $ 82.32 4.2 %
REVPAR................. $ 59.31 $ 61.60 3.9 % $ 62.26 1.1 % $ 64.26 $ 64.75 0.8 %
Holiday Inn Park Center
Plaza(5)(7)
San Jose, California.... 1975/1990 231
Occupancy.............. 58.4% 62.2% 6.4 % 72.1% 16.0 % 70.6% 78.4% 11.0 %
ADR.................... $ 72.47 $ 73.41 1.3 % $ 78.16 6.5 % $ 80.40 $ 86.94 8.1 %
REVPAR................. $ 42.35 $ 45.66 7.8 % $ 56.38 23.5 % $ 56.79 $ 68.15 20.0 %
Best Western Albuquerque
Airport
Hotel(5)(8)
Albuquerque, New Mexi-
co..................... 1972/1994 266
Occupancy.............. 85.2% 83.5% (2.0)% 83.7% 0.2 % 84.6% 82.0% (3.1)%
ADR.................... $ 48.11 $ 53.23 10.6 % $ 53.24 0.0 % $ 53.32 $ 55.14 3.4 %
REVPAR................. $ 40.98 $ 44.44 8.4 % $ 44.55 0.2 % $ 45.09 $ 45.23 0.3 %
Le Baron Airport Ho-
tel(5)(9)
San Jose, California.... 1973/1995 327
Occupancy.............. 64.3% 66.2% 3.0 % 65.2% (1.4)% 66.6% 78.1% 17.3 %
ADR.................... $ 47.85 $ 52.77 10.3 % $ 64.40 22.0 % $ 63.35 $ 74.47 17.6 %
REVPAR................. $ 30.76 $ 34.93 13.5 % $ 42.01 20.3 % $ 42.19 $ 58.14 37.8 %
Holiday Inn Mission Val-
ley(4)(5)
San Diego, California... 1970/1995 318
Occupancy.............. 68.6% 69.8% 1.7 % 68.5% (1.9)% 73.2% 73.1% (0.1)%
ADR.................... $ 61.09 $ 62.94 3.0 % $ 65.17 3.5 % $ 65.55 $ 67.67 3.2 %
REVPAR................. $ 41.94 $ 43.94 4.8 % $ 44.63 1.6 % $ 48.00 $ 49.50 3.1 %
ACQUIRED HOTELS:
Days Inn Lake Buena Vis-
ta(5)(9)
Orlando, Florida........ 1985/1994 490
Occupancy.............. 73.9% 77.9% 5.4 % 77.8% (0.1)% 83.0% 76.8% (7.5)%
ADR.................... $ 48.44 $ 47.45 (2.0)% $ 49.02 3.3 % $ 49.01 $ 61.44 25.4 %
REVPAR................. $ 35.82 $ 36.95 3.2 % $ 38.16 3.3 % $ 40.66 $ 47.20 16.1 %
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ------------------------
YEAR NUMBER
OPENED/ OF GUEST % % %
HOTELS/LOCATION(1) RENOVATED(2) ROOMS 1993 1994 CHANGE 1995 CHANGE 1995 1996 CHANGE
------------------ ------------ -------- ------- ------- ------ ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn Resort
Monterey(5)(10)
Monterey, California.... 1971/1996 204
Occupancy.............. 60.7% 60.8% 0.2 % 63.8% 4.9 % 69.5% 71.8% 3.3 %
ADR.................... $ 93.40 $ 94.13 0.8 % $ 91.25 (3.1)% $ 89.45 $100.27 12.1 %
REVPAR................. $ 56.69 $ 57.18 0.9 % $ 58.19 1.8 % $ 62.18 $ 71.94 15.7 %
Hilton Hotel-Durham,
North Carolina.......... 1987/1995 152
Occupancy.............. 65.4% 72.4% 10.7 % 72.1% (0.4)% 72.8% 76.5% 5.1 %
ADR.................... $ 66.96 $ 72.05 7.6 % $ 76.42 6.1 % $ 76.08 $ 83.13 9.3 %
REVPAR................. $ 43.81 $ 52.20 19.2 % $ 55.08 5.5 % $ 55.40 $ 63.59 14.8 %
PROPOSED ACQUISITION HO-
TELS:
Four Points by
Sheraton(5)(11)
Marietta, Georgia....... 1985/1996 219
Occupancy.............. * * * 70.4% * 73.4% 66.4% (9.5)%
ADR.................... * * * $ 69.02 * $ 68.06 $ 84.29 23.8 %
REVPAR................. * * * $ 48.60 * $ 49.93 $ 55.97 12.1 %
Sheraton Key
Largo(5)(12)
Key Largo, Florida...... 1985/1996 200
Occupancy.............. 75.0% 70.3% (6.3)% 73.3% 4.3 % 75.7% 81.0% 7.0 %
ADR.................... $104.49 $109.46 4.8 % $112.70 3.0 % $114.83 $119.79 4.3 %
REVPAR................. $ 78.42 $ 76.90 (1.9)% $ 82.59 7.4 % $ 86.92 $ 97.06 11.7 %
French Quarter Suites
Hotel(5)(13)
Atlanta, Georgia........ 1985/1996 155
Occupancy.............. 75.5% 78.2% 3.6 % 78.5% 0.4 % 80.6% 74.0% (8.2)%
ADR.................... $ 84.33 $ 91.24 8.2 % $ 96.21 5.4 % $ 95.15 $109.38 15.0 %
REVPAR................. $ 63.70 $ 71.33 12.0 % $ 75.52 5.9 % $ 76.71 $ 80.96 5.5 %
Radisson Hotel Arlington
Heights(3)
Arlington Heights,
Illinois............... 1981/1995 201
Occupancy.............. 60.7% 67.0% 10.4 % 63.5% (5.2)% 62.6% 71.0% 13.4 %
ADR.................... $ 61.52 $ 62.15 1.0 % $ 68.08 9.5 % $ 67.90 $ 76.36 12.5 %
REVPAR................. $ 37.34 $ 41.64 11.5 % $ 43.25 3.9 % $ 42.48 $ 54.25 27.7 %
-----
Totals--All Hotels..... 4,633
=====
WEIGHTED AVERAGES:
Initial Hotels
Occupancy.............. 71.6% 71.7% 0.1 % 72.9% 1.7 % 74.8% 75.1% 0.4 %
ADR.................... $ 57.65 $ 62.28 8.0 % $ 69.19 11.1 % $ 69.11 $ 74.46 7.7 %
REVPAR................. $ 41.26 $ 44.67 8.3 % $ 50.46 13.0 % $ 51.70 $ 55.93 8.2 %
Acquired Hotels
Occupancy.............. 69.2% 72.8% 5.2 % 73.4% 0.8 % 77.9% 75.5% (3.1)%
ADR.................... $ 61.08 $ 61.30 0.4 % $ 62.72 2.3 % $ 62.29 $ 74.28 19.3 %
REVPAR................. $ 42.27 $ 44.60 5.5 % $ 46.04 3.2 % $ 48.51 $ 56.11 15.7 %
Proposed Acquisition Ho-
tels
Occupancy.............. 70.0% 71.3% 1.8 % 71.0% (0.4)% 72.6% 72.9% 0.4 %
ADR.................... $ 84.94 $ 87.80 3.4 % $ 86.46 (1.5)% $ 86.63 $ 97.60 12.7 %
REVPAR................. $ 59.45 $ 62.58 5.3 % $ 61.38 (1.9)% $ 62.91 $ 71.16 13.1 %
</TABLE>
- --------
* Occupancy, ADR and REVPAR for the noted periods were not available to the
Company.
(1) The occupancy, ADR and REVPAR calculations for the Hotels are derived from
room revenue included in the audited financial data relating to each of
the 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): Hilton
Hotel-Durham (January 1997), Holiday Inn Resort Monterey (November 1996),
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) 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), the Days Inn
Ocean City (February 1993) and the Radisson Hotel Arlington Heights (March
1993).
Notes continued on following page.
57
<PAGE>
(4) The Company plans to reposition this hotel to operate as a Holiday Inn
Select.
(5) There can be no assurance that the brand conversion and repositioning of
this hotel will occur as planned.
(6) The Company plans to reposition this hotel to operate as a Hampton Inn.
(7) The Company plans to reposition this hotel to operate as a Crowne Plaza.
(8) This hotel also has an affiliation with Best Western. The Company plans
to reposition this hotel to operate as a Wyndham Hotel.
(9) The Company plans to reposition this hotel to operate as a Wyndham Hotel.
(10) The Company plans to reposition this hotel to operate as a Hilton Hotel.
(11) The Company plans to reposition this hotel to operate as a Wyndham Garden
Hotel. The Lessee has advised the Company that it plans to retain Wyndham
Hotel Corporation as the manager of this hotel.
(12) The Company plans to reposition this hotel to operate as a Westin Resort.
(13) The Company plans to reposition this hotel to operate as a DoubleTree
Guest Suites.
DESCRIPTIONS OF HOTELS
Fourteen of the Current Hotels, containing an aggregate of 3,572 guest
rooms, are full-service hotels 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
brand conversion of the Current Hotels, the Company's full-service hotels will
include one Courtyard by Marriott, three Hilton Hotels, one Holiday Inn, two
Crowne Plazas, three Holiday Inn Selects, three Wyndham Hotels and one
independent hotel. All four of the Proposed Acquisition Hotels are full-
service hotels with an aggregate of 775 guest rooms. After the Company's
planned acquisition and repositioning of the Proposed Acquisition Hotels, such
hotels will operate under the DoubleTree Guest Suites, Radisson Hotel, Wyndham
Garden Hotel and Westin Resort brands. 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 Current Hotels, containing an aggregate of 286 guest rooms, are
limited-service hotels which target both business and leisure travelers. After
completion of the Company's planned brand repositionings of the Current
Hotels, the Company's limited-service hotels will consist of two Hampton Inns.
Limited-service hotels have limited or no meeting space and typically do not
offer food and beverage facilities. 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 each of the Current Hotels and Proposed
Acquisition Hotels.
INITIAL 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 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.
58
<PAGE>
The Company acquired the hotel at the time of the IPO and plans to make
approximately $242,000 in additional improvements and renovations to the hotel
by August 1997.
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. From May 1994 through the hotel's July
1996 acquisition by the Company, AGHI had invested an additional $845,400 to
further improve the restaurant, lounge, exterior entrances, guest rooms and
meeting facilities at the hotels.
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 time it implemented a $376,000 capital improvement program
which included the renovation of guest rooms and public areas. The Company
acquired the hotel at the time of the IPO and plans to invest an aggregate of
approximately $50,000 in additional improvements to the hotel during 1997.
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 residents 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 an outdoor pool. The hotel is associated
with the prestigious Small Luxury Hotels(R), Historic Hotels of America and
Luxury Hotels of America(R) affiliations.
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. The Company acquired the hotel at the
time of the IPO and since its acquisition has made approximately $24,000 in
improvements to the hotel. The Company has budgeted $26,000 for additional
improvements to the hotel during 1997. 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).
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
59
<PAGE>
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. The Company acquired the hotel at
the time of the IPO and plans to invest approximately $341,000 in capital
improvements at the hotel during 1997.
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
Holiday Inn Dallas DFW Airport South targets the business traveler but also
offers additional facilities which appeal to families. The hotel 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 AGHI's 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. Following
AGHI's completion of the initial renovations in 1992 and until the Company's
acquisition of the hotel at the time of the IPO, an additional $2.5 million
was spent upgrading the hotel. Since the Company's acquisition of the hotel,
it has spent approximately $730,000 renovating and improving the hotel and has
budgeted for 1997 an additional $1.6 million for renovations and improvements
in anticipation of repositioning the hotel to operate under the Holiday Inn
Select brand. There can be no assurance that such brand conversion will occur.
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.
The Company acquired the hotel at the time of the IPO and since that date
has spent approximately $1.2 million renovating and improving the hotel. The
Company has budgeted for 1997 approximately $1.1 million in additional
improvements to the hotel in anticipation of repositioning the hotel under the
Holiday Inn Select brand. There can be no assurance that such brand conversion
will occur.
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 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 acquired the hotel at the time of the IPO and since
that date has invested approximately $975,000 on renovations and improvements
to the hotel. The Company has budgeted for 1997 approximately
60
<PAGE>
$990,000 in additional improvements to the hotel in anticipation of
repositioning the hotel to operate under the Hampton Inn brand by March 1997.
There can be no assurance that such brand conversion will occur.
Holiday Inn Select-Madison--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 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.
The Company acquired the Holiday Inn Select--Madison at the time of the IPO
and since that date has invested approximately $850,000 on renovations and
improvements to the hotel. The Company has budgeted for 1997 approximately
$870,000 in additional improvements to the hotel in anticipation of
repositioning the hotel as a Crowne Plaza. There can be no assurance that such
brand conversion will occur.
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.
The Company acquired the hotel at the time of the IPO and since that date
has spent approximately $1.6 million on an extensive renovation program at the
hotel. The Company has budgeted for 1997 approximately $3.6 million in order
to complete this renovation program and to convert the hotel from a
traditional Holiday Inn into a Crowne Plaza hotel. In addition, it was
recently recommended to the Redevelopment Agency of the City of San Jose that
the Company be issued a $350,000 grant for renovation of the exterior of the
hotel. The Company expects to utilize the funds during 1997, assuming they are
received during this year. There can be no assurance that such brand
conversion and improved operating results will occur.
Best Western Albuquerque Airport Hotel--Albuquerque, New Mexico
The Best Western 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 acquired the hotel at the time of the IPO and since that date
has embarked on an extensive renovation program at the hotel that includes 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. Since the Company's acquisition of the hotel, it has
spent approximately $1.6 million on the renovation program and has budgeted
for 1997 an additional $3.6 million in order to complete the program.
61
<PAGE>
Upon the completion of the renovation program, the Company expects that it
will convert the hotel to the Wyndham Hotel brand. There can be no assurance
that such brand conversion will occur.
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 acquired the hotel at the time of the IPO and since that date
has embarked on an extensive renovation program to upgrade the entire hotel
and reposition it as a Wyndham Hotel. The renovations include the conversion
of currently underutilized space to an additional 33 guest rooms. Since the
Company's acquisition of the hotel, the Company has spent approximately $1.7
million on the renovation program and has budgeted for 1997 an additional $5.0
million in order to complete the program. There can be no assurance that such
brand conversion and improved operating results will occur. The Company
originally anticipated converting this hotel to a DoubleTree brand; however,
as a result of DoubleTree Corporation's recent acquisition of Red Lion Hotels
and its subsequent decision to convert the Red Lion branded hotel in this
market to a DoubleTree Hotel, the Company altered its initial branding plan
for the hotel.
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 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.
The Company acquired the hotel at the time of the IPO and since that date
has spent approximately $390,000 on renovations and capital improvements at
the hotel. The Company has budgeted for 1997 approximate $1.8 million in
additional capital improvements 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 originally anticipated converting
this hotel to a DoubleTree brand; however as a result of DoubleTree
Corporation's recent acquisition of Red Lion Hotels and its subsequent
decision to convert the Red Lion branded hotel in this market to a DoubleTree
Hotel, the Company altered its initial branding plan for the hotel.
ACQUIRED HOTELS
Days Inn Lake Buena Vista--Lake Buena Vista, Florida
On October 22, 1996, the Company acquired the 490-room Days Inn Lake Buena
Vista for an aggregate purchase price of $30.5 million, consisting of $30.0
million in cash and 25,397 shares of restricted Common Stock valued at
$500,000 at the time of the closing of the acquisition of the hotel. In
addition, in connection with this acquisition the Company entered into an
agreement to purchase a license and an association membership from one of the
sellers, which agreement the Company immediately assigned to the Lessee, for
the membership in Grand Theme Hotels and exclusive use of the African royal
safari theme in the Orlando area for approximately $1.3 million payable in
installments through 1997, and will pay an additional $900,000 for certain
construction, design and other services related to the operation of the hotel.
The Lessee also paid the seller $200,000 for certain cash flow guarantees
through 1997. In addition, commencing January 1998, in connection with the
license and the association membership, the Lessee is required to pay
recurring association fees including a base monthly fee equal to 1.0% of the
prior month's gross monthly room revenues generated at the hotel, and an
additional fee of 0.5% to 1.0% of gross monthly room revenues if the trailing
twelve month's gross room revenues at the hotel exceeds a threshold of
approximately $13 million, (subject to increase based on the
62
<PAGE>
percentage increase in the CPI). In addition, the Lessee is obligated to pay a
recurring royalty for the African royal safari theme equal to an amount which
ranges from 10% to 25% of net operating income in excess of $6 million
(subject to adjustment if the Lessee invests more than $40 million in the
hotel). The Lessee is also obligated to pay a marketing assistance fee equal
to .25% of gross room revenues. The marketing and association fees are not
expected to exceed 2.25% of gross room revenues for any twelve-month period.
The association membership agreement terminates in October 2008; the Lessee is
obligated to pay liquidated damages if the agreement is terminated earlier.
The Days Inn Lake Buena Vista is located approximately one-quarter mile
south of Walt Disney World's Lake Buena Vista entrance. The area in which the
hotel is located is resort-oriented and includes hotels, strip retail centers
and numerous free standing restaurants. Currently, Orlando is a $15 billion-
per-year tourism market, and management believes that local hotels will
benefit from even greater demand in the future with both Universal Studios and
Walt Disney World recently announcing multi-billion dollar expansion projects.
Hotel occupancy in the Orlando market is very strong, with a year-to-date
occupancy through September 30, 1996 of 82.3%. The hotel has also been
selected by Disney as one of the hotels outside its park to which it will
offer reservations to overflow customers. The hotel was developed in 1985 and
contains a total of 490 guest rooms, including 94 suites. The hotel is
configured around a large courtyard area which contains a swimming pool and
play areas. Additional amenities include a restaurant, deli, cocktail lounge,
approximately 4,200 square feet of convention space and a gift shop.
Since its acquisition of the hotel, the Company has commenced an extensive
renovation program to upgrade the entire hotel and to reposition the facility
as a Wyndham Hotel. The renovations include refurbishing all areas of the
hotel including public areas and guest rooms, including the addition of
approximately 9,000 square feet of convention space, as well as significant
alterations to the hotels exterior, including extensive landscaping and other
entertainment attractions. The hotel will be redesigned to reflect an African
royal safari theme that will tie in with Disney's new Wild Animal Kingdom
theme park, which is expected to open in 1998. Since the Company's acquisition
of the hotel, the Company has spent approximately $1.8 million on this
renovation program and has budgeted for 1997 an additional $7.5 million in
order to complete this program. There can be no assurance that such brand
conversion and improved operating results will occur.
The Days Inn Lake Buena Vista constitutes more than 10% of the aggregate
historical cost basis of the Company's assets as of December 31, 1996. The
aggregate tax bases of depreciable real and personal property of the hotel for
federal income tax purposes were approximately $28.2 million and $500,000,
respectively, as of December 31, 1996. 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 5 to 7
years for the personal property. The 1996 realty tax rate for the Days Inn
Lake Buena Vista was $21.08 per $1,000 of assessed value. The occupancy rate
for the Days Inn Lake Buena Vista was as follows: (i) 73.9% for the year ended
December 31, 1993; (ii) 77.9% for the year ended December 31, 1994; (iii)
77.8% for the year ended December 31, 1995; and (iv) 76.8% for the 9 months
ended September 30, 1996. Occupancy information for the year ended December
31, 1992 was not available to the Company.
Holiday Inn Resort Monterey--Monterey, California
On November 21, 1996, the Company acquired the 204-room Holiday Inn Resort
Monterey for approximately $15.5 million in cash. The Holiday Inn Resort
Monterey is located in the major tourist destination city of Monterey,
California. The hotel is a three-story, interior corridor facility configured
around a central courtyard and pool. Amenities include two tennis courts, a
heated outdoor pool, an indoor therapy whirlpool, restaurant, lounge and
approximately 6,200 square feet of meeting space.
The Monterey/Carmel area is nationally known for its beautiful coastline
scenery, the scenic 17 Mile Drive, Fisherman's Wharf, the Monterey Aquarium,
the golf courses of Pebble Beach, Spy Glass and Cypress Point and the historic
Cannery Row. In addition, the communities of Monterey and Carmel have limited
the development of new lodging facilities in their area through several voter
initiatives. The hotel had occupancy,
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<PAGE>
ADR and REVPAR of 65.5%, $100.08 and $65.50, respectively, for the twelve
months ended September 30, 1996. The hotel was developed in 1971 and is wood
frame construction with painted stucco and wood exterior walls trimmed with
rock veneer. The contemporary architecture and well-developed landscaping
combine to produce an appealing complex similar to others found in the area.
The Company has budgeted for 1997 approximately $3.9 million in renovations
and capital improvements to the hotel in order to reposition the hotel as a
Hilton Hotel. There can be no assurance that such brand conversion and
improved operating results will occur.
Hilton Hotel-Durham--Durham, North Carolina
On January 8, 1997, the Company acquired the 152-room Hilton Hotel-Durham
for approximately $12.1 million in cash. The Hilton Hotel-Durham is located in
northwestern Durham, one mile from Duke University and Duke Medical Center.
The hotel is accessible by two major highways and is situated in proximity to
a number of business centers. The hotel has been well maintained and underwent
an interior renovation in 1993 and 1994. The competitive market in which the
hotel operates has experienced significant increases in rate and occupancy
levels over the last several years, with overall demand for guest rooms
increasing by 8.1% from 1992 to 1995, from 64.0% to 72.1%, and average room
rates increased by 13.2% for the same time period, from $63.22 to $76.42.
The hotel, which was constructed in 1987, offers 152 guest rooms, 300
parking spaces and over 6,000 square feet of meeting space. The hotel also
contains a full-service restaurant, an entertainment lounge and a lobby bar,
an outdoor pool, an exercise room, a business center and a car rental counter.
The Company has budgeted for 1997 approximately $250,000 for renovations and
improvements of the hotel and approximately $2.4 million on a 42 guest room
expansion of the hotel.
This hotel competes with the Durham Option Hotel. Pursuant to the Option
Agreement, the Company has the option and right of first refusal to acquire
AGHI's 16.7% partnership interest in the Durham Option Hotel. See "Risk
Factors--Conflicts Relating to Continued Ownership of Other Hotel Properties"
and "Certain Relationships and Transactions--Options to Purchase and Rights of
First Refusal."
PROPOSED ACQUISITION HOTELS
The Company has entered into contracts to purchase the Proposed Acquisition
Hotels for purchase prices aggregating approximately $70.6 million. The
closing of the purchase of each of the Proposed Acquisition Hotels is subject
to satisfactory completion of various closing conditions. Accordingly, no
assurance can be given that the Company will acquire any or all of the
Proposed Acquisition Hotels. See "Risk Factors--Risk That Proposed Acquisition
Hotels Will Not Be Acquired." If the Proposed Acquisition Hotels are acquired,
the Company will have invested approximately $128.6 million in hotel
acquisitions since the IPO and will own 20 hotels containing approximately
4,600 guest rooms. This represents a more than 50% increase in the Company's
portfolio since the IPO based upon the number of guest rooms. Set forth below
are summary descriptions of the Proposed Acquisition Hotels:
Portfolio Purchase. In December 1996, the Company entered into a series of
agreements to acquire a portfolio of hotels, including the Four Points by
Sheraton, the Sheraton Key Largo and the French Quarter Suites Hotel for an
aggregate purchase price of approximately $59.1 million. The purchase price
for the Portfolio Purchase is as follows: (i) approximately $49.5 million in
cash and (ii) the assumption of approximately $9.6 million of mortgage
indebtedness secured by the French Quarter Suites Hotel.
Four Points by Sheraton--Marietta, Georgia
The Four Points by Sheraton is located in Marietta, Georgia, a northwest
suburb of Atlanta. The hotel was built in 1985 as a 219-room Sheraton. The
hotel is situated within a highly traveled commercial and residential area in
central Marietta. Amenities at the hotel include a restaurant, lounge, outdoor
pool, fitness center and approximately 10,000 square feet of meeting space.
The hotel's extensive meeting space is the largest in Marietta, allowing the
hotel to accommodate the majority of the group and meetings demand in that
market.
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<PAGE>
The Company has budgeted approximately $2.8 million to renovate the hotel
during 1997 in order to reposition the hotel to operate under the Wyndham
Garden Hotel brand. There can be no assurance that such brand conversion will
occur. The Company expects to lease the hotel to the Lessee, which, in turn,
expects to engage Wyndham Hotel Corporation as the manager of this property.
Assuming the acquisition of this hotel by the Company, this will be the first
hotel owned by the Company that is not managed by AGHI.
The hotel is being acquired as part of the Portfolio Purchase. The Company
has allocated a $17.0 million cash purchase price to Four Points by Sheraton.
The hotel had occupancy, ADR and REVPAR of 65.2%, $81.41 and $53.11,
respectively, for the twelve months ended September 30, 1996. The closing is
scheduled to occur in March 1997 and is conditioned on, among other things,
the satisfactory completion of the Company's due diligence and receipt of
certain lender consents.
Sheraton Key Largo--Key Largo, Florida
The Sheraton Key Largo is located at Mile Marker 97 and US Highway 1 in Key
Largo, Florida. The hotel, developed in 1985, is a 200-room resort complex
contained within three sprawling four-story structures nestled within highly
dense vegetation and situated on the island's western coastline. The resort
offers a private beach, boat dock, two outdoor pools, two tennis courts, a
2,000 foot nature trail, two restaurants, a lounge and approximately 10,500
square feet of meeting space. Additional amenities include a gift shop, hair
salon and water sports activities. The Sheraton Key Largo is the largest hotel
facility in the major tourist destination of Key Largo.
The Company has budgeted approximately $3.0 million to renovate the hotel
during 1997 in order to reposition the hotel to operate as a Westin Resort.
There can be no assurance that such conversion will occur. The hotel had
occupancy, ADR and REVPAR of 77.3%, $116.70 and $90.19, respectively, for the
twelve months ended September 30, 1996.
The hotel is being acquired as part of the Portfolio Purchase. The Company
has allocated a $26.1 million cash purchase price to the Sheraton Key Largo.
The closing of the acquisition is scheduled to occur in March 1997 and is
conditioned on, among other things, the satisfactory completion of the
Company's due diligence and receipt of certain lender consents. The Company
expects that the hotel will be leased to the Lessee and will be managed by
AGHI.
French Quarter Suites Hotel--Atlanta, Georgia
The French Quarter Suites Hotel is located in the Cumberland Mall/Galleria
area of northwestern Atlanta. The hotel was constructed in 1985 and contains a
total of 155 guest rooms of which 144 are two-room, 600 square foot suites.
The hotel also contains an upscale restaurant, the Cafe New Orleans, as well
as a fitness center, an outdoor pool and 3,500 square feet of meeting space.
The Company has budgeted approximately $2.8 million during 1997 to complete
an extensive renovation of the hotel in order to convert the facility to
operate as a DoubleTree Guest Suites hotel. There can be no assurance that
such brand conversion will occur. The hotel had occupancy, ADR and REVPAR of
73.6%, $107.00 and $78.70, respectively, for the twelve months ended September
30, 1996.
The hotel is being acquired as part of the Portfolio Purchase. The Company
has allocated a $16.0 million purchase price to the French Quarter Suites
Hotel, consisting of approximately $6.4 million in cash and the assumption of
approximately $9.6 million of mortgage indebtedness bearing an interest rate
of 9.75% per annum and secured by the property. The closing of the acquisition
is scheduled to occur in March 1997 and is conditioned on, among other things,
the satisfactory completion of the Company's due diligence and receipt of
certain lender consents. The Company expects that the hotel will be leased to
the Lessee and managed by AGHI.
65
<PAGE>
Radisson Hotel Arlington Heights--Arlington Heights, Illinois
The Radisson Hotel Arlington Heights is located in suburban northwest
Chicago, approximately 8.5 miles from O'Hare International Airport, in an area
dominated by a large number of corporate users of lodging facilities,
including National Car Rental, United Airlines, American Airlines, Airborne
Express and Pepsi-Cola. The hotel, which was developed in 1981, is a 201-room
full-service facility. The six-story hotel contains a restaurant, lobby and
approximately 7,200 square feet of meeting space. Other amenities at the hotel
include an indoor heated pool, exercise room and gift shop.
The hotel has been managed by AGHI since March 1993. In 1993, when AGHI
commenced managing the property, occupancy, ADR and REVPAR at the hotel were
60.7%, $61.52 and $37.34, respectively. By the twelve months ended September
30, 1996, occupancy at the hotel had increased 15.2% to 69.9%, ADR at the
hotel had increased 21.1% to $74.52 and REVPAR at the hotel had increased
39.5% to $52.08.
The purchase price of the hotel is approximately $11.5 million payable as
follows: (i) $3.3 million in cash and (ii) the assumption of a one-year, $8.2
million first mortgage note, which bears interest at the rate of 7.5% per
annum. In addition, commencing on the earlier of the fourth year anniversary
of the completion of initial renovations of the hotel or January 1, 2003, the
seller will have the right to receive a 25% profits interest in the net cash
flow and the net proceeds from certain capital transactions generated at the
hotel. The Company has the option to purchase this profits interest for an
amount equal to 25% of the fair market value of the hotel less the sum of
$11.2 million plus the costs related to any additional expansion of the hotel
at any time after the fourth anniversary of the completion of the initial
renovations at the hotel (subject to a 30-month extension in certain
circumstances). If the Company exercises its option and acquires the seller's
25% profit interest, the profits interest will be extinguished immediately
upon acquisition. This future cash flow right was granted in order to
compensate the sellers for the expected improvement in the hotel's performance
that is not fully reflected in the historical operating results. The Company
expects that the hotel will be leased to the Lessee and continue to be managed
by AGHI.
The Company has budgeted for 1998 approximately $4.0 million to renovate the
hotel and approximately $2.0 million to add at least 31 guest rooms to the
hotel. The restaurant facilities are subject to a space lease with a third
party lessee; such lease provides for monthly payments of $11,111 from the
date of the closing of the purchase through December 1997, at which time the
lease expires.
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 leases each Current Hotel and will lease each Proposed Acquisition
Hotel to the Lessee for a term of twelve years from the inception of the lease
pursuant to separate Participating Leases that provide for rent equal to the
greater of Base Rent or Participating Rent. The Participating Leases for the
Proposed Acquisition Hotels are expected to contain substantially the same
basic terms as the Participating Leases for the Current Hotels. In addition,
the Company and the Lessee are party to a Lease Master Agreement (the "Lease
Master Agreement"), which sets 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.
Participating Lease Terms. Each Participating Lease has a term of twelve
years from the date of the Company's acquisition of the hotel subject to such
lease, subject to earlier termination upon the occurrence of certain
contingencies described in the Participating Lease (including, particularly,
the provisions described herein under "Damage to Hotels," "Condemnation of
Hotels," and "Termination of Participating Leases Upon Disposition of the
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
66
<PAGE>
other revenue at each Hotel, and (iii) certain other amounts, including
interest accrued on any late payments or charges ("Additional Charges"). Base
Rent and Participating Rent departmental thresholds (departmental revenue on
which the rent percentage is based) are increased annually by a percentage
equal to the percentage increase in the 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 ten of the
Hotels, the franchise agreements for the hotels require increases in the
franchise royalty rates in future years and the Participating Leases for those
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
fourteen of the Hotels, the Company plans to undertake substantial renovations
that are expected to be completed by the fourth quarter of 1997. At thirteen
of these Hotels, the renovations are expected to significantly negatively
affect the operating margins at these 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 hotels contain Participating Rent
thresholds that adjust effective January 1, 1997 and/or January 1, 1998, as
the case may be, 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 thirteen Hotels will adjust effective January 1,
1997 and/or January 1, 1998, as the case may be, 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 budgeted 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. The monthly departmental thresholds and the weekly Base Rent are set
based on the Company's annual budget, which reflects the seasonal variations
in the Company's revenues. Participating Rent payments during each calendar
quarter will be adjusted at the end of each quarter to reflect actual results.
A final adjustment of the Participating Rent for each fiscal year will be
made, based on audited statements of revenue for each hotel.
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<PAGE>
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 hotel
pursuant to the terms of the Participating Leases based on the historical
revenues for the twelve months ended September 30, 1996, as if the Company had
owned the hotels and the Participating Leases were in effect during such
twelve-month period and October 1, 1995 was the beginning of the lease year.
For each hotel, pro forma Participating Rent is greater than Base Rent.
<TABLE>
<CAPTION>
LEASE TWELVE MONTHS ENDED
EXPIRATION SEPTEMBER 30, 1996
DATE BASE RENT PARTICIPATING -----------------------------------
(MONTH/ (DOLLARS IN RENT FORMULA PRO FORMA
HOTEL PROPERTIES YEAR) THOUSANDS) (DOLLARS IN THOUSANDS) PARTICIPATING RENT
- ------------------------ ---------- ----------- ------------------------------- -------------------------
PRO FORMA TELEPHONE
TOTAL AND
REVENUE ROOM F&B OTHER
--------- ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL HOTELS
Holiday Inn Dallas DFW
Airport West
--Bedford, Texas....... 6/08 $ 827 Rooms: 25.0% of first $2,650; $ 5,286 $ 1,421 $ 68 $ 53
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 Jersey..
6/08 946 Rooms: 20.0% of first $2,150; 4,887 1,787 0 72
60.0% of next $1,315; 70.0%
thereafter; Telephone and
Other: 25.0%
Hampton Inn Richmond
Airport
- --Richmond, Virginia....
6/08 530 Rooms: 30.0% of first $1,155; 2,090 917 0 36
70.0% thereafter; Telephone
and Other: 30.0%
Hotel Maison de Ville(2)
- --New Orleans,
Louisiana.............. 6/08 274 Rooms: 15.0% of first $890; 1,937 410 33 11
60.0% of next $210; 70.0%
thereafter; F&B: 5.0% of first
$430; 10.0% thereafter;
Telephone and Other: 15.0%
Hilton Hotel--Toledo
- --Toledo, Ohio.......... 6/08 832 Rooms: 15.0% of first $2,400; 5,978 1,020 239 55
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; 12,028 3,540 449 60
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; 8,421 3,216 149 115
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, Maryland..
6/08 719 Rooms: 30.0% of first $1,025; 2,443 1,222 0 34
70.0% thereafter; Telephone
and Other: 30.0%
</TABLE>
See notes on page 71.
68
<PAGE>
<TABLE>
<CAPTION>
LEASE TWELVE MONTHS ENDED
EXPIRATION SEPTEMBER 30, 1996
DATE BASE RENT PARTICIPATING ------------------------------------
(MONTH/ (DOLLARS IN RENT FORMULA PRO FORMA
HOTEL PROPERTIES YEAR) THOUSANDS) (DOLLARS IN THOUSANDS) PARTICIPATING RENT
------------------------ ---------- ----------- ------------------------------- --------------------------
PRO FORMA TELEPHONE
TOTAL AND
REVENUE ROOM F&B OTHER
--------- ------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL HOTELS
Holiday Inn Select-
Madison(5)(6)
--Madison, Wisconsin...
6/08 $1,597 Rooms: 25.0% of first $2,250; $ 7,972 $ 2,476 $ 319 $ 62
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)
--San Jose,
California............ 6/08 1,091 Rooms: 20.0% of first $3,600; 7,931 1,976 128 169
65.0% of next $1,050; 75.0%
thereafter; F&B: 5.0% of first
$1,350; 10.0% thereafter;
Telephone and Other: 30.0%
Best Western Albuquerque
Airport Hotel(9)
--Albuquerque, New
Mexico................ 6/08 1,202 Rooms: 25.0% of first $2,560; 6,440 1,834 106 111
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 Jose,
California............ 6/08 1,323 Rooms: 20.0% of first $3,100; 9,938 2,751 176 156
60.0% of next $1,975; 70.0%
thereafter; F&B: 5.0% of first
$2,320; 15.0% thereafter;
Telephone and Other: 30.0%
Holiday Inn Mission
Valley(12)(13)
--San Diego,
California............ 6/08 1,542 Rooms: 25.0% of first $3,570; 6,893 2,120 75 99
65.0% of next $900; 75.0%
thereafter; F&B: 5.0% of first
$845; 10.0% thereafter;
Telephone and Other: 25.0%
ACQUIRED HOTELS
Days Inn Lake
Buena Vista(14)(15)
--Lake Buena Vista,
Florida...............
10/08 5,044 Rooms: 25.0% of first $2,531; 10,257 4,805* 43* 376*
60.0% of next $3,449, 70.0%
thereafter; F&B: 5.0% of first
$579; 10.0% thereafter;
Telephone and Other: 50.0%
Holiday Inn Resort
Monterey(16)(17)
--Monterey,
California............ 11/08 1,279 Rooms: 20.0% of first $3,189; 6,104 1,814 30 93
60.0% of next $1,636; 70.0%
thereafter; F&B: 2.5% of first
$740; 5.0% thereafter;
Telephone and Other: 50.0%
</TABLE>
See notes on page 71.
69
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
LEASE SEPTEMBER 30, 1996
EXPIRATION ----------------------------------
DATE BASE RENT PARTICIPATING PRO FORMA
(MONTH/ (DOLLARS IN RENT FORMULA PARTICIPATING
HOTEL PROPERTIES YEAR) THOUSANDS) (DOLLARS IN THOUSANDS) RENT
------------------------ ---------- ----------- ------------------------------- ------------------------
PRO FORMA TELEPHONE
TOTAL AND
REVENUE ROOM F&B OTHER
--------- ------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ACQUIRED HOTELS
Hilton Hotel-Durham(18)
--Durham, North
Carolina.............. 1/09 $ 1,133 Rooms: 25.0% of first $2,075; $ 5,236 $ 1,380 $ 160 $ 38
------- 60.0% of next $692; 70.0% -------- ------- ------ ------
thereafter; F&B: 7.5% of first
$1,276; 15.0% thereafter;
Telephone and Other: 30.0%
TOTALS--Current
Hotels................. 22,848 103,841 32,689 1,975 1,540
------- -------- ------- ------ ------
PROPOSED
ACQUISITION HOTELS
Four Points by
Sheraton(19)
--Marietta, Georgia....
3/09 1,350 Rooms: 20.0% of first $2,400; 5,803 1,754 127 71
65.0% of next $1,150; 75.0%
thereafter; F&B: 7.5% of first
$1,090; 20.0% thereafter;
Telephone and Other: 30.0%
Sheraton Key
Largo(20)(21)
--Key Largo, Florida...
3/09 2,184 Rooms: 20.0% of first $3,950; 9,237 2,459 74 81
60.0% of next $1,875; 70.0%
thereafter; F&B: 2.5% of first
$1,674; 5.0% thereafter;
Telephone and Other: 25.0%
French Quarter Suites
Hotel(22)(23)
--Atlanta, Georgia.....
3/09 1,373 Rooms: 25.0% of first $2,050; 5,670 2,231 65 49
65.0% of next $925; 75.0%
thereafter; F&B: 5.0% of first
$715; 10.0% thereafter;
Telephone and Other: 25.0%
Radisson Hotel
Arlington Heights(24)
--Arlington Heights,
Illinois..............
2/09 922 Rooms: 20.0% of first $2,450; 4,518 1,356 108 76
------- 60.0% of next $820; 70.0% -------- ------- ------ ------
thereafter; F&B: 15.0% of
first $300; 60.0% thereafter;
Telephone and Other: 25.0%
TOTALS--Proposed
Acquisition Hotels..... 5,829 25,228 7,800 374 277
------- -------- ------- ------ ------
TOTALS--All Hotels..... $28,677 $129,069 $40,489 $2,349 $1,817
======= ======== ======= ====== ======
</TABLE>
* Pro forma Participating Rent is calculated on a quarterly basis. For the
quarter ended December 31, 1995, Base Rent is greater than pro forma
Participating Rent at this hotel. Therefore, the total pro forma
Participating Rent has been increased by $447 to reflect the excess of Base
Rent over Participating Rent for such quarter.
See notes on page 71.
70
<PAGE>
(1) If food & beverage ("F&B") revenue exceeds $1,000, Participating Rent
will include 5% of total F&B revenue.
(2) There was an additional adjustment to the room department Participating
Rent thresholds of 4.0% in 1997.
(3) There was an additional adjustment to the room department Participating
Rent thresholds of 2.0% in 1997 and 2.0% in 1998.
(4) The Participating Rent formula was reset in 1997 to the following: Rooms:
30.0% of first $1,400; 70.0% thereafter; Telephone and Other: 30.0%. Base
Rent was reset in 1997 to $800 and will grow at CPI thereafter.
(5) There will be an additional adjustment to the room department
Participating Rent thresholds of 3.0% in 2000.
(6) The Participating Rent formula was reset in 1997 to the following: Rooms:
25.0% of the 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: 30.0%. Base
Rent was reset in 1997 to $1,750 and will grow at CPI thereafter.
(7) The Participating Rent formula was reset in 1997 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
was reset in 1997 to $1,400 and will grow at CPI thereafter.
(8) There will be an additional adjustment to the room department
Participating Rent thresholds of 2.0% in 1999 and 2.0% in 2000.
(9) The Participating Rent formula was reset in 1997 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
was reset in 1997 to $1,400 and will grow at CPI thereafter.
(10) The Participating Rent formula was reset in 1997 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%. The
Participating Rent formula will be reset in 1998 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
was reset in 1997 to $2,100 and will grow at CPI thereafter.
(11) There will be an additional adjustment to the room department
Participating Rent thresholds of 4.0% in 1999.
(12) The Participating Rent formula was reset in 1997 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 was
reset in 1997 to $1,800 and will grow at CPI thereafter.
(13) There will be an additional adjustment to the room department
Participating Rent thresholds of 3.0% in 1999.
(14) There will be an additional adjustment to the room department
Participating Rent thresholds of 2.0% in 1999 and 2.0% in 2000.
(15) The Participating Rent formula will be reset in 1998 to the following:
Rooms: 25.0% of first $5,452; 60.0% of next $4,933; 70.0% thereafter;
F&B: 5.0% of first $745; 10.0% thereafter; Telephone and Other: 50.0%.
Base Rent will reset in 1998 to $4,624 and grow at CPI thereafter.
(16) There will be an additional adjustment to the room department
Participating Rent thresholds of 4.5% in 1999 and 3.0% in 2000.
(17) The Participating Rent formula will be reset in 1998 to the following:
Rooms: 20.0% of first $3,023; 60.0% of next $1,973; 70.0% thereafter;
F&B: 2.5% of first $768; 5.0% thereafter; Telephone and Other: 50.0%.
Base Rent will reset in 1998 to $2,041 and grow at CPI thereafter.
(18) The Participating Rent formula will be reset in 1998 to the following:
Rooms: 25.0% of first $2,460; 60.0% of next $911; 70.0% thereafter; F&B:
7.5% of first $1,522; 15.0% thereafter; Telephone and Other: 30.0%. Base
Rent will reset in 1998 to $1,564 and grow at CPI thereafter.
(19) The Participating Rent formula will be reset in 1998 to the following:
Rooms: 25.0% of first $2,625; 65.0% of next $1,275; 75.0% thereafter;
F&B: 7.5% of first $1,130; 20.0% thereafter; Telephone and Other 30.0%.
Base Rent will be reset to $1,460 and grow at CPI thereafter.
(20) There will be an additional adjustment to the room department
Participating Rent thresholds of 2.5% in 1999 and 2.5% in 2000 and 1.0%
in 2001.
Notes continued on following page.
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(21) The Participating Rent formula will be reset in 1998 to the following:
Rooms: 20.0% of first $3,875; 60.0% of next $2,200; 70.0% thereafter;
F&B: 2.5% of first $1,737; 5.0% thereafter; Telephone and Other: 25.0%.
Base Rent will reset in 1998 to $2,284 and grow at CPI thereafter.
(22) There will be an additional adjustment to the room department
Participating Rent thresholds of 3.0% in 1999 and 1.0% in 2000.
(23) The Participating Rent formula will be reset in 1998 to the following:
Rooms: 25.0% of first $2,450; 65.0% of next $1,050; 75.0% thereafter;
F&B: 5.0% of first $742; 10.0% thereafter; Telephone and Other: 25.0%.
Base Rent will reset in 1998 to $1,466 and grow at CPI thereafter.
(24) The Participating Rent formula will be reset in 1998 to the following:
Rooms: 20.0% of first $2,575; 60.0% of next $1,000; 70.0% thereafter;
F&B: 7.5% of first $1,100; 15.0% thereafter; Telephone and Other: 25.0%.
Base Rent will reset in 1998 to $1,162 and grow at CPI thereafter.
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 Hotels. The Participating Leases also provide
for rent reductions and abatements in the event of damage or destruction or a
partial taking of any Hotel as described under "Damage to Hotels" and
"Condemnation of Hotels."
Lessee Capitalization; Lessee Pledge. At the time of the IPO, the partners
of the Lessee (i) capitalized the Lessee with $500,000 in cash and (ii)
pursuant to the Lessee Pledge, pledged 275,000 OP Units 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 to be released from the Lessee Pledge.
Distribution Restrictions. The Lessee may not pay any distributions to its
partners (except for the purpose of permitting its partners to pay taxes on
the income attributable to them from the Lessee 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) $6.0 million or (ii) 17.5% of actual rent payments from hotels leased to
the Lessee during the preceding calendar year (annualized for 1996) (the
"Lessee Distribution Restriction"). 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 limitation in the
Company's Charter, or 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 net worth threshold for
the Lessee Distribution Restriction, annual rent payments will be determined
on a calendar year basis and will be annualized for any partial calendar year.
If the Lessee's net worth exceeds the net worth threshhold for 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 net worth threshold for 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 Common Stock or OP
Units acquired by the Lessee during the period of the Lessee Distribution
Restriction 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 net worth threshhold for the Lessee Distribution
Restriction is satisfied.
Subordination of Management Fees. The Lessee has engaged AGHI to operate the
Current Hotels and will engage AGHI to operate three of the Proposed
Acquisition Hotels. See "--The Management Agreements." The Participating
Leases provide that effective upon written notice by the Company of any
monetary Event of Default
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under the Participating Leases or a default under the FF&E Note, and during
the continuance thereof, no management fees will be paid to AGHI with respect
to any Hotel. Any deferred management fee will accrue without interest until
any such default has been cured. In addition, each Management Agreement which
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 Current Hotel
(including the periodic replacement or refurbishment of FF&E). The aggregate
amount of such reserves is equal 4.0% of total revenue for each Current Hotel
(which, on a consolidated pro forma basis for the twelve months ended
September 30, 1996, represented approximately 5.4% 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 Current Hotels in good order and repair, except for
ordinary wear and tear, and to make non-structural, foreseen and unforeseen,
and ordinary and extraordinary, repairs (other than capital repairs) which may
be necessary and appropriate to keep the Current Hotels in good order and
repair.
The Lessee is not obligated to bear the cost of any capital improvements or
capital repairs to the Current Hotels. With the consent of the Company,
however, the Lessee, at its expense, may make capital additions, modifications
or improvements to the Hotels, provided that such action does not
significantly alter their character or purposes and maintains or enhances the
value of the Hotels. All such alterations, replacements and improvements are
subject to all the terms and provisions of the Participating Leases and will
become the property of the Company upon termination of the Participating
Leases. The Company owns substantially all personal property (other than
inventory) not affixed to, or deemed a part of, the real estate or
improvements at the Current Hotels, but does not own such personal property
which would cause any portion of the rents under the Participating Leases not
to qualify as "rents from real property" for REIT income test purposes. See
"Federal Income Tax Considerations--Requirements for Qualification as a REIT--
Income Tests" and "Certain Relationships and Transactions--Sale of Personal
Property."
Insurance and Property Taxes and Assessments. The Company is responsible for
paying for (i) real estate and personal property taxes and assessments at the
Current Hotels (except to the extent that personal property associated with
the Current Hotels is owned by the Lessee), (ii) casualty insurance on the
Current Hotels and (iii) business interruption insurance covering the Base
Rent and Participating Rent. The aggregate real estate and personal property
tax obligations for the Current Hotels during the twelve months ended
September 30, 1996 was approximately $2.8 million. The Lessee is required to
pay or reimburse the Company for all liability insurance on the Current
Hotels, with extended coverage, including comprehensive general public
liability, workers' compensation and other insurance appropriate and customary
for properties similar to the Current Hotels and naming the Company as an
additional named insured.
Events of Default. Events of Default under the Participating Leases and the
Lease Master Agreement include, among others, the following:
(i) the failure by the Lessee to pay Base or Participating Rent when due
and the continuation of such failure for a period of ten days after receipt
by the Lessee of notice from the Company;
(ii) the failure by the Lessee to observe or perform any other term of a
Participating Lease or the Lease Master Agreement and the continuation of
such failure for a period of 30 days after receipt by the Lessee of notice
from the Company thereof, unless the Lessee is diligently proceeding to
cure, in which case the cure period will be extended to 180 days;
(iii) if the Lessee shall generally not be paying its debts as they
become due or file a petition for relief or reorganization or arrangement
or any other petition in bankruptcy, for liquidation or to take advantage
of any bankruptcy or insolvency law of any jurisdiction, make a general
assignment for the benefit of its creditors, consent to the appointment of
a custodian, receiver, trustee or other similar officer with respect to it
or any substantial part of its assets, be adjudicated insolvent or take
corporate action for the purpose of any of the foregoing;
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(iv) if the Lessee is liquidated or dissolved or commences proceedings to
effect the same, or ceases to do business or sells all or substantially all
of its assets;
(v) if the Lessee voluntarily discontinues operations of a Current Hotel
for more than three days, except as a result of damage, destruction,
condemnation or force majeure; or
(vi) if an event of default beyond applicable cure periods occurs under
the Franchise License with respect to any Current Hotel as a result of any
action or failure to act by the Lessee or its agents (including AGHI).
In addition, a default of the type described above will result in a cross-
default of all other Participating Leases to which the Lessee is a party.
Indemnification. Under each of the Participating Leases, the Lessee has
agreed to indemnify, and is obligated to hold harmless, the Company from and
against all liabilities, costs and expenses (including reasonable attorneys'
fees and expenses) incurred by, imposed upon or asserted against the Company
on account of, among other things, (i) any accident or injury to persons or
property on or about the Current Hotels, including claims under liquor
liability, "dram shop" or similar laws; (ii) any misuse by the Lessee or any
of its agents of the leased property; (iii) any environmental liability
(except to the extent such liability results from a pre-existing condition)
(see "Environmental Matters" below); (iv) taxes and assessments in respect of
the Current Hotels (other than real estate and personal property taxes and
assessments (other than on property owned by the Lessee) and income taxes of
the Company on income attributable to the Current Hotels and capital
impositions); (v) any breach of the Participating Leases by the Lessee; or
(vi) any breach of any subleases related to the Current Hotels, provided,
however, that such indemnification does not require the Lessee to indemnify
the Company against the Company's own negligent acts or omissions or willful
misconduct.
Assignment and Subleasing. The Lessee is not permitted to sublet all or any
part of the Current Hotels or assign its interest under any of the
Participating Leases, other than to an affiliate of the Lessee, without the
prior written consent of the Company. The Company has generally agreed to
consent to any sublease of any portion of any Current Hotel that sells
alcoholic beverages to the Beverage Corporations (as defined in "Formation
Transactions") or of a retail portion of any Current Hotel (provided such
sublease will not cause any portion of the Rents to fail to qualify as "rents
from real property" for REIT income qualification test purposes). See
"Sublease" below. No such assignment or subletting will release the Lessee
from any of its obligations under the Participating Leases.
Damage to Hotels. In the event of damage to or destruction of any Current
Hotel covered by insurance which then renders the hotel unsuitable for its
intended use and occupancy, the Company may elect not to repair, rebuild or
restore the hotel, in which event the Participating Lease shall terminate, and
the Company generally shall be entitled to retain any proceeds of insurance
related to such damage or destruction. In the event the Company terminates a
Participating Lease under such circumstances, the Company, at its option, must
either (i) pay the Lessee the fair market value of the Lessee's leasehold
interest in the remaining term of the lease (which amount will be determined
by discounting to present value, for each year of the remainder of the lease
term, cash flow attributable to such lease after deducting the cost component
of the applicable management fees, at an annual discount rate of 12% (for the
purposes of such calculation, the annual cash flow for each remaining year of
the lease term shall be equal to the cash flow attributable to such lease for
the twelve months ended on the lease termination date)) or (ii) offer to lease
to the Lessee a substitute hotel on terms that would create a leasehold
interest in such hotel with a fair market value equal to or exceeding the fair
market value of the Lessee's remaining leasehold interest under the
Participating Lease to be terminated.
In the event that damage to or destruction of a Hotel which is covered by
insurance does not render such hotel unsuitable for its intended use and
occupancy as a hotel, the Company or, at the Company's option, the Lessee,
generally will be obligated to repair or restore such hotel. In the event of
material damage to or destruction of any Hotel which is not covered by
insurance, the Company may either repair, rebuild or restore the hotel (at the
Company's expense) to substantially the same condition as existed immediately
prior to such damage or terminate the Participating Lease without penalty. In
the event of non-material damage to a Current Hotel, the Company is required
to repair, rebuild or restore the hotel at its expense. During any period
required for repair or restoration of any damaged or destroyed Hotel, rent
will be equitably abated.
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Condemnation of Hotels. In the event of a total condemnation of a Current
Hotel, the relevant Participating Lease will terminate with respect to such
hotel as of the date of taking, and the Company and the Lessee will be
entitled to their shares of any condemnation award in accordance with the
provisions of the Participating Lease. In the event of a partial taking which
does not render the hotel unsuitable for the Lessee's use, the Lessee shall
restore the untaken portion of the hotel to a complete architectural unit, and
the Company shall contribute to the cost of such restoration that part of the
condemnation award required for such restoration.
Termination of Participating Leases upon Disposition of the Current
Hotels. In the event the Company enters into an agreement to sell or otherwise
transfer a Current Hotel, the Company will have the right to terminate the
Participating Lease with respect to such hotel upon 30 days' prior written
notice upon either (i) paying the Lessee the fair market value of the Lessee's
leasehold interest in the remaining term of the Participating Lease to be
terminated (which amount will be determined by discounting to present value,
for each year of the remainder of the lease term, cash flow attributable to
such lease after deducting the cost component of the applicable management
fees, at an annual discount rate of 12% (for the purposes of such calculation,
the annual cash flow for each remaining year of the lease term shall be equal
to the cash flow attributable to such lease for the twelve months ended on the
lease termination date)) or (ii) offering to lease to the Lessee a substitute
hotel on terms that would create a leasehold interest in such hotel with a
fair market value equal to or exceeding the fair market value of the Lessee's
remaining leasehold interest under the Participating Lease to be terminated.
Termination of Participating Leases upon Change in Tax Laws. In the event
that changes in federal income tax laws allow the Company or a subsidiary or
affiliate to directly operate hotels, the Company will have the right to
terminate all, but not less than all, Participating Leases with the Lessee, in
which event the Company will pay the Lessee the fair market value of the
remaining term of the Participating Leases.
Franchise Licenses. The Company has agreed that the Lessee will be the
licensee under each of the Franchise Licenses on the 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, Crowne Plaza, Westin and Sheraton. There can be no
assurance the Company will receive such temporary operational rights in any
new Franchise Licenses with such franchisors. See "Franchise Agreements."
Sublease. In order to facilitate compliance with state and local liquor laws
and regulations, the Lessee subleases those areas of the Current 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 has been purchased at the Lessee's expense and is
owned by the Lessee. Any inventory used by the Lessee in the operation of each
Current Hotel shall, upon termination of its Participating Lease, be purchased
by the Company or its designee for its fair market value.
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Approval of Managers by Company. The Company has the right to approve (which
approval will not be unreasonably withheld) the engagement by the Lessee of
any operator of a Current Hotel other than AGHI 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
AGHI
The Lessee has engaged AGHI to manage the Current Hotels and will engage
AGHI to manage three of the Proposed Acquisition Hotels pursuant to the
Management Agreements. The following is a summary of the Management Agreements
and certain related agreements:
Management Agreement Terms. Each Management Agreement has an initial twelve-
year term. In the event of the extension or renewal of the term of the
applicable Participating Lease, the Management Agreement will be similarly
extended or renewed.
Management Fees. Each Management Agreement requires 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 is entitled to receive an incentive fee equal
to 0.025% of annual gross revenues for each 0.1% increase in annual gross
revenues over the gross revenues for the preceding twelve-month period up to
the maximum incentive fee. Such incentive fee is payable quarterly and is
adjusted at the end of each calendar year to reflect actual results. Every
four years the basis upon which the incentive fee is calculated is required to
be renegotiated between the Lessee and the Manager. The payment of the
management fees to AGHI by the Lessee are subordinate to the Lessee's
obligations to the Company under the Participating Leases. The management fees
payable to AGHI during 1996 and 1997, respectively, will be earned only to the
extent that the Lessee's income during each such year 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. 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, which will be funded by the Lessee under the
Participating Leases. See "The Hotels--The Participating Leases--Subordination
of Management Fees."
Termination of Participating Lease. In the event of a termination of a
Participating Lease for a Hotel, the Management Agreement for such hotel also
will terminate.
Obligation to Purchase Common Stock. Messrs. Jorns and Wiles, who are
stockholders of AGHI and are also executive officers of the Company, have
agreed to use 50.0% of the dividends (net of the tax liability attributed to
such dividends) received by them from AGHI that are attributable to AGHI's
earnings from the management of hotels owned by the Company (as determined in
good faith by such officers) to purchase, subject to compliance with
applicable securities laws, annually in the open market, during each of the
twelve years following the closing of the IPO, additional shares of Common
Stock, or, if any such purchase would violate the ownership limitation in the
Company's Charter, or at the option of the Operating Partnership, OP Units.
Certain Transfer Restrictions. The stockholders of AGHI have agreed, for so
long as more than 50.0% of the Management Agreements with respect to the
Initial Hotels remain in place, to grant to 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 is subordinate to a right of first refusal in favor of
AGHI and the existing stockholders of AGHI set forth in AGHI's existing
stockholders' agreement. For this purpose, a Change in Control Transaction
means a sale of stock in AGHI that will result in the ability of a person
(other than a current stockholder of AGHI) and his or its controlled
Affiliates to elect at least a majority of the Board of Directors of
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AGHI. A Change in Control Transaction does not include (i) an underwritten
public offering of common stock of AGHI, (ii) the transfer of stock to a
spouse of an AGHI stockholder, (iii) the transfer of stock to a trust for the
benefit of the spouse and/or children of an AGHI stockholder, or (iv) the
transfer of stock to any corporation or other entity of which a stockholder
controls at least 50.0% of the voting interests. The stockholders of AGHI have
also 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.
Wyndham
The Lessee has advised the Company that it expects to engage Wyndham to
manage the Four Points by Sheraton. It is expected that the management
agreement with Wyndham will have an initial twelve year term and will provide
for the payment of a base management fee equal to 1.5% of gross revenues at
the hotel plus an incentive management fee of up to 1.5% of gross revenues.
Wyndham will be entitled to receive the incentive management fee during the
first two years of the term of the agreement if (i) annualized 1997 gross
revenues for the hotel exceed 1996 gross revenues for the hotel by at least 6%
and (ii) 1998 gross revenues for the hotel exceed 1996 gross revenues for the
hotel by at least 12%. Thereafter, the incentive management fee will be earned
if annual gross revenues for the hotel exceed the 1998 gross revenues for the
hotel by at least the cumulative percentage increase in CPI since 1998. The
Lessee's payment of the base management fee to Wyndham will be subordinated to
the payment of Base Rent under the Participating Lease relating to the hotel,
and the payment of the incentive management fee to Wyndham will be
subordinated to the payment of the Base Rent and Participating Rent
thereunder. In addition, Wyndham will be reimbursed by the Lessee, at an
initial rate of approximately $4,960 per month, for accounting and financial
services performed by Wyndham. The retention of Wyndham as a manager of the
Four Points by Sheraton is subject to the execution of a definitive management
agreement with the Lessee. Accordingly, there can be no assurance that the
terms of the management agreement will not change or that Wyndham will
ultimately agree to manage the hotel upon its acquisition by the Company or in
the future.
MORTGAGE INDEBTEDNESS
The Holiday Inn Dallas DFW South is subject to non-recourse mortgage
indebtedness in the outstanding principal amount of $14.0 million as of
December 31, 1996 (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.
The Courtyard by Marriott-Meadowlands is subject to non-recourse mortgage
indebtedness that secures two notes in the outstanding principal amounts of
approximately $4.5 million and $575,800, respectively, as of December 31, 1996
(the "Secaucus Loans"). The $4.5 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 $575,800 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 IPO
and the transfer of the Courtyard by Marriott-Meadowlands hotel to a
subsidiary of the Operating Partnership, the Company agreed to guarantee to
the holder of the Secaucus Loans payment of rent under the ground lease
relating to the hotel
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($150,000 per annum), real estate taxes ($159,600 for the twelve months ended
September 30, 1996) and capital reserves required by the Secaucus Loans (4% of
the gross revenues), and guarantee that, after a default under the Secaucus
Loans, Base Rent from the Participating Lease will be applied to the Secaucus
Loans, in each case until such loans are satisfied or such hotel is
transferred (by foreclosure or otherwise) to the holder of such loans.
In connection with the planned purchase by the Company of the French Quarter
Suites Hotel, the Company will assume a non-recourse mortgage note encumbering
the hotel in the outstanding principal amount, as of December 31, 1996, of
approximately $9.6 million (the "French Quarter Loan"). The French Quarter
Loan was entered into on June 14, 1995, bears interest at the rate of 9.75%
per annum and is payable in equal monthly installments of principal and
interest of approximately $93,100 each. The French Quarter Loan matures on
July 1, 2002, at which time a balloon payment of approximately $8.2 million
will be due and payable.
In connection with the planned purchase of the Radisson Hotel Arlington
Heights, the Company will assume a one-year mortgage note in the principal
amount of approximately $8.2 million (the "Radisson Loan"). The Radisson Loan
bears interest at the rate of 7.5% per annum, and will require quarterly
payments in arrears of interest only of $154,100. The Radisson Loan will
mature on the one year anniversary of the date of the closing of the purchase
of that hotel, at which time a balloon payment of approximately $8.2 million
will be due and payable.
LINE OF CREDIT
Neither the Company's Bylaws nor its Charter limits the amount of
indebtedness the Company may incur. To ensure that the Company has sufficient
liquidity to conduct its operations, including funding the acquisition of
additional hotels, making renovations and capital improvements to hotels and
for working capital requirements, the Company has access to the Line of
Credit. The Line of Credit is secured by, among other things, first mortgage
liens on all of the Current Hotels, other than Holiday Inn Dallas DFW Airport
South and Courtyard by Marriott-Meadowlands, and is expected to be secured by
two of the Proposed Acquisition Hotels. The Line of Credit also will be
secured by a mortgage lien on any subsequently acquired hotels purchased
without outstanding mortgage indebtedness. While the Company currently has a
maximum borrowing limit 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 Current 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 Current 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 Hotels and any other hotels securing the Line of Credit,
multiplied by 5.0. The Company has received a commitment from its Line of
Credit lenders to increase the borrowing limit under the Line of Credit from
$100 million to $150 million and to make certain other modifications thereto
that would increase the financial flexibility of the Company. This commitment
to increase the maximum amount available under the Line of Credit is subject
to consummation of the Offering and the satisfaction of other customary
conditions. Accordingly, there can be no assurance that these modifications to
the Line of Credit will occur. The Company expects to pay commitment and other
fees of approximately $700,000 in connection with such increase. After taking
into account the increase in the borrowing limit under the Line of Credit and
assuming the Offering is completed and the Proposed Acquisition Hotels are
acquired, the Company expects to have approximately $106.9 million of
borrowing capacity under the Line of Credit. 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,
manager and the franchise brand of any hotel securing the Line of Credit in
the future. In addition, the Line of Credit requires that the current limited
partners of the Lessee own no less than 65% of the limited partnership
interests of the Lessee at all times.
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Outside of the Line of Credit, the Company and its subsidiaries may not
currently incur any additional debt or recourse obligations, without the
consent of its Line of Credit lenders, other than the debt assumed in
connection with the acquisition of the Holiday Inn Dallas DFW Airport South
and Courtyard by Marriott-Meadowlands Hotel. Under the commitment relating to
the modifications to the Line of Credit, the Company will be permitted to
incur up to $50 million in recourse and property specific debt. Accordingly,
if the closing of these modifications to the Line of Credit do not occur prior
to the Company's acquisition of the Radisson Hotel Arlington Heights and the
French Quarter Suites Hotel, such acquisitions will be subject to the approval
of the Company's lenders under the Line of Credit. The Line of Credit expires
on July 31, 1999 and is subject to extension under certain circumstances for
an additional one-year term. Borrowings under the Line of Credit bear interest
at 30-day, 60-day or 90-day LIBOR, (5.50%, 5.53% and 5.56% at December 31,
1996), 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 Current Hotels are subject to ground leases with third parties
with respect to the land underlying each such hotel. The ground leases are
triple net leases which require the tenant to pay all expenses of owning and
operating the hotel, including real estate taxes and structural maintenance
and repair. One of the Proposed Acquisition Hotels is subject to a ground
lease with the state of Florida for certain offshore real property accessible
by the guests of the hotel.
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 Best Western 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 Best Western Albuquerque Airport Hotel for the twelve
months ended September 30, 1996 was 81.8%. See "Risk Factors--Contingent
Obligation to Construct Additional Hotel Rooms."
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.
The Sheraton Key Largo property includes approximately 42,500 square feet of
off-shore bay bottom land in Florida Bay on which a commercial marina is
operated pursuant to a lease from the Board of Trustees of the Internal
Improvement Trust Fund of the State of Florida, as lessor. The lease, which
terminates in May 2021,
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requires an annual lease fee of approximately $3,100. SKL of Florida, Inc.,
the lessee under the lease and the seller of the hotel, will assign its
interest in the lease to the Company upon the closing of the purchase of the
hotel. However, the lessor will not give its consent to the assignment of
lessee's interest in the lease until after the Company has acquired the hotel.
Accordingly, there can be no assurance that the Company will obtain the
lessor's consent to the assignment.
FRANCHISE CONVERSIONS AND OTHER CAPITAL IMPROVEMENTS
The Company has budgeted during 1997 approximately $33.3 million for
additional capital improvements and renovations at the Current Hotels. In
addition, the Company has budgeted approximately $14.6 million to renovate and
refurbish the Proposed Acquisition Hotels. 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."
FRANCHISE AGREEMENTS
Thirteen of the Current Hotels and three of the Proposed Acquisition Hotels
are operated under Franchise Licenses with nationally recognized hotel
companies. In addition, two of the Current Hotels that are not currently
subject to franchise agreements are expected to become subject to franchise
agreements during the second quarter of 1997. 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 provide for termination at each franchisor's option
upon the occurrence of certain events, including the Lessee's failure to pay
royalties and fees or perform its other covenants under the respective license
agreement, bankruptcy, abandonment of the franchise, commission of a felony,
assignment of the license without the consent of the franchisor, or failure to
comply with applicable law in the operation of the relevant Hotel. Certain of
the Franchise Licenses require that the Company guarantee the payment of
franchise fees, liquidated damages and termination fees on behalf of the
Lessee. The Lessee is not entitled to terminate the Franchise Licenses unless
it receives the prior written consent of the Company. The Franchise Licenses
do not renew automatically upon expiration. The Lessee is responsible for
making all payments under the Franchise Licenses to the franchisors. Under the
franchise agreements, the Lessee pays franchise royalty fees ranging 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
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OR ANY WRITTEN OR ORAL COMMUNICATIONS REGARDING THE SUBJECT MATTER HEREOF. A
GRANT OF A HILTON FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED
AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR
ENDORSEMENT BY 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 HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A
COURTYARD BY MARRIOTT FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT
INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL
OR ENDORSEMENT BY MARRIOTT INTERNATIONAL, INC. (OR ANY OF ITS AFFILIATES,
SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY, 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 SELECTSM 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 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
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 THE COMPANY, THE OPERATING
PARTNERSHIP, THE LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
WYNDHAM GARDEN(R) IS A REGISTERED TRADEMARK AND WYNDHAMTM AND THE WYNDHAM
WTM LOGO ARE TRADEMARKS OF WYNDHAM IP CORPORATION, A SUBSIDIARY OF WYNDHAM
HOTEL CORPORATION ("WYNDHAM"). NEITHER WYNDHAM NOR ANY OF ITS 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 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, THE LESSEE 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.
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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 HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A
DAYS INN OR A RAMADA FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT
INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL
OR ENDORSEMENT BY 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) AND DOUBLETREE GUEST SUITES(R) ARE REGISTERED TRADEMARKS
OF DOUBLETREE CORPORATION WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR
ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A
GRANT OF A (FRANCHISE/LICENSE) FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS,
AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR
ENDORSEMENT BY DOUBLETREE CORPORATION (OR ANY OF ITS AFFILIATES, SUBSIDIARIES
OR DIVISIONS) OF THE COMPANY, THE OPERATING PARTNERSHIP, THE LESSEE 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 HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A
SMALL LUXURY HOTELS AFFILIATION LICENSE FOR CERTAIN OF THE 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.
BEST WESTERN(R) A REGISTERED TRADEMARK OF BEST WESTERN INTERNATIONAL
CORPORATION, WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE
FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A
BEST WESTERN AFFILIATION LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS,
AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR
ENDORSEMENT BY BEST WESTERN INTERNATIONAL CORPORATION, (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY, THE OPERATING
PARTNERSHIP, THE LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
RADISSON HOTELS(R) IS A REGISTERED TRADEMARK OF CARLSON COMPANIES, INC.,
WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL
RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A RADISSON
HOTELS LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE
INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY CARLSON
COMPANIES, INC. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES, OR DIVISIONS) OF THE
COMPANY, THE OPERATING PARTNERSHIP, THE LESSEE, OR THE COMMON STOCK OFFERED
HEREBY.
SHERATON(R) AND FOUR POINTS ARE REGISTERED TRADEMARKS OF ITT CORP., WHICH
HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF
THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A SHERATON OR A FOUR
POINTS HOTELS LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD
NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY ITT
CORP. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY,
THE OPERATING PARTNERSHIP, THE LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
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WESTIN RESORTS(R) AND WESTIN HOTELS & RESORTS(R) ARE REGISTERED TRADEMARKS
OF THE PARTNERSHIP OF STARWOOD CAPITAL GROUP, L.P., GOLDMAN SACHS & CO. AND
NOMURA ASSET CAPITAL CORPORATION, WHICH HAS NOT ENDORSED OR APPROVED THE
OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS
PROSPECTUS. A GRANT OF A WESTIN LICENSE FOR CERTAIN OF THE HOTELS IS NOT
INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL
OR ENDORSEMENT BY THE PARTNERSHIP OF STARWOOD CAPITAL GROUP, L.P., GOLDMAN
SACHS & CO. AND NOMURA ASSET CAPITAL CORPORATION (OR ANY OF THEIR AFFILIATES,
SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY, THE OPERATING PARTNERSHIP, THE
LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
LUXURY HOTELS OF AMERICA(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 HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT
OF A LUXURY HOTELS OF AMERICA AFFILIATION LICENSE FOR CERTAIN OF THE 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 is self-administered and employs Messrs. Jorns, Wiles, Barr,
Valentine and three 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 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 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 Hotels by qualified
independent environmental engineers. The purpose of the Phase I ESAs is to
identify potential sources of contamination for which the Hotels may be
responsible and to assess the status of environmental regulatory compliance.
The Phase I ESAs include historical reviews of the 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
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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 Hotels will not be affected by the condition of the
properties in the vicinity of the 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 Hotels are in
material compliance with all federal, state and local ordinances and
regulations regarding hazardous or toxic substances and other environmental
matters. Neither the Company nor, to the knowledge of the Company, any of the
current owners of the 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 has the option and right of first refusal to acquire
AGHI's (i) 50.0% partnership interest in the partnership that owns the Boise,
Idaho Option Hotel and (ii) 16.7% partnership interest in the partnership that
owns 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 to a Participating Lease
relating to such Option Hotels. The Boise, Idaho Option Hotel was opened in
October 1996. The Durham, North Carolina Option Hotel is currently under
development and is expected to open during the first quarter of 1997. 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.
COMPETITION
The hotel industry is highly competitive. Each of the Hotels is located in a
developed area that includes other hotel properties. The number of competitive
hotel properties in a particular area could have a material adverse effect on
occupancy, ADR and REVPAR of the Hotels or at hotel properties acquired in the
future.
The Company may be competing for investment opportunities with entities that
have substantially greater financial resources than the Company. These
entities may generally be able to accept more risk than the Company can
prudently manage, including risks with respect to the creditworthiness of a
hotel operator or the geographic proximity of its investments. Competition may
generally reduce the number of suitable investment opportunities offered to
the Company and increase the bargaining power of property owners seeking to
sell. Further, the Company believes competition from entities organized for
purposes substantially similar to the Company's objectives could increase
significantly if the Company is successful. There is no restriction in the
Participating Leases or the Management Agreements on the Lessee's or AGHI's
ability to lease or manage hotels which may compete with the Company's hotels.
Although not currently anticipated, AGHI and the Lessee may manage or lease
(but may not acquire or develop) hotels that compete with the Company's
hotels.
INSURANCE
The Company carries comprehensive liability, fire, extended coverage and
business interruption insurance with respect to the Current Hotels, with
policy specifications, insured limits and deductibles customarily carried for
similar hotels. The Company will carry similar insurance with respect to any
other hotels developed or acquired in the future. There are, however, certain
types of losses (such as losses arising from wars, certain losses
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arising from hurricanes and earthquakes, and losses arising from other acts of
nature) that are not generally insured because they are either uninsurable or
not economically insurable. Should an uninsured loss or a loss in excess of
insured limits occur, the Company could lose its capital invested in the
affected hotel, as well as the anticipated future revenues from such hotel,
and would continue to be obligated on any mortgage indebtedness or other
obligations related to the hotel. Any such loss could adversely affect the
business of the Company. Management of the Company believes the Current Hotels
are 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.
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FORMATION TRANSACTIONS
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).
Simultaneously with the closing of the IPO, the Company consummated the
Formation Transactions, which included the following:
. The Company sold 8,075,000 shares of Common Stock in the IPO. All of the
net proceeds to the Company from the Offering were contributed to AGH GP
and AGH LP, which, in turn, contributed such proceeds, together with
certain other assets acquired from the Plan (as described below), to the
Operating Partnership in exchange for an approximate 81.3% interest in
the Operating Partnership. AGH GP, a wholly owned subsidiary of the
Company and the sole general partner of the Operating Partnership
received a 1.0% interest in the Operating Partnership. AGH LP, also a
wholly owned subsidiary of the Company, received an approximate 80.3%
limited partnership interest in the Operating Partnership;
. The Company acquired, directly or indirectly, a 100.0% interest in each
of the Initial Hotels for an aggregate of 1,896,996 OP Units, 137,008
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 was repaid from the net
proceeds of the IPO, as follows):
. The Operating Partnership acquired 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 560,178 OP Units (valued at approximately $9.9 million,
based on the offering price in the IPO);
. The Company acquired 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 137,008 shares of Common Stock
(valued at approximately $2.4 million, based on the offering price
in the IPO), and the Company, in turn, contributed such interests to
the Operating Partnership in exchange for 137,008 OP Units; and
. The Operating Partnership acquired, 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 1,336,818 OP Units (valued
at approximately $23.7 million, based on the offering price in the
IPO) and approximately $91.0 million in cash.
. The Operating Partnership reimbursed 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 leased each Initial Hotel to the Lessee for a
term of twelve years pursuant to a Participating Lease, which requires
Base Rent to be paid on a weekly basis and Participating Rent to be paid
on a monthly basis;
. The Operating Partnership received from the Primary Contributors options
to acquire their interests in the two Option Hotels (see "The Hotels--
Options to Purchase and Rights of First Refusal");
. The Lessee contracted 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;
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<PAGE>
. The Operating Partnership established the Line of Credit;
. In order to facilitate compliance with state and local liquor laws and
regulations, the Lessee subleased (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
are contractually obligated to pay to the Lessee rent payments equal to
30% of gross revenues net of cost of goods sold and certain related
taxes from the sale of food and beverages generated from such areas;
however, pursuant to the Participating Leases, such subleases do not
reduce the Participating Rent payments to the Company, which it is
entitled to receive from such food and beverage sales; and
. In order for the Company to qualify as a REIT, the Operating Partnership
sold certain personal property relating to certain of the Initial Hotels
to the Lessee in exchange for one or more five-year amortizing recourse
promissory notes in the aggregate principal amount of $315,000 that is
secured by such personal property (collectively, the "FF&E Note");
BENEFITS TO THE OFFICERS AND THE PRIMARY CONTRIBUTORS
As a result of the Formation Transactions, officers of the Company and the
Primary Contributors received the following benefits:
. Mr. Jorns received 89,441 OP Units, Mr. Wiles received 26,846 OP Units,
Mr. Barr received 10,000 OP Units, Mr. Sowell received 256,120 OP Units,
Mr. Lewis W. Shaw II received 89,441 OP Units, and Mr. Kenneth W. Shaw
received 88,330 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 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 IPO) were valued at approximately $1.6
million, $476,516, $177,500, $4.5 million, $1.6 million and $1.6 million
(based on the offering price in the IPO), respectively, and are more
liquid than their interests in the Initial Hotels;
. Messrs. Jorns, Wiles, Barr and Valentine were granted options to acquire
225,000, 75,000, 40,000 and 20,000 shares of Common Stock, respectively,
at the offering price in the IPO, which are exercisable in four equal
annual installments commencing on the date of grant;
. Messrs. Jorns, Wiles, Barr and Valentine received stock awards of
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;
. The Operating Partnership reimbursed 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 repaid 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, were 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, is 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
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up to 2.0% of gross revenues that will be earned incrementally upon
reaching certain gross revenue targets. The management fees payable to
AGHI are subordinate to the rent payments due to the Company under the
Participating Leases. Prior to 1998, all unpaid management fees are
forfeited; thereafter, unpaid management fees are 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, are entitled to all cash flow from 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 initial valuation of the Company was determined primarily based upon a
capitalization of the Company's estimated Cash Available for Distribution and
other factors rather than on the basis of each hotel's cost or appraised
value.
The purchase prices for the interests 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 was 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 was acquired pursuant to
various agreements. These acquisitions were subject to all of the terms and
conditions of such agreements. The Company assumed 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 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
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 agreed to indemnify the Company against breaches of such
representations and warranties. These representations and warranties survive
until July 31, 1997.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors consists of five members, four of whom are
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 is divided into three classes serving
staggered three-year terms. The Company has four executive officers and three
other professionals 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 48 Class I/1997
Executive Officer, and
President
Bruce G. Wiles............. Executive Vice President 45 --
Kenneth E. Barr............ Executive Vice President, 48 --
Chief Financial Officer,
Secretary
and Treasurer
Russ C. Valentine.......... Senior Vice President-- 51 --
Acquisitions
H. Cabot Lodge III......... Independent Director 41 Class II/1998
James R. Worms............. Independent Director 51 Class II/1998
James McCurry.............. Independent Director 48 Class III/1999
Kent R. Hance.............. Independent Director 54 Class III/1999
</TABLE>
Steven D. Jorns became the Chairman of the Board, Chief Executive Officer
and President of the Company in April 1996. Mr. Jorns is the founder of and
has served since its formation in 1981 as Chairman of the Board, Chief
Executive Officer and President of AGHI. Prior to forming AGHI, Mr. Jorns
spent seven years with an affiliate of General Growth Companies overseeing
that company's hotel portfolio. Prior to that, Mr. Jorns was associated with
Hospitality Motor Inns, a division of Standard Oil of Ohio, and held marketing
positions with Holiday Inns, Inc. Mr. Jorns is a graduate of Oklahoma State
University with a degree in Hotel and Restaurant Administration. He has been
honored by that University as one of its distinguished alumni. He has served
on the Hotel and Restaurant Advisory Boards for two universities and was
selected by Lodging Hospitality Magazine as a "Rising Star" of the Industry in
1992.
Bruce G. Wiles became an Executive Vice President of the Company in April
1996. Mr. Wiles has served since 1989 as an Executive Vice President of AGHI,
where he is responsible for AGHI's acquisition and development activities. Mr.
Wiles has more than fourteen years of experience in the hospitality industry.
Prior to joining AGHI in 1989, Mr. Wiles was a Senior Vice President for
Integra, a Dallas-based, NYSE hotel management and restaurant company. At
Integra, his duties included evaluating hotel acquisitions and overseeing real
estate development, as well as the acquisition and negotiation of all real
estate based financing. Prior to joining Integra in 1986, Mr. Wiles was a
founder and President of Bruce G. Wiles and Associates, Ltd., a 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 became an Executive Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company in April 1996. Mr. Barr has served
since 1994 as a Senior Vice President of AGHI, where he directs the Accounting
and Finance Department. At AGHI, Mr. Barr is responsible for financial
management and controllership functions, including financial reporting,
internal audits, treasury activities, and training functions. Prior to joining
AGHI, Mr. Barr held a senior financial position with Richfield Hotel
Management,
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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.
Russ C. Valentine became Senior Vice-President--Acquisitions of the Company
in April 1996. Mr. Valentine has served since 1990 as a Senior Vice
President--Acquisitions of AGHI. Prior to joining AGHI, Mr. Valentine was a
Principal with Laventhol & Horwath, in charge of the firm's Dallas and
Southwest Real Estate and 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 became a director of the Company in July 1996. Mr. Lodge
is a co-founder and has served since October 1995 as Chairman of the Board of
Superconducting Core Technologies, Inc., a wireless telecommunications
equipment manufacturer. From August 1983 to August 1995, he was a Managing
Director and Executive Vice President of W.P. Carey & Co., a New York real
estate investment bank that specializes in long term net-leases with
corporations and manages in excess of $1.5 billion in assets, nine real estate
public limited partnerships and three real estate investment trusts. Mr. Lodge
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 became a director of the Company in July 1996. Mr. Worms has
served since August 1995 as a Managing Director of William E. Simon & Sons
L.L.C., a private investment firm and merchant bank and President of William
E. Simon & Sons Realty, through which the firm conducts its real estate
activities. Prior to joining William E. Simon & Sons, Mr. Worms was employed
since March 1987 by Salomon Brothers Inc, an international investment banking
firm, most recently as a managing director. Mr. Worms received a Bachelor of
Arts degree from the University of California, Los Angeles, a Masters of
Business Administration from the University of California at Los Angeles'
Anderson School of Business, and a Juris Doctor degree from the Hastings
College of Law.
James B. McCurry became a director of the Company in July 1996. Mr. McCurry
served from December 1994 through December 1996 as Chief Executive Officer of
NeoStar Retail Group, Inc. ("NeoStar"), a specialty retailer of consumer
software. Currently, Mr. McCurry is a business consultant. NeoStar filed a
voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in September
1996. From April 1983 to December 1994, Mr. McCurry was the Chairman of
Babbage's Inc., a consumer software retailer, which merged with Software Etc.
Stores, Inc. in December of 1994 to form NeoStar. Mr. McCurry received a
Masters of Business Administration with High Distinction from Harvard Business
School and a Bachelor of Arts with High Honors from the University of Florida.
He is a member of the Board of Directors of Pacific Sunwear of California,
Inc.
Kent R. Hance became a director of the Company in July 1996. Mr. Hance has
been since 1994 a law partner in the firm Hance, Scarborough, Woodward &
Weisbart, L.L.P., Austin, Texas, and from 1991 to 1994 he was a law partner in
the firm of Hance and Gamble. From 1985 to 1987, Mr. Hance was a law partner
with Boyd, Viegal and Hance. Mr. Hance served as a member of the Texas
Railroad Commission from 1987 until 1991 and as its Chairman from 1989 until
1991. From 1979 to 1985, he served as a member of the United States Congress.
Mr. Hance served as a State Senator in the State of Texas from 1975 to 1979
and was a professor of business law at 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.
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<PAGE>
BOARD OF DIRECTORS AND COMMITTEES
The Company is managed by a five-member Board of Directors, a majority of
whom are Independent Directors. The Board of Directors has an Audit Committee,
a Compensation Committee and a Leasing Committee.
Audit Committee. The Audit Committee consists of Messrs. Hance and McCurry.
The Audit Committee makes recommendations concerning the engagement of
independent public accountants, reviews with the independent public accountants
the plans and results of the audit engagement, approves professional services
provided by the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit
fees, and reviews the adequacy of the Company's internal accounting controls.
Compensation Committee. The Compensation Committee consists of Messrs. Hance
and Worms. The Compensation Committee determines compensation of the Company's
executive officers and administers the 1996 Plan.
Leasing Committee. The Leasing Committee consists of Messrs. Lodge and Worms.
Leasing Committee reviews not less frequently than annually the Lessee's
compliance with the terms of the Participating Leases and reviews and approves
the terms of any new leases between the Company and the Lessee.
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee during 1996 consisted of Messrs. Hance
and Worms, neither of whom was, prior to or during 1996, an officer or employee
of the Company. Neither of such persons had any relationships requiring
disclosure under applicable rules and regulations.
EXECUTIVE COMPENSATION
The Company was organized as a Maryland corporation on April 12, 1996 and
commenced operations upon the completion of its IPO on July 31, 1996. The
following table sets forth information, for the fiscal year ended December 31,
1996, regarding the compensation of the Company's Chief Executive Officer. No
executive officer of the Company earned annual salary and bonus in excess of
$100,000 during the fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATIONS
AWARDS
----------------------------
RESTRICTED
ANNUAL COMPENSATION AWARDS
---------------------------------- -------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER
POSITION YEAR(1) SALARY($) BONUS($) COMPENSATION($) AWARD(S)$/(2) OPTIONS/(#)(3) COMPENSATION
------------------ ------- --------- -------- --------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Steven D. Jorns......... 1996 41,667 None None $532,500 225,000 None
Chief Executive
Officer and President
</TABLE>
- --------
(1) Includes compensation only during the period from July 31, 1996 (inception)
through December 31, 1996.
(2) In connection with the IPO, the Company granted Mr. Jorns stock awards of
30,000 shares of restricted Common Stock, 6,000 of which vested on the date
of grant and the remainder vest over a four-year period from the date of
grant. Calculation is based on a per share price of Common Stock of $17.75,
the offering price in connection with the IPO.
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<PAGE>
(3) In connection with the IPO, the Company granted incentive stock options
("ISOs") and nonqualified options to Mr. Jorns to purchase shares of Common
Stock. Of the 225,000 options granted to Mr. Jorns, 202,468 are
nonqualified stock options and 22,532 are ISOs, 56,250 of which vested on
the date of grant and the remainder become exercisable over a three-year
period from the date of grant.
The executive officers, including Mr. Jorns, receive health and disability
insurance benefits which do not exceed 10% of their respective salaries. These
benefits are also provided to all other employees of the Company.
OPTION GRANTS
The following table sets forth information regarding grants of stock options
to the Company's executive officers during the 1996 fiscal year. The options
were granted pursuant to the 1996 Plan. See "Management--Stock Incentive
Plans."
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATE OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
---------------------------------------------- -----------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- ------------ ----------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Steven D. Jorns......... 225,000 62.50% $17.75 7/24/06 $ 2,511,000 $ 6,365,250
Bruce G. Wiles.......... 75,000 20.83 17.75 7/24/06 837,000 2,121,750
Kenneth E. Barr......... 40,000 11.11 17.75 7/24/06 446,400 1,131,600
Russ C. Valentine....... 20,000 5.56 17.75 7/24/06 223,200 565,800
</TABLE>
The options granted to Messrs. Jorns, Wiles, Barr and Valentine were granted
as of July 25, 1996 at an exercise price of $17.75 per share, the per share
price of the Common Stock in the IPO. Each of such options becomes exercisable
over four equal annual installments, commencing on the date of grant and
expires on the tenth anniversary of the date of grant.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 1996 DECEMBER 31, 1996(2)
NAME EXERCISE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Steven D. Jorns......... None None 56,250/168,750 $ 337,500 $ 1,012,500
Bruce G. Wiles.......... None None 18,750/56,250 112,500 337,500
Kenneth E. Barr......... None None 10,000/30,000 60,000 180,000
Russ C. Valentine....... None None 5,000/15,000 30,000 90,000
</TABLE>
- --------
(1) No options were exercised in 1996.
(2) Represents the number of shares of Common Stock underlying the options
(excluding options the exercise price of which was more than the market
value of the underlying securities) times the market price at December 31,
1996 of $23.75, minus the exercise price.
EMPLOYMENT AGREEMENTS
At the closing of the IPO, the Company entered into an employment agreement
with Mr. Jorns, pursuant to which Mr. Jorns serves as Chairman of the Board,
Chief Executive Officer and President of the Company for a term of five years
at an initial annual base compensation of $100,000, subject to any increases in
base compensation approved by the Compensation Committee. In addition, at the
closing of the IPO, the Company entered into employment agreements with Messrs.
Wiles, Barr and Valentine, pursuant to which Mr. Wiles served as Executive Vice
President, Mr. Barr served as Executive Vice President and Chief Financial
Officer
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<PAGE>
and Mr. Valentine served 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 is entitled to receive severance
benefits in an amount equal to the greater of (i) the aggregate of all
compensation due such officer during the balance of the term of the employment
agreement or (ii) 1.99 times the "base amount" as determined in the 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 is paid an annual fee of
$17,000. In addition, each such director is 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 is paid to such directors 50.0% in cash and
50.0% in shares of Common Stock. Meeting fees are paid in cash. Directors who
are employees of the Company do not receive any fees for their service on the
Board of Directors or a committee thereof. In addition, the Company reimburses
directors for their out-of-pocket expenses incurred in connection with their
service on the Board of Directors.
In connection with the IPO, each non-employee director was granted
nonqualified options to purchase 10,000 shares of Common Stock at an exercise
price of $17.75 per share (the offering price in connection with the IPO) that
vest in three annual installments commencing on the date of grant. Any non-
employee director who ceases to be a director will forfeit the right to
receive any options not previously vested. See "--Stock Incentive Plans--The
Directors' Plan."
STOCK INCENTIVE PLANS
The 1996 Plan and the Directors' Plan were approved and adopted 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 is 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 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
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<PAGE>
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 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
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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 approved prior to the IPO 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
are exercisable in four equal annual installments, commencing on July 25,
1996, subject to continued employment through the applicable vesting date.
Both the ISOs and the nonqualified options are 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 are ISOs to the extent permitted under the ISO "$100,000
limitation" described above. In addition, Messrs. Jorns, Wiles, Barr and
Valentine were 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
(July 25, 1996), 20.0% on each of the first and second anniversaries and 25.0%
on each of the third and fourth 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
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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. Pursuant to the Directors' Plan, each Independent Director was
awarded nonqualified options to purchase 10,000 shares of Common Stock on July
25, 1996 (the date the registration statement relating to the Common Stock
sold in the IPO was declared effective by the Commission) (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 IPO have an exercise price equal to
the public offering price in the IPO of $17.75 per share and 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 shares 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 were made to each
Founding Director on July 25, 1996 (the date that the registration statement
relating to the IPO was declared effective by the Commission) and to each Non-
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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, 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, under the
MGCL, 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 has entered into indemnification agreements with each of its
executive officers and directors. The indemnification agreements require,
among other matters, that the Company indemnify its executive officers
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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.
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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
owned equity interests or contract rights relating to certain of the Initial
Hotels prior to the acquisition of such hotels by the Company. Such persons
and affiliates received an aggregate of 126,287 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 July 1997), such persons
and entities may receive cash or, at the Company's option, an aggregate of
126,287 shares of Common Stock. See "Partnership Agreement--Exchange Rights."
In addition, the Operating Partnership reimbursed 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 repaid
approximately $3.75 million of indebtedness guaranteed by AGHI in connection
with the Formation Transactions. 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
The Company has entered into a shared services and office space agreement
with AGHI pursuant to which AGHI provides the Company with office space and
limited support personnel for the Company's headquarters at 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 has the option and right of
first refusal to acquire AGHI's (i) 50.0% partnership interest in the
partnership that owns the Boise, Idaho Option Hotel, and (ii) 16.7%
partnership interest in the partnership that owns 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. The Boise, Idaho Option Hotel was opened in October 1996,
and the Durham, North Carolina Option Hotel is currently under development and
is expected to be open during the first quarter of 1997. 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.
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EMPLOYMENT AGREEMENTS AND STOCK INCENTIVE PLANS
The Company has entered into an employment agreement with Mr. Jorns,
pursuant to which Mr. Jorns serves as Chairman, Chief Executive Officer, and
President of the Company for a term expiring on July 31, 2001 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
has entered into employment agreements with Messrs. Wiles, Barr and Valentine,
pursuant to which Mr. Wiles serves as Executive Vice President, Mr. Barr
serves as Executive Vice President and Chief Financial Officer and Mr.
Valentine serves as Senior Vice President--Acquisitions, each for a term
expiring on July 31, 2001, 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, 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
sold certain personal property relating to certain of the Initial Hotels to
the Lessee for $315,000, which amount was 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 expiring on July 31,
2001.
THE PARTICIPATING LEASES
The Company and the Lessee have entered into the Participating Leases, each
with a term of twelve years from the inception of the lease, relating to the
Current Hotels. The Company anticipates that similar Participating Leases will
be entered into with respect to the Proposed Acquisition Hotels upon their
acquisition and any additional hotel properties acquired by the Company in the
future. See "The 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 Hotels after the payment of operating
and other expenses. See "Selected Financial Information--The Lessee." In
addition, the Company has entered into a Lease Master Agreement which sets
forth the terms of the Lessee Pledge and certain other matters.
THE MANAGEMENT AGREEMENTS
The Lessee and AGHI entered into the Management Agreements, each with a term
of twelve years from the date of the acquisition of the applicable hotel,
relating to the management of the Current Hotels. The Company anticipates that
similar Management Agreements will be entered into with AGHI with respect to
three of the Proposed Acquisition Hotels and selected additional 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 Hotels--The Management
Agreements."
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THE BEVERAGE CORPORATIONS
In order to facilitate compliance with state and local liquor laws and
regulations, the Lessee subleases those areas of the Current Hotels that
comprise the restaurant and other areas where alcoholic beverages are served
to the Beverage Corporations, fourteen 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. The Lessee is expected to enter into similar sublease
arrangements with the Beverage Corporations upon purchase of the Proposed
Acquisition Hotels.
AGHI, THE LESSEE AND OTHER OPERATORS
American General Hospitality, Inc.
AGHI was founded in 1981 by Mr. Jorns, the Company's Chairman of the Board,
Chief Executive Officer and President. As of December 31, 1996, AGHI's
management portfolio consisted of 64 hotels containing in excess of 11,200
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. AGHI has a
national presence, with operating experience in 40 states, involving 212
different hotels. AGHI has developed seven hotels from the ground up.
Recently, AGHI completed development of a Courtyard by Marriott in Boise,
Idaho and has a Courtyard by Marriott under development in Durham, North
Carolina for which the Company has limited purchase options. See "The 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 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.
The Company believes that it will benefit significantly from the hotel
management experience of AGHI. AGHI manages all of the Current Hotels and is
expected to be retained by the Lessee as manager of three of the Proposed
Acquisition Hotels. 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, Radisson, the Choice Hotels family of brands and the HFS
Incorporated family of brands. The Company believes that these relationships
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 Hotels--The Management Agreements." Except for the two Option Hotels,
for which the Company has purchase options on AGHI's interests in such hotels,
and one other hotel that was excluded from the IPO (see "Risk Factors--
Conflicts of Interest--Conflicts Relating to Continued Ownership of Other
Hotel Properties"), AGHI's activities are limited to managing and operating
Company-owned hotels and hotels owned by third parties. See "The Hotels--
Options to Purchase and Rights of First Refusal."
The Lessee has contracted with AGHI to manage the Current Hotels under an
incentive compensation structure (as described below). The Lessee has advised
the Company that it will retain AGHI to manage three of the Proposed
Acquisition Hotels pursuant to the same incentive compensation structure.
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 persons unaffiliated with the Company, who also hold interests in the
Lessee.
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AGH Leasing, L.P.
The Company leases each Current Hotel, and expects to lease each of the
Proposed Acquisition Hotels, to the Lessee pursuant to a separate
Participating Lease. In addition, selected newly acquired hotels may be leased
by the Company to the Lessee. Messrs. Jorns, Wiles and Barr, executive
officers of the Company, own collectively approximately 23.0% of the Lessee.
The remaining interests in the Lessee are owned by persons unaffiliated with
the Company, who also hold interests in AGHI. Each Participating Lease has a
term of twelve years from the inception of the lease, 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 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 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.
Other Operators
The Company intends to selectively seek other qualified hotel brand
owner/operators and hotel management companies, in addition to the Lessee and
AGHI, to lease and/or manage certain of the Company's future new hotel
acquisitions. The Company, with the consent of its Line of Credit lenders,
anticipates that it will lease hotels to independent hotel operators or, as a
condition to entering into a Participating Lease with the Lessee, will require
the Lessee to retain an independent hotel manager in connection with selected
acquisitions, provided such lessee or manager has demonstrated, in the
Company's judgment, (i) certain unique knowledge of the hotel or the market in
which the hotel operates that will enhance the revenues that could be expected
to be generated by the hotel, (ii) a proven track record for implementing
product, brand and repositioning strategies, (iii) a significant national or
regional lodging industry reputation or (iv) substantial financial resources.
In addition, the Company will seek to develop lessee or management
relationships with operators which are capable of providing the Company with
additional acquisition opportunities that satisfy its investment criteria. The
Company believes that the use of a flexible lessee or manager structure,
coupled with the continued expansion of its brand and franchise relationships,
will result in additional acquisition opportunities for the Company. The
Lessee has advised the Company that it expects to retain Wyndham to manage the
Four Points by Sheraton hotel following its acquisition by the Company.
According to public filings, Wyndham Hotel Corporation is a NYSE listed
company which, as of December 31, 1996, operated or franchised in excess of 75
hotels.
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 (i) capitalized the Lessee with $500,000
in cash and (ii) pursuant to the Lessee Pledge, pledged to the Company
275,000 OP Units having a value of approximately $4.9 million, based on
the IPO offering price of the Common Stock, 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 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
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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) (the "Lessee
Distribution Restriction") 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 net worth threshold of the Lessee
Distribution Restriction is satisfied);
. management fees paid to AGHI by the Lessee under the Management
Agreements are 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 incremental upon reaching certain gross revenue targets;
. base and incentive management fees payable by the Lessee to AGHI are
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, have agreed 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 IPO;
. 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 has established 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 has established a Leasing Committee, consisting
entirely of Independent Directors, that reviews not less frequently than
annually the Lessee's compliance with the terms of the Participating
Leases and reviews and approves the terms of each new Participating
Lease between the Company and the Lessee.
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PRINCIPAL STOCKHOLDERS
The following table sets forth as of December 31, 1996 certain information
regarding the beneficial ownership of shares of Common Stock by (i) each
director of the Company, (ii) each executive officer of the Company, (iii) by
all directors and executive officers of the Company as a group and (iv) by
persons who own more than 5.0% of the shares of Common Stock. Except as
otherwise described below, all shares are owned directly and the indicated
person has sole voting and investment power. The number of shares of Common
Stock includes the number of shares of Common Stock that such person could
receive if he exchanged his OP Units for shares of Common Stock under certain
circumstances.
<TABLE>
<CAPTION>
PERCENT
NUMBER OF SHARES OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS(1)
------------------------ --------------------- --------
<S> <C> <C>
Kenneth E. Barr(2)....................... 26,779 *
Kent R. Hance(3)......................... 6,192 *
Steven D. Jorns(4)....................... 177,958 2.1%
H. Cabot Lodge III(5).................... 3,692 *
James McCurry(5)......................... 3,692 *
Russ C. Valentine(6)..................... 11,840 *
Bruce G. Wiles(7)........................ 57,948 *
James R. Worms(8)........................ 4,692 *
Executive officers and directors as a
group
(8 persons)............................. 292,793 3.5%
Morgan Stanley Group Inc. and Morgan
Stanley Asset Management Inc.(9)........ 1,170,300 14.2%
</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
July 31, 1997, the first anniversary date of the closing of the IPO.
(2) Includes (a) 10,000 shares of Common Stock that have vested under options
granted pursuant to the 1996 Plan, (b) 6,000 shares of restricted Common
Stock that constitute stock awards, (c) 600 shares of Common Stock
purchased through open market transactions after the IPO, (d) 79 shares of
Common Stock held by the Plan and attributable to Mr. Barr, (e) 10,000 OP
Units issued to Mr. Barr in connection with the Formation Transactions and
(f) 100 shares of Common Stock purchased by Mr. Barr through open market
transactions since the IPO, as custodian on behalf of a family member,
with respect to which Mr. Barr disclaims beneficial ownership.
(3) Includes (a) 3,333 shares of Common Stock that have vested under options
granted pursuant to the Directors' Plan, (b) 359 shares of Common Stock
issued pursuant to the Directors' Plan and (c) 2,500 shares of Common
Stock purchased through open market transactions after the IPO.
(4) Includes (a) options to purchase 56,250 shares of Common Stock that have
vested under options granted pursuant to the 1996 Plan, (b) 30,000 shares
of restricted Common Stock that constitute stock awards, (c) 100 shares of
Common Stock purchased through open market transactions after the IPO, (d)
70,337 OP Units issued to Mr. Jorns in connection with the Formation
Transactions, (e) 19,104 OP Units issued to Mr. Jorns' wife in connection
with the Formation Transactions and (f) 2,167 shares of Common Stock held
by the Plan and attributable to Mr. Jorns. Mr. Jorns disclaims beneficial
ownership of all OP Units held by his wife.
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(5) Includes (a) 3,333 shares of Common Stock that have vested under options
granted pursuant to the Directors' Plan and (b) 359 shares of Common Stock
issued pursuant to the Directors' Plan.
(6) Includes (a) options to purchase 5,000 shares of Common Stock that have
vested under options granted pursuant to the 1996 Plan, (b) 4,000 shares
of restricted Common Stock that constitute stock awards, (c) 1,000 shares
of Common Stock purchased through open market transactions after the IPO
and (d) 1,840 shares of Common Stock held by the Plan and attributable to
Mr. Valentine.
(7) Includes (a) 18,750 shares of Common Stock that have vested under options
granted pursuant to the 1996 Plan, (b) 10,000 shares of restricted Common
Stock that constitute stock awards, (c) 2,352 shares of Common Stock held
by the Plan and attributable to Mr. Wiles and (d) 26,846 OP Units issued
to Mr. Wiles in connection with the Formation Transactions.
(8) Includes (a) 3,333 shares of Common Stock that have vested under options
granted pursuant to the Directors Plan, (b) 359 shares of Common Stock
issued pursuant to the Directors' Plan and (c) 1,000 shares of Common
Stock purchased through open market transactions after the IPO.
(9) Beneficial ownership information is based on the Schedule 13G jointly
filed by Morgan Stanley Group Inc. (1585 Broadway, New York, New York
10036) and Morgan Stanley Asset Management Inc. (1221 Avenue of the
Americas, New York, New York 10020), dated November 8, 1996.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of (i) the capital stock of the Company
and (ii) certain provisions of Maryland law and of the Charter and Bylaws of
the Company does not purport to be complete and is subject to and qualified in
its entirety by reference to Maryland law described herein, and to the Charter
and Bylaws of the Company.
GENERAL
Under its Charter, the Company has the authority to issue 100,000,000 shares
of Common Stock, $0.01 par value per share. 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.
Subject to the provisions of the Charter regarding the restrictions on
transfer of stock, 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, redemption or appraisal 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.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common 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
shares of 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.
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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 shares of stock of 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, provides that no person may own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 9.8% of the
outstanding shares of any class of Common Stock (subject to the Look-Through
Ownership Limitation applicable to certain stockholders, as described below).
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. Subject to
certain limited exceptions, 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 second sentence of the succeeding paragraph.
Any transfer of Common Stock that would (i) result in any person owning,
directly or indirectly, Common Stock in excess of the Ownership Limitation (or
the Look-Through Ownership Limitation, if applicable), (ii) result in Common
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.
Subject to certain exceptions described below, any purported transfer of
Common Stock that would (i) result in any person owning, directly or
indirectly, shares of Common Stock in excess of the Ownership Limitation (or
the Look-Through Ownership Limitation, if applicable), (ii) result in the
shares of Common 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. The record holder of
the shares of Common Stock that are designated as Shares-in-Trust (the
"Prohibited Owner") will be required to submit such number of shares of Common
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.
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Shares-in-Trust will remain issued and outstanding shares of Common 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 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.
"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 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 are
listed or admitted to trading or, if the shares of Common 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 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
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
are listed or admitted to trading is open for the transaction of business or,
if the shares of Common 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 in violation of
the foregoing restrictions, or any person who owned shares of Common 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.
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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 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 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 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 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.
NUMBER OF DIRECTORS; CLASSIFICATION OF THE BOARD OF DIRECTORS
The Charter and Bylaws 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.
There are five directors, four of whom are Independent Directors. The holders
of Common Stock are 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, the Board of Directors is 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 precludes stockholders from removing incumbent directors except
upon a substantial affirmative vote and filling the vacancies created by such
removal with their 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 has purchased and maintains 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 Stockholder") or an
affiliate thereof are prohibited for five years after the most recent date on
which the Interested Stockholder became an Interested Stockholder. 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
corporation and (b) two-thirds of the votes entitled to be cast by holders of
voting shares of such corporation
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other than shares held by the Interested Stockholder 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 Stockholder 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 Stockholder becomes an Interested
Stockholder.
CONTROL SHARE ACQUISITION STATUTE
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 stockholder 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.
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. 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
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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, 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. As permitted by the MGCL,
the Bylaws of the Company provide that 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 Charter requires the Board of Directors generally to use commercially
reasonable efforts to cause the Company 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 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.
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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 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 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.
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
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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 access to the Line of Credit. Borrowings under the Line of Credit
have been utilized to purchase the Acquired Hotels and will be utilized to
purchase the Proposed Acquisition Hotels, and additional funds may be used to
acquire additional hotels. The Line of Credit is secured by a first mortgage
lien on fourteen of the Current Hotels. The Line of Credit will be secured by
two of the Proposed Acquisition Hotels and by subsequently acquired hotels that
are not encumbered with other indebtedness. The Company intends to continue to
maintain a conservative capital structure and expects to continue 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 received
a commitment from its Line of Credit lenders that, subject to the satisfaction
of certain conditions, would permit the Company to increase its borrowing limit
under the Line of Credit from $100 million to $150 million.
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 hotels, 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 hotels owned by the Operating Partnership.
Such indebtedness may be recourse to all or any part of the hotels of the
Company or the Operating Partnership, or may be limited to the particular hotel
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 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."
HOTEL OPERATOR POLICY
The Company intends to selectively seek other qualified hotel brand
owner/operators and hotel management companies, in addition to the Lessee and
AGHI, to lease and/or manage certain of the Company's future new hotel
acquisitions. The Company anticipates that it will lease hotels to independent
hotel operators or, as a condition to entering into a Participating Lease with
the Lessee, will require the Lessee to retain an independent hotel manager in
connection with selected acquisitions. The Company will seek lessee or
management relationships with hotel operating companies that have demonstrated,
in the Company's judgment, (i) certain unique knowledge of the hotel or the
market in which such hotel operates, (ii) a proven track record for
implementing product, brand and operational repositioning strategies, (iii) a
significant national or regional lodging industry reputation or (iv)
substantial financial resources. In addition, the Company will seek to develop
lessee or management relationships with operators that are capable of providing
the Company with additional acquisition opportunities that satisfy its
investment criteria. The Company believes that the use of a flexible lessee or
manager structure, coupled with the continued expansion of its brand and
franchise relationships, will
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result in additional acquisition opportunities for the Company. The Lessee has
advised the Company that it expects to retain Wyndham to manage the Four
Points by Sheraton hotel following its acquisition. According to public
filings, Wyndham is an NYSE listed company which, as of December 31, 1996,
operated or franchised in excess of 75 hotels. See "The Hotels--Management
Agreements--Wyndham."
CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies and entered 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 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 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 Hotels by the
Operating Partnership resulting from the differing tax bases of the Company
and such affiliates associated with such hotels. In an effort to address this
and other potential conflicts of interest, the Company's Bylaws provide that
the Company's decision with respect to the subsequent sale of a Hotel
purchased from a Primary Contributor or their affiliates must be made by a
majority of 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 has 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." In addition,
the Independent Directors must approve the terms of any acquisition from AGHI
of the Ramada Limited--Madison, Wisconsin. See "Risk Factors--Conflicts of
Interest--Conflicts Relating to Continued Ownership of Other Hotel
Properties."
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Provisions of the MGCL
Pursuant to the MGCL, 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 fact of the common
directorship or interest is disclosed or known to (i) the board of directors
or committee, and the board or committee authorizes, approves or ratifies the
contract or transaction by the affirmative vote of a majority of disinterested
directors, even if the disinterested directors constitute less than a quorum,
or (ii) the stockholders entitled to vote, and the transaction or contract is
authorized, approved or ratified by a majority of the votes cast by the
stockholders entitled to vote other than the votes of shares owned of record
or beneficially by the interested director or corporation, firm or other
entity, 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 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 has made
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.
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SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the Offering 13,787,405 shares of Common Stock will
be issued and outstanding, 1,896,996 shares of Common Stock will be reserved
for potential issuance upon exchange of 1,896,996 OP Units and an additional
948,564 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 set forth in the Charter. See
"Description of Capital Stock--Restrictions on Transfer." The 162,405 shares
of restricted Common Stock issued in connection with the acquisition of
certain Hotels, the 1,896,996 shares of Common Stock available for issuance
upon exchange of OP Units issued in connection with the Formation
Transactions, the 1,436 shares of restricted Common Stock issued to the
Company's directors under the Directors' Plan, and the 50,000 shares of
restricted Common Stock, of which 5,000 have vested, granted to the Company's
executive officers under the 1996 Plan and any shares of Common Stock or
shares of Common Stock available for issuance upon exchange of OP Units issued
in connection with the Wyndham Alliance (collectively, "Restricted Shares")
are "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 and the acquisition of certain Hotels have agreed with
Smith Barney Inc. and/or the Company, subject to limited exceptions, 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, until July 31, 1997, without the prior written consent of Smith
Barney Inc. and/or the Company. Wyndham has agreed, subject to limited
exceptions, not to sell, offer or contract to sell, grant any options for the
sale of, or otherwise transfer any Common Stock or OP Units acquired by it
pursuant to the Wyndham Alliance for a period of six months from the date of
the acquisition of such Common Stock or OP Units. The Company has agreed to
file a registration statement with the Commission by October 1997 with respect
to sales of (i) Common Stock received upon exchange of OP Units issued in the
Formation Transactions, (ii) 25,397 shares of Common Stock issued in
connection with the acquisition of one of the Current Hotels and (iii) any
shares of Common Stock issued or received upon the exchange of OP Units
pursuant to the Wyndham Alliance. The Company is 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 (a) have been disposed of pursuant to such registration statement,
(b) have been otherwise distributed pursuant to Rule 144, or (c) have been
otherwise transferred in a transaction resulting in the transferee receiving
Common Stock no longer deemed to be "restricted securities." In addition, the
Company has granted to Wyndham certain demand and piggyback registration
rights in connection with any Restricted Shares issued pursuant to the Wyndham
Alliance.
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The Company has also filed a registration statement on Form S-8 with respect
to the shares of Common Stock issued to the Company's executive officers and
directors under the 1996 Plan and the Directors' Plan and shares of Common
Stock issuable in respect of the exercise of the Company Options. Such shares
of Common Stock issued pursuant to the 1996 Plan and the Directors' Plan or
upon the exercise of the Company Options will be available for sale in the
public market without restriction to the extent they are held by persons who
are not affiliates of the Company and, to the extent they are held by
affiliates, pursuant to Rule 144 under the Securities Act, without observance
of the holding period requirement. 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.
The Company's Common Stock trades on the NYSE under the symbol "AGT." No
prediction can be made as to the effect, if any, that the Offering, or future
sales of shares, or the availability of shares for future 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.
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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.
MANAGEMENT
The Operating Partnership is organized as a Delaware limited partnership
with AGH GP, as general partner, AGH LP, as a 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"), has 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 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 Partner, (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 Partner, 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.
CAPITAL CONTRIBUTION
The Company, through AGH GP and AGH LP, contributed to the Operating
Partnership substantially all of the net proceeds of the IPO, in consideration
of which AGH GP received an approximate 1.0% general partnership interest and
AGH LP received an approximate 80.3% limited partnership interest in the
Operating Partnership. Since the IPO, the Company through AGH GP and AGH LP,
made certain additional contributions to the Operating Partnership thereby
increasing its interest therein to approximately 81.4%. 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.
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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 received rights (the "Exchange Rights")
that enable them to cause the Operating Partnership to exchange each OP Unit
for cash equal to the value of one 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 July 31, 1997 (one year following
the closing of the IPO), 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 July 31, 1997, 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 lock-up agreements
described in "Shares Available for Future Sale." The aggregate number of
shares of Common Stock currently issuable upon exercise of the Exchange Rights
is 1,896,996. 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 Agreements among the Company and the
Limited Partners other than AGH LP and the sellers of certain of the Hotels
(the "Sellers"), and Wyndham (together, the "Registration Rights Agreements"),
the Limited Partners or the Sellers, as the case may be, 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 prior to October 1997. Wyndham has also been
granted certain demand and piggyback registration rights. 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.
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 pays all
administrative costs and expenses of the Company, AGH GP and AGH LP (the
"Company Expenses"), and the Company Expenses are treated as expenses of the
Operating Partnership. The Company Expenses generally 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, do not include any administrative and operating
costs and expenses incurred by the Company that are attributable to hotel
properties or partnership interests in a
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Subsidiary Partnership that are owned by the Company directly rather than
through the Operating Partnership. The Company does not own any of the 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 the
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 operates 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
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
qualifies 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 generally 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
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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.
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. The Company has two wholly owned subsidiary corporations, AGH GP
and AGH LP, which are "qualified REIT subsidiaries." Consequently, AGH GP and
AGH LP will not be subject to federal corporate income taxation, although they
may be subject to state and local taxation. 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 to customers in the ordinary
course of business) 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.
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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 as rents from real property 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 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 has leased from the Operating
Partnership the land, buildings, improvements, furnishings, and equipment
comprising the Hotels for a term of twelve years and will also lease the land,
buildings, improvements, furnishings and equipment comprising the Proposed
Acquisition 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 Hotels and Proposed Acquisition
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.
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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 Hotels and the Proposed Acquisition 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
Hotels and the Proposed Acquisition Hotels and generally will control how the
Hotels and the Proposed Acquisition Hotels are operated and maintained, (iv)
the Lessee will bear all of the costs and expenses of operating the Hotels and
the Proposed Acquisition 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 Hotels and the Proposed Acquisition Hotels during the term of
the 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 Hotels and the Proposed Acquisition Hotels or (B) the Lessee's use,
management, maintenance or repair of the Hotels and the Proposed Acquisition
Hotels, (vii) the Lessee is obligated to pay substantial fixed rent for the
period of use of the Hotels and the Proposed Acquisition Hotels, and (viii)
the Lessee stands to incur substantial losses (or reap substantial gains)
depending on how successfully it operates the Hotels and the Proposed
Acquisition 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 a Hotel must not be
greater than 15% of the Rents received under the Participating Lease. The
Rents attributable to the personal property in a 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 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 Hotel at the
beginning and at the end of such taxable year (the "Adjusted Basis Ratio").
With respect to each 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 is in the process
of obtaining appraisals of the personal property for each Proposed Acquisition
Hotel that the Operating Partnership will acquire for cash. The Participating
Leases provide that the Adjusted Basis Ratio for each 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 Hotel from exceeding 15%, which cooperation includes the purchase by
Lessee at fair market value of enough personal property at such Hotel so that
the Adjusted Basis Ratio for such Hotel is less than 15%. In the event that
the amount of personal property relating to certain of the 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 Hotels to not qualify as
rents from real property, the Operating Partnership will sell a portion of
such personal property relating to such Hotels to the Lessee in exchange for
the FF&E Note. In addition, the Participating
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Leases provide that if future renovations and refurbishments to a Hotel would
cause the Adjusted Basis Ratio for such 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 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 a Hotel to the extent that such acquisition would cause the
Adjusted Basis Ratio for that Hotel to exceed 15%. The Company does not expect
the Adjusted Basis Ratio for any Hotel to exceed 15% and therefore expects
that the portion of rents received attributable to personal property will be
treated as rents from real property. However, there can be no 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 income that is nonqualifying income for purposes of the 95% gross income
test, 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 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. The only equity interest that the
Company owns directly in the Lessee is an option to acquire a 25% profits
interest in the Radisson Hotel Arlington Heights Hotel. That profits interest
represents less than a 1% of the assets or net profits of the Lessee, and will
be extinguished immediately upon its acquisition by the Company. 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 purchase 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 after-tax 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
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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 prohibits a stockholder 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 Hotels, or manage or operate the Hotels and
Proposed Acquisition 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 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 with respect to the Initial
Hotels indicate that the Franchise Licenses with respect to the Initial Hotels
represent less than 1.0% of the total value of the Company's assets. The
Company is currently in the process of obtaining appraisals of the Franchise
Licenses with respect to all hotels acquired after the Initial Hotels. 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
Hotels, or manages or operates the 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).
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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 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 95% gross income
test (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 the Subsidiary
Partnerships), 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 25%
asset requirement. In addition, the Company has represented that it will not
acquire or dispose, or cause the Operating
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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.
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 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
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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
alternative 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 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 Hotels and Proposed Acquisition 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
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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 a Hotel or
Proposed Acquisition Hotel, the Company terminates the Participating Lease,
and the Company is unable to find a replacement lessee for such Hotel or
Proposed Acquisition Hotel within 90 days of such foreclosure, gross income
from hotel operations conducted by the Company from such Hotel or Proposed
Acquisition 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 Hotel or Proposed
Acquisition 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 undistributed 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.
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.
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
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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.
Distributions from the Company to holders which are not designated as
capital gains dividends and which are in excess of the Company's current and
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 gain realized from the sale
of the shares of Common Stock, taxable as described below.
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
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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 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 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 Hotels and Proposed Acquisition Hotels) by
the Company will be taxed as though the Foreign Investors were
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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 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 Operating Partnership and 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
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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.
Under recently issued regulations ("check the box regulations"), an
organization with two or more members will be classified as a partnership on
or after January 1, 1997 unless it elects to be treated as an association (and
therefore taxable as a corporation) or falls within one of several specific
provisions which define a corporation. For entities which were in existence
prior to January 1, 1997 (such as the Operating Partnership and the Subsidiary
Partnerships), the claimed classification by the entity will be respected for
all periods prior to January 1, 1997 if (i) the entity had a reasonable basis
for its claimed classification under the law prior to January 1, 1997; (ii)
the entity and all members thereof recognized the federal tax consequence of
any change in the entity's classification within the sixty (60) months prior
to January 1, 1997; and (iii) neither the entity nor any member was notified
in writing on or before May 8, 1996 that the classification of the entity was
under examination (in which case the entity's classification would be
determined in the examination). An exception to partnership classification
under the "check the box regulations" exists for 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). A publicly traded partnership is treated
as a corporation unless at least 90% of the gross income of such partnership,
for each taxable year the partnership is a publicly 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 pursuant to the provisions of the "check the
box regulations" as well as the law prior to January 1, 1997 will be treated
for federal income tax purposes as partnerships and not as associations
taxable as corporations or as publicly traded partnerships. 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 partnerships for federal income
tax purposes. If such challenge were sustained by a court, the Operating
Partnership and each Subsidiary Partnership would be treated as corporations
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
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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 partnership in which the Company has an interest was
taxable as a corporation rather than as a partnership for federal income tax
purposes, the Company likely 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 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 an 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.
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. The Proposed
Acquisition Hotels will be acquired for cash. The Company will allocate the
purchase price among land, building and personal property and will claim
depreciation deductions based on prescribed tax depreciation rates.
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 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 is organized as a Maryland corporation and has
an office in Texas. AGH LP is organized as a Nevada corporation and will not
have any contacts with Texas other than ownership of its limited partnership
interest in the Operating Partnership. The Operating Partnership is 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
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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 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.
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The Company has received a private determination from the Comptroller that
verifies the foregoing Texas franchise tax consequences of this structure.
There can be no assurance, however, that the Comptroller will not revoke the
pronouncements upon which that determination is based. In addition, that
determination will not be binding upon the Comptroller to the extent the
Company or its subsidiaries fail to comply with the factual representations set
forth in the determination.
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 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, presently are not
subject to the Texas franchise tax. The corporate general partners in those
partnerships, however, are subject to the Texas franchise tax. It is expected
that Texas legislators and/or the Comptroller will propose or recommend, as the
case may be, statutory amendments subjecting all comparable limited partners to
the franchise tax or expanding 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, AGH LP and/or
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...............................................
Legg Mason Wood Walker, Incorporated...........................
Montgomery Securities..........................................
Prudential Securities Incorporated.............................
The Robinson-Humphrey Company, Inc.............................
---------
Total...................................................... 5,500,000
=========
</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., Legg Mason Wood Walker,
Incorporated, Montgomery Securities, Prudential Securities 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 public offering,
the public offering price, concessions and reallowances to dealers may be
changed by the Underwriters.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 825,000 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 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 is traded on the NYSE under the symbol "AGT." In order to
maintain the requirements for listing the shares of Common Stock on the NYSE,
the Underwriters have undertaken to sell lots of 100 or more shares of Common
Stock.
The Company and its officers and directors agreed in connection with the IPO
that, for a period of one year ending July 25, 1997, they would not, without
the prior written consent of Smith Barney Inc., sell, offer to sell, solicit
and offer to buy, contract to sell, grant any option to purchase or otherwise
transfer or dispose of any shares of Common Stock or any other securities
convertible into, or exercisable for, shares of Common Stock.
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EXPERTS
The Consolidated Financial Statements of American General Hospitality
Corporation as of September 30, 1996 and for the period from July 31, 1996
through September 30, 1996 and the related financial statement schedule; the
Combined Financial Statements of the AGH Predecessor Hotels as of December 31,
1994 and 1995 and July 30, 1996 and for each of the three years in the period
ended December 29, 1995 and for the period from December 30, 1995 through July
30, 1996 and the related financial statement schedule; the Combined Financial
Statements of the Other Initial 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 Financial Statements of the Days
Inn Lake Buena Vista as of December 31, 1995 and for the year then ended;
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 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. 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.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (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 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. The Commission also
maintains a site on the World Wide Web, the address of which is
http://www.sec.gov, that contains reports, proxy and information statements
and other information regarding issuers, such as the Company, that file
electronically with the Commission. Such reports, proxy statements and other
information concerning the Company can also be inspected at the offices of the
National Association of Securities Dealers, 1735 K Street, N.W., Washington,
D.C. 20006, which supervises the NYSE on which the Company's Common Stock is
traded.
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The Company is 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 furnishes its stockholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
condensed consolidated financial statements for each of the first three
quarters of each fiscal year. The Company includes in such reports annual
audited and quarterly unaudited financial statements for the Lessee.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the information that has
been incorporated by reference in this Prospectus (not including exhibits to
the information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this
Prospectus incorporates). Requests for such copies should be directed to
American General Hospitality Corporation, 3860 West Northwest Highway, Suite
300, Dallas, Texas 75220 (telephone (214) 904-2000), Attention: Kenneth E.
Barr.
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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.
"Acquired Hotels" means the Days Inn Lake Buena Vista, the Holiday Inn
Resort-Monterey and the Hilton Hotel-Durham.
"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 Hotel, the ratio that the average of
the adjusted bases of the personal property in a 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 Hotel at the beginning
and at the end of a taxable year.
"ADR" means average daily room rate.
"AGH GP" means AGH GP, Inc., a Nevada corporation and wholly owned
subsidiary of the Company, which is 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 is a Limited Partner of the Operating
Partnership.
"AGH Predecessor Hotels" means the following four Initial Hotels that were
acquired primarily from partnerships controlled by stockholders 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 operates the Current
Hotels pursuant to the Management Agreements, and certain of its affiliates.
"Alliance Securities" means those shares of Common Stock or OP Units issued
to Wyndham Hotel Corporation and its affiliates pursuant to the Wyndham
Alliance.
"Anti-Abuse Rule" means the regulations issued by the United States Treasury
Department under the Partnership Provisions of the Code that 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 sublease from the Lessee the portion of fourteen of the Current
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 Current
Hotels where alcoholic beverages are sold.
"Board of Directors" means the Board of Directors of the Company.
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"Bylaws" means the Bylaws of the Company.
"Cash Available for Distribution" means Funds From Operations adjusted for
amortization of deferred financing costs, franchise transfer costs and
unearned officers' compensation, 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).
"Current Hotels" means the sixteen hotels that the Company currently owns.
"DFW South Loan" means the non-recourse mortgage on Holiday Inn Dallas DFW
Airport South in the outstanding principal amount as of December 31, 1996 of
approximately $14.0 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.
"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,
one share 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.
145
<PAGE>
"Foreign Investors" means nonresident alien individuals, foreign
corporations, foreign partnerships and foreign trusts and estates.
"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 Hotels.
"French Quarter Loan" means the non-recourse note in the outstanding
principal amount of approximately $9.6 million, as of December 31, 1996, to be
assumed by the Company in connection with the purchase of the French Quarter
Suites Hotel.
"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.
"Hotels" means collectively the Current Hotels and the Proposed Acquisition
Hotels.
"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 acquired
pursuant to the Formation Transactions at the time of the IPO.
"IPO" means the Company's initial public offering of Common Stock.
"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 sets forth the terms of the Lessee's required
capitalization and certain other matters.
"Lessee" means AGH Leasing, L.P., which leases the 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 Company's $100 million line of credit with
Societe Generale, Southwest Agency, Bank One Texas, N.A. and certain other
lenders.
"Lock-up Period" means the one-year period that expires in July 1997.
"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 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 of Common Stock which is the subject of the
Prospectus.
"Offering Price" means the assumed public offering price of the Common Stock
of $24 3/8 per share (which was the last reported sale price on the NYSE on
January 15, 1997).
146
<PAGE>
"OP Units" means units of limited partnership interest in the Operating
Partnership.
"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 two Courtyard by Marriott currently located in
Boise, Idaho and in Durham, North Carolina in which AGHI holds an interest.
"Other Initial Hotels" means the following nine Initial Hotels that were
acquired primarily from persons unaffiliated with AGHI in connection with the
IPO and the related Formation Transactions: 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 Best Western
Albuquerque Airport Hotel.
"Ownership Limitation" means the ownership of more than 9.8% 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 leases the current 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.
"Portfolio Purchase" means the Company's proposed acquisition of the Four
Points by Sheraton Hotel, the French Quarter Suites Hotel and the Sheraton Key
Largo from French Quarter Holdings, Inc. for an aggregate purchase price of
approximately $59.1 million.
"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).
"Proposed Acquisition Hotels" means collectively the Four Points by
Sheraton, Sheraton Key Largo, French Quarter Suites Hotel and the Radisson
Hotel Arlington Heights.
"Radisson Loan" means the one-year mortgage note in the principal amount of
approximately $8.2 million to be assumed by the Company in connection with the
purchase of Radisson Hotel Arlington Heights.
"Registration Rights Agreements" means the Registration Rights Agreement
among the Company and the Limited Partners other than AGH LP and the Plan, the
Registration Rights Agreement entered into by the Company in connection with
acquisition of certain Hotels and the Registration Rights Agreement that will
be entered into between the Company and Wyndham pursuant to the Wyndham
Alliance.
"REIT" means real estate investment trust as defined in Section 856 of the
Code.
"Related Party Tenant" under the Code means, a tenant of the Company's real
property in which the Company, or an owner of 10.0% or more of the Company,
directly or constructively owns 10.0% or more of the ownership interests.
"Rents" means, collectively, Base Rent and Participating Rent.
147
<PAGE>
"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 December 31, 1996 of approximately $4.5
million and $575,800, respectively.
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary Partnerships" means one or more subsidiary partnerships, joint
ventures, general partnerships and limited liability companies through which
the Operating Partnership owns certain of the Hotels.
"Treasury Regulations" means the income tax regulations promulgated under the
Code.
"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 Hotels divided by the total number of guest rooms sold at all
of the Hotels.
"Weighted Average Occupancy" means the total number of guest rooms sold at
all of the Hotels divided by the total number of guest rooms available at all
of the Hotels.
"Wyndham" means Wyndham Hotel Corporation, together with its subsidiaries.
"Wyndham Alliance" means the strategic alliance between the Company and
Wyndham.
148
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
American General Hospitality Corporation
Pro Forma Statements of Operations for the Year Ended December 31, 1995,
the Twelve Months Ended September 30, 1996 and the Nine Months Ended
September 30, 1996 and 1995 (unaudited)................................ F-3
Pro Forma Consolidated Balance Sheet as of September 30, 1996
(unaudited)............................................................ F-10
Report of Independent Accountants....................................... F-14
Consolidated Balance Sheet as of September 30, 1996..................... F-15
Consolidated Statement of Operations for the Period from July 31, 1996
(inception of operations) through September 30, 1996................... F-16
Consolidated Statement of Shareholders' Equity for the Period from April
12, 1996 (date of capitalization) through September 30, 1996........... F-17
Consolidated Statement of Cash Flows for the Period from July 31, 1996
(inception of operations) through September 30, 1996................... F-18
Notes to Consolidated Financial Statements.............................. F-19
Schedule III--Real Estate and Accumulated Depreciation as of September
30, 1996............................................................... F-26
AGH Leasing, L.P.
Pro Forma Combined Statements of Operations for the Year Ended December
31, 1995, the Twelve Months Ended September 30, 1996 and the Nine
Months Ended September 30, 1996 and 1995 (unaudited)................... F-27
Balance Sheet as of September 30, 1996 (unaudited)...................... F-34
Statement of Operations for the Period from July 31, 1996 (inception of
operations) through September 30, 1996 (unaudited)..................... F-35
Statement of Cash Flows for the Period from July 31, 1996 (inception of
operations) through September 30, 1996 (unaudited)..................... F-36
Notes to Financial Statements........................................... F-37
AGH Predecessor Hotels
The AGH Predecessor Hotels represent four of the Initial Hotels
acquired, concurrent with the Company's initial public offering
primarily from limited partnerships controlled by shareholders of
American General Hospitality, Inc. The AGH Predecessor Hotels are
deemed to be the predecessor of the Company.
Report of Independent Accountants....................................... F-40
Combined Balance Sheets as of December 30, 1994, December 29, 1995 and
July 30, 1996.......................................................... F-41
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 for the period from December 30, 1995 through
July 30, 1996.......................................................... F-42
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 and for the period from December 30, 1995 through
July 30, 1996.......................................................... F-43
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 for the period from December 30, 1995 through
July 30, 1996.......................................................... F-44
Notes to Combined Financial Statements.................................. F-45
Schedule III--Real Estate and Accumulated Depreciation as of July 30,
1996................................................................... F-50
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Other Initial Hotels
The Other Initial Hotels represent nine of the Initial Hotels acquired,
concurrent with the Company's initial public offering, primarily from
parties unaffiliated with the Company through contracts with the
sellers acquired from an AGHI affiliate.
Report of Independent Accountants....................................... F-51
Combined Balance Sheets as of December 31, 1994 and 1995 (audited) and
June 30, 1996 (unaudited).............................................. F-52
Combined Statements of Operations for each of the Three Years in the
Period Ended
December 31, 1995 (audited) and the Six Months Ended June 30, 1996
(unaudited)............................................................ F-53
Combined Statements of Equity for each of the Three Years in the Period
Ended
December 31, 1995 (audited) and the Six Months Ended June 30, 1996
(unaudited)............................................................ F-54
Combined Statements of Cash Flows for each of the Three Years in the
Period Ended
December 31, 1995 (audited) and the Six Months ended June 30, 1996
(unaudited)............................................................ F-55
Notes to Combined Financial Statements.................................. F-56
Schedule III--Real Estate and Accumulated Depreciation as of December
31, 1995............................................................... F-62
</TABLE>
<TABLE>
<S> <C>
Days Inn Lake Buena Vista hotel
Represents the Days Inn Lake Buena Vista hotel in Orlando, Florida (one
of the Acquired Hotels) acquired by the Company on October 22, 1996.
Audited financial statements are provided in accordance with the
significant business acquisition rules and regulations of the
Securities and Exchange Commission.
</TABLE>
<TABLE>
<S> <C>
Report of Independent Accountants....................................... F-63
Balance Sheets as of December 31, 1995 (audited) and September 30, 1996
(unaudited)............................................................ F-64
Statements of Operations for the Year Ended December 31, 1995 (audited)
and the Nine Months Ended September 30, 1996 and 1995 (unaudited)...... F-65
Statements of Equity for the Year Ended December 31, 1995 (audited) and
the Nine Months Ended September 30, 1996 and 1995 (unaudited).......... F-66
Statements of Cash Flows for the Year Ended December 31, 1995 (audited)
and the Nine Months Ended September 30, 1996 and 1995 (unaudited)...... F-67
Notes to Financial Statements........................................... F-68
</TABLE>
F-2
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995, THE TWELVE MONTHS ENDED SEPTEMBER 30,
1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
The following unaudited Pro Forma Statements of Operations of the Company
for the year ended December 31, 1995, the twelve months ended September 30,
1996, and the nine months ended September 30, 1996 and 1995 are presented as
if the consummation of the IPO and related Formation Transactions, the
acquisition of all Hotels and the consummation of the Offering and application
of the net proceeds therefrom had occurred on January 1, 1995 and all of the
Hotels had been leased pursuant to the Participating Leases as of that date.
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 IPO and related Formation
Transactions, the acquisition of all Hotels and the consummation of the
Offering have been made.
The following unaudited Pro Forma Statements of Operations 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.
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
OFFERING
PROPOSED AND LINE
INITIAL ACQUIRED ACQUISITION OF
HOTELS HOTELS HOTELS CREDIT TOTAL
----------- ---------- ----------- -------- -----------
(A) (A) (A) (B)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Participating Lease
revenue (C).......... $24,754,071 $7,967,997 $ 7,247,372 $39,969,440
Interest income (D)... 31,500 31,500
----------- ---------- ----------- -------- -----------
Total revenue......... 24,785,571 7,967,997 7,247,372 40,000,940
----------- ---------- ----------- -------- -----------
Depreciation (E)...... 7,404,235 1,620,173 2,032,316 11,056,724
Amortization (F)...... 702,628 123,117 14,000 $235,714 1,075,459
Real estate and
personal property
taxes and property
insurance (G)........ 2,165,073 961,139 1,401,044 4,527,256
General and
administrative (H)... 1,137,857 240,918 321,225 1,700,000
Ground lease expense
(G).................. 881,217 881,217
Amortization of
unearned officers'
compensation (I)..... 88,750 88,750
Interest expense (J).. 1,886,733 1,548,488 (316,001) 3,119,220
----------- ---------- ----------- -------- -----------
Total expenses........ 14,266,493 2,945,347 5,317,073 (80,287) 22,448,626
----------- ---------- ----------- -------- -----------
Income before minority
interest............... 10,519,078 5,022,650 1,930,299 80,287 17,552,314
Minority interest (K)... 1,967,068 2,122,916
----------- -----------
Net income applicable to
common shareholders.... $ 8,552,010 $15,429,398
=========== ===========
Net income per common
share.................. $ 1.04 $ 1.12
=========== ===========
Weighted average number
of shares of Common
Stock outstanding...... 8,262,008 13,787,405
=========== ===========
</TABLE>
See notes beginning on page F-5.
F-3
<PAGE>
TWELVE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
HISTORICAL
JULY 31,
1996 OFFERING
THROUGH PROPOSED AND
SEPTEMBER PRO FORMA INITIAL ACQUIRED ACQUISITION LINE OF
30, 1996 ADJUSTMENTS HOTELS HOTELS HOTELS CREDIT TOTAL
---------- ----------- ----------- ---------- ----------- -------- -----------
(L) (M) (A) (A) (A) (B)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Participating Lease
revenue (C).......... $5,218,526 $22,246,651 $27,465,177 $8,739,652 $ 8,450,400 $44,655,229
Interest income (D)... 32,227 (727) 31,500 31,500
---------- ----------- ----------- ---------- ----------- -------- -----------
Total revenue......... 5,250,753 22,245,924 27,496,677 8,739,652 8,450,400 44,686,729
---------- ----------- ----------- ---------- ----------- -------- -----------
Depreciation (E)...... 1,008,874 5,075,499 6,084,373 1,620,173 2,032,316 9,736,862
Amortization (F)...... 116,572 586,056 702,628 123,117 14,000 $235,714 1,075,459
Real estate and per-
sonal property taxes
and property insur-
ance (G)............. 511,115 1,854,319 2,365,434 961,139 1,401,044 4,727,617
General and adminis-
trative (H).......... 194,226 943,631 1,137,857 240,918 321,225 1,700,000
Ground lease expense
(G).................. 218,000 744,993 962,993 962,993
Amortization of
unearned officers'
compensation (I)..... 14,792 73,958 88,750 88,750
Interest expense (J).. 347,622 1,039,876 1,387,498 1,548,488 183,234 3,119,220
---------- ----------- ----------- ---------- ----------- -------- -----------
Total expenses........ 2,411,201 10,318,332 12,729,533 2,945,347 5,317,073 418,948 21,410,901
---------- ----------- ----------- ---------- ----------- -------- -----------
Income before minority
interest............... 2,839,552 11,927,592 14,767,144 5,794,305 3,133,327 (418,948) 23,275,828
Minority interest (K)... 545,102 2,761,456 2,815,163
---------- ----------- -----------
Net income applicable to
common shareholders.... $2,294,450 $12,005,688 $20,460,665
========== =========== ===========
Net income per common
share.................. $ 0.29 $ 1.45 $ 1.48
========== =========== ===========
Weighted average number
of shares of Common
Stock outstanding...... 8,002,331 8,262,008 13,787,405
========== =========== ===========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
HISTORICAL
JULY 31,
1996 OFFERING
THROUGH PROPOSED AND
SEPTEMBER PRO FORMA INITIAL ACQUIRED ACQUISITION LINE OF
30, 1996 ADJUSTMENTS HOTELS HOTELS HOTELS CREDIT TOTAL
---------- ----------- ----------- ---------- ----------- -------- -----------
(L) (M) (A) (A) (A) (B)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Participating Lease
revenue (C).......... $5,218,526 $16,308,885 $21,527,411 $6,798,749 $ 6,830,070 $35,156,230
Interest income (D)... 32,227 (8,602) 23,625 23,625
---------- ----------- ----------- ---------- ----------- -------- -----------
Total revenue......... 5,250,753 16,300,283 21,551,036 6,798,749 6,830,070 35,179,855
---------- ----------- ----------- ---------- ----------- -------- -----------
Depreciation (E)...... 1,008,874 3,490,162 4,499,036 1,215,130 1,524,237 7,238,403
Amortization (H)...... 116,572 410,399 526,971 90,775 10,500 176,786 805,032
Real estate and per-
sonal property taxes
and property insur-
ance (G)............. 511,115 1,262,960 1,774,075 609,185 1,050,783 3,434,043
General and adminis-
trative (H).......... 194,226 659,167 853,393 180,689 240,918 1,275,000
Ground lease expense
(G).................. 218,000 504,245 722,245 722,245
Amortization of
unearned officers'
compensation (I)..... 14,792 51,771 66,563 66,563
Interest expense (J).. 347,622 810,090 1,157,712 1,174,270 2,465 2,334,447
---------- ----------- ----------- ---------- ----------- -------- -----------
Total expenses........ 2,411,201 7,188,794 9,599,995 2,095,779 4,000,708 179,251 15,875,733
---------- ----------- ----------- ---------- ----------- -------- -----------
Income before minority
interest............... 2,839,552 9,111,489 11,951,041 4,702,970 2,829,362 (179,251) 19,304,122
Minority interest (K)... 545,102 2,234,845 2,334,794
---------- ----------- -----------
Net income applicable to
common shareholders.... $2,294,450 $ 9,716,196 $16,969,328
========== =========== ===========
Net income per common
share.................. $ 0.29 $ 1.18 $ 1.23
========== =========== ===========
Weighted average number
of shares of Common
Stock outstanding...... 8,002,331 8,262,008 13,787,405
========== =========== ===========
</TABLE>
See notes beginning on page F-5.
F-4
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PROPOSED OFFERING
INITIAL ACQUIRED ACQUISITION AND LINE
HOTELS HOTELS HOTELS OF CREDIT TOTAL
----------- ---------- ----------- --------- -----------
(A) (A) (A) (B)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Participating Lease
revenue (C).......... $18,816,305 $6,027,094 $5,627,042 $30,470,441
Interest income (D)... 23,625 23,625
----------- ---------- ---------- --------- -----------
Total revenue......... 18,839,930 6,027,094 5,627,042 30,494,066
----------- ---------- ---------- --------- -----------
Depreciation (E)...... 5,553,176 1,215,130 1,524,237 8,292,543
Amortization (F)...... 526,971 90,775 10,500 $ 176,786 805,032
Real estate and
personal property
taxes and property
insurance (G)........ 1,623,805 609,185 1,050,783 3,283,773
General and
administrative (H)... 853,392 180,689 240,919 1,275,000
Ground lease expense
(G).................. 660,913 660,913
Amortization of
unearned officers'
compensation (I)..... 66,563 66,563
Interest expense (J).. 1,157,712 1,174,270 2,465 2,334,447
----------- ---------- ---------- --------- -----------
Total expenses........ 10,442,532 2,095,779 4,000,709 179,251 16,718,271
----------- ---------- ---------- --------- -----------
Income before minority
interest............... 8,397,398 3,931,315 1,626,333 (179,251) 13,775,795
Minority interest (K) .. 1,570,313 1,666,154
----------- -----------
Net income applicable to
common shareholders.... $ 6,827,085 $12,109,641
=========== ===========
Net income per common
share.................. $ 0.83 $ 0.88
=========== ===========
Weighted average number
of shares of Common
Stock outstanding...... 8,262,008 13,787,405
=========== ===========
</TABLE>
(A) Represents the pro forma statements of operations of the Initial Hotels,
Acquired Hotels and Proposed Acquisition Hotels as if all of the Hotels were
acquired on January 1, 1995 and leased to the Lessee pursuant to the
Participating Leases since that date.
(B) Represents amortization of deferred loan costs associated with the
commitment to be received by the Company to increase the borrowing capacity
under the Line of Credit to $150 million. Also represents adjustments to
interest expense due to the change in borrowings outstanding after adjustments
for the Offering and Line of Credit.
(C) 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 revenues of
the Hotels. The departmental revenue thresholds in the Participating Lease are
seasonally adjusted for interim periods and certain of the Participating Lease
formulas adjust in January 1997 and/or January 1998. See "The Hotels--The
Participating Leases."
F-5
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO STATEMENTS OF OPERATIONS
The Participating Lease revenue is comprised of the following:
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED ENDED
DECEMBER SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
31, 1995 1996 1996 1995
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Base rent............... $28,677,000 $28,677,000 $21,507,750 $21,507,750
Excess of Participating
Rent over Base Rent.... 11,292,440 15,978,229 13,648,480 8,962,691
----------- ----------- ----------- -----------
Total Participating
Lease revenue........ $39,969,440 $44,655,229 $35,156,230 $30,470,441
=========== =========== =========== ===========
</TABLE>
(D) 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 commencing July 31, 1996 and bears
interest at 10% per annum.
(E) Represents depreciation on the Hotels. Pro forma 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.
At September 30, 1996, the Company's pro forma investment in hotel
properties, at cost, consists of the following:
<TABLE>
<CAPTION>
AGH OTHER PROPOSED
PREDECESSOR INITIAL ACQUIRED ACQUISITION
HOTELS HOTELS HOTELS HOTELS TOTAL
----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Land.................... $ 1,496,515 $ 11,311,000 $ 6,004,000 $ 7,179,375 $ 25,990,890
Building and
improvements........... 19,293,233 134,699,284 52,690,300 62,460,567 269,143,384
Furniture, fixtures and
equipment.............. 2,847,464 6,560,598 1,345,700 2,153,813 12,907,575
----------- ------------ ----------- ----------- ------------
$23,637,212 $152,570,882 $60,040,000 $71,793,755 $308,041,849
=========== ============ =========== =========== ============
</TABLE>
(F) Represents amortization of deferred loan costs related to the Line of
Credit, amortization of franchise transfer costs and amortization of
organizational costs and other deferred expenses. Deferred loan costs of
$3,325,000 (at cost) are amortized utilizing a method which approximates the
interest method over four years which is the term of the Line of Credit
(including option periods). Franchise transfer costs of $949,000 (at cost) are
amortized over the term of the related franchise agreements which approximates
10 years. Organizational costs and other deferred expenses of $1,340,887 (at
cost) are amortized over terms ranging from 5 to 12 years.
F-6
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO STATEMENTS OF OPERATIONS--(CONTINUED)
(G) Represents amounts to be paid by the Operating Partnership. Such amounts
were derived from the historical amounts paid with respect to the Hotels
adjusted for the probable real estate and personal property tax increases.
Four of the Other Initial Hotels (Holiday Inn Park Plaza, LeBaron Airport
Hotel, Holiday Inn Mission Valley and Hilton Hotel--Toledo) and one Acquired
Hotel (Days Inn Lake Buena Vista) are located in states which require tax
reassessments based primarily on the price as specified in a sale to an
unrelated third party.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------
PROPOSED
INITIAL ACQUIRED ACQUISITION
HOTELS HOTELS HOTELS TOTAL
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Real estate and personal
property taxes..................... $1,854,104 $803,866 $1,240,000 $3,897,970
Property insurance.................. 310,969 157,273 161,044 629,286
---------- -------- ---------- ----------
Total real estate and
personal property taxes
and insurance.................... $2,165,073 $961,139 $1,401,044 $4,527,256
========== ======== ========== ==========
Ground lease expense................ $ 881,217 $ 881,217
========== ==========
</TABLE>
<TABLE>
<CAPTION>
COMBINED
HISTORICAL
JULY 31, TWELVE MONTHS ENDED SEPTEMBER 30, 1996
1996 ------------------------------------------
THROUGH PROPOSED
SEPTEMBER PRO FORMA INITIAL ACQUIRED ACQUISITION
30, 1996 ADJUSTMENTS HOTELS HOTELS HOTELS TOTAL
---------- ----------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Real estate and
personal property
taxes................. $ 419,376 $1,589,431 $2,008,807 $803,866 $1,240,000 $4,052,673
Property insurance..... 91,739 264,888 356,627 157,273 161,044 674,944
--------- ---------- ---------- -------- ---------- ----------
Total real estate and
personal property
taxes and
insurance........... $ 511,115 $1,854,319 $2,365,434 $961,139 $1,401,044 $4,727,617
========= ========== ========== ======== ========== ==========
Ground lease expense... $ 218,000 $ 744,993 $ 962,993 $ 962,993
========= ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
COMBINED
HISTORICAL
JULY 31, NINE MONTHS ENDED SEPTEMBER 30, 1996
1996 ------------------------------------------
THROUGH PROPOSED
SEPTEMBER PRO FORMA INITIAL ACQUIRED ACQUISITION
30, 1996 ADJUSTMENTS HOTELS HOTELS HOTELS TOTAL
---------- ----------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Real estate and
personal
property taxes........ $ 419,376 $1,088,832 $1,508,208 $507,980 $ 930,000 $2,946,188
Property insurance..... 91,739 174,128 265,867 101,205 120,783 487,855
--------- ---------- ---------- -------- ---------- ----------
Total real estate and
personal property
taxes and
insurance........... $ 511,115 $1,262,960 $1,774,075 $609,185 $1,050,783 $3,434,043
========= ========== ========== ======== ========== ==========
Ground lease expense... $ 218,000 $ 504,245 $ 722,245 $ 722,245
========= ========== ========== ==========
</TABLE>
F-7
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO STATEMENTS OF OPERATIONS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995
------------------------------------------
PROPOSED
INITIAL ACQUIRED ACQUISITION
HOTELS HOTELS HOTELS TOTAL
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Real estate and personal property
taxes.............................. $1,390,578 $507,980 $ 930,000 $2,828,558
Property insurance.................. 233,227 101,205 120,783 455,215
---------- -------- ---------- ----------
Total real estate and personal
property taxes and insurance..... $1,623,805 $609,185 $1,050,783 $3,283,773
========== ======== ========== ==========
Ground lease expense................ $ 660,913 $ 660,913
========== ==========
</TABLE>
(H) Represents general and administrative expenses to be paid or reimbursed
to the Company by the Operating Partnership. The following annual general and
administrative expenses are based on historical general and administrative
expenses as well as estimated 1997 expenses:
<TABLE>
<S> <C>
Salaries and wages (including directors fees)................ $ 688,500
Professional fees............................................ 334,500
Directors' and officers' insurance........................... 94,500
Allocated rent, supplies and other........................... 103,000
Other operating expenses..................................... 479,500
----------
$1,700,000
==========
</TABLE>
(I) 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
$17.75 per share, the price per share of Common Stock issued in the IPO).
(J) Represents interest expense on the following debt for the year ended
December 31, 1995:
<TABLE>
<S> <C>
Holiday Inn Dallas DFW Airport South(1)....................... $1,181,102
Courtyard by Marriott--Meadowlands(2)......................... 389,630
French Quarter Suites Hotel(3)................................ 932,081
Radisson Hotel Arlington Heights(4)........................... 616,407
----------
$3,119,220
==========
</TABLE>
Interest expense for the twelve months ended September 30, 1996 and the nine
months ended September 30, 1996 and 1995 are calculated in the same manner as
the year ended December 31, 1995 interest expense.
(1) Represents debt assumed by the Operating Partnership of approximately
$14.1 million collateralized by 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% per annum.
(2) Represents two notes assumed by the Operating Partnership totalling
approximately $5.2 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% per annum, respectively.
F-8
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO STATEMENTS OF OPERATIONS--(CONTINUED)
(3) Represents debt assumed by the Operating Partnership of approximately
$9.6 million collateralized by the French Quarter Suites Hotel. The debt
matures in July 2002 and bears interest at a fixed rate of 9.75% per annum.
(4) Represents debt assumed by the Operating Partnership of approximately
$8.2 million collateralized by the Radisson Hotel Arlington Heights.
Interest only payments are due quarterly in arrears. The debt will mature
on the first anniversary of the acquisition by the Operating Partnership
and bears interest at a fixed rate of 7.5% per annum.
Approximately $3.0 million of borrowings under the Line of Credit were
borrowed to fund construction and renovations and were outstanding since
September 18, 1996. The Line of Credit interest expense is based on the 30-day
LIBOR plus 1.85% (7.3%). Such borrowings are collateralized by first mortgage
liens on the Hotels excluding the hotels which collateralize other borrowings
described previously.
As of December 31, 1996, the Company had invested approximately $10.7
million in capital improvements and renovations at the Current Hotels. The
Company has budgeted approximately $33.3 million for additional renovations
and refurbishments at these hotels. In addition, the Company has budgeted
approximately $14.6 million to be spent on renovations and refurbishments at
the four Proposed Acquisition Hotels during 1997. Interest expense related to
borrowings incurred after September 30, 1996 to fund these estimated costs
over the next twelve months is not included in the pro forma statements of
operations.
(K) Calculated as 12.1% of income before minority interest.
(L) Represents the Company's historical statement of operations for the
period from July 31, 1996 (inception of operations) to September 30, 1996.
(M) Represents the pro forma statement of operations of the Initial Hotels
for periods prior to July 31, 1996 (inception of operations) adjusted for the
acquisition of the Initial Hotels by the Company and related Formation
Transactions.
F-9
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
The following unaudited Pro Forma Consolidated Balance Sheet is presented as
if the acquisition of the Acquired Hotels and the Proposed Acquisition Hotels
and the comsummation of the Offering and the application of the net proceeds
therefrom as set forth under the caption "Use of Proceeds" had occurred on
September 30, 1996. Such pro forma information is based upon the consolidated
balance sheet of the Company and 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 acquisition of all Hotels
and the consummation of 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 September 30, 1996, nor does
it purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
ACQUIRED HOTELS OFFERING AND
AND PROPOSED LINE OF
HISTORICAL ACQUISITION HOTELS CREDIT PRO FORMA
------------ ------------------ ------------- ------------
(A) (B) (C)
<S> <C> <C> <C> <C>
ASSETS
Investment in hotel
properties, net........ $175,613,813 $131,833,755 (D) $307,447,568
Cash and cash
equivalents............ 4,186,235 (3,686,235)(E) $ 9,653,108 (E) 10,153,108
Accounts receivable,
net.................... 4,100,406 4,100,406
Deferred expenses, net.. 3,106,315 1,567,000 (F) 825,000 (F) 5,498,315
Other assets............ 538,323 538,323
Advances to Lessee...... 315,000 315,000
------------ ------------ ------------- ------------
Total assets........ $187,860,092 $129,714,520 $ 10,478,108 $328,052,720
============ ============ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt.................... $ 19,297,508 $ 17,778,565 (G) $ 37,076,073
Debt, Line of Credit.... 3,000,000 111,435,955 (H) $(114,435,955)(H)
Distributions payable... 2,790,057 2,790,057
Accounts payable,
accrued expenses and
other liabilities...... 6,069,701 125,000 (I) 6,194,701
Minority interest in
Operating Partnership.. 29,303,428 (63,703)(J) 4,881,294 (J) 34,121,019
------------ ------------ ------------- ------------
Total liabilities... 60,460,694 129,150,817 (109,429,661) 80,181,850
------------ ------------ ------------- ------------
Stockholders' equity:
Common stock.......... 82,620 254 (K) 55,000 (K) 137,874
Additional paid-in
capital.............. 128,163,784 563,449 (L) 119,852,769 (L) 248,580,002
Unearned officers'
compensation......... (872,708) (872,708)
Retained earnings..... 25,702 25,702
------------ ------------ ------------- ------------
Total stockholders'
equity............. 127,399,398 563,703 119,907,769 247,870,870
------------ ------------ ------------- ------------
Total liabilities
and stockholders'
equity............. $187,860,092 $129,714,520 $ 10,478,108 $328,052,720
============ ============ ============= ============
</TABLE>
See Notes to Pro Forma Consolidated Balance Sheet.
F-10
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Represents the historical balance sheet of the Company as of September 30,
1996.
(B) Represents the acquisition of the assets relating to the Acquired Hotels
and the Proposed Acquisition Hotels, including estimated closing costs. The
acquisitions are financed through borrowings under the Company's Line of
Credit, assumption of indebtedness, cash on hand (including net proceeds from
the Offering--See Note E) and issuance of 25,397 shares of restricted Common
Stock. Additionally deferred expenses of $1,300,000 related to the Days Inn
Lake Buena Vista hotel and $267,000 of franchise transfer costs related to the
Acquired Hotels and Proposed Acquisition Hotels were incurred. See following
notes.
(C) Represents the net proceeds from the Offering and related allocation to
minority interest and deferred financing fees incurred in connection with the
Company's receipt of the commitment from its lenders to increase its Line of
Credit.
(D) Increase represents the purchase of the following Acquired Hotels and
Proposed Acquisition Hotels, including estimated closing costs (the purchase
included only the land, building and improvements and furniture, fixtures and
equipment except for the $1.3 million allocated to deferred costs from the
Days Inn Lake Buena Vista hotel acquisition):
Purchase of Acquired Hotels, including closing costs:
<TABLE>
<S> <C>
Days Inn Lake Buena Vista.................................. $ 31,850,000
Holiday Inn Resort Monterey................................ 15,790,000
Hilton Hotel--Durham....................................... 12,400,000
------------
Total increase due to the purchase of the Acquired Hotels.. 60,040,000
------------
Purchase of the Proposed Acquisition Hotels, including estimated
closing costs:
Radisson Hotel Arlington Heights........................... 11,818,755
Four Points by Sheraton.................................... 17,300,000
French Quarter Suites Hotel................................ 16,300,000
Sheraton Key Largo......................................... 26,375,000
------------
Total increase due to the purchase of the Proposed
Acquisition Hotels........................................ 71,793,755
------------
Total increase due to the purchase of the Acquired Hotels
and Proposed Acquisition Hotels........................... $131,833,755
============
</TABLE>
The allocation of the Acquired Hotels' and Proposed Acquisition Hotels'
purchase price to the assets acquired consists of the following:
<TABLE>
<CAPTION>
PROPOSED
ACQUIRED ACQUISITION
HOTELS HOTELS TOTAL
----------- ----------- ------------
<S> <C> <C> <C>
Land................................ $ 6,004,000 $ 7,179,375 $ 13,183,375
Building and improvements........... 52,690,300 62,460,567 115,150,867
Furniture, fixtures and equipment... 1,345,700 2,153,813 3,499,513
----------- ----------- ------------
$60,040,000 $71,793,755 $131,833,755
=========== =========== ============
</TABLE>
The acquisitions have been accounted for as purchases.
As of December 31, 1996, the Company had invested approximately $10.7
million in capital improvements and renovations at the Current Hotels. The
Company has budgeted for 1997 approximately $33.3 million for
F-11
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
additional renovations and refurbishments at these hotels. In addition, the
Company has budgeted approximately $14.5 million to be spent on renovations and
refurbishments at the four Proposed Acquisition Hotels during 1997. These
estimated costs which will be made over the next twelve months are 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
Operations.
(E) Net decrease represents the following:
<TABLE>
<CAPTION>
ACQUIRED
HOTELS AND
PROPOSED OFFERING AND
ACQUISITION LINE OF
HOTELS CREDIT TOTAL
------------ ------------- ------------
<S> <C> <C> <C>
Gross proceeds of the Offering..... $ 134,062,500 $134,062,500
Underwriters' discount............. (7,038,281) (7,038,281)
Other expected expenses of the
Offering.......................... (2,235,156) (2,235,156)
Cash payments to acquire the
Acquired Hotels, including closing
costs (The Company also issued
$500,000 of restricted Common
Stock)............................ $(59,540,000) (59,540,000)
Cash payments to acquire the
Proposed Acquisition Hotels
including closing costs (The
Company also assumed debt of
$17,778,565)...................... (54,015,190) (54,015,190)
Payment of anticipated loan costs
related to the Line of Credit..... (700,000) (700,000)
Payment of franchise transfer costs
and other deferred expenses....... (1,567,000) (1,567,000)
Borrowings (payments) under Line of
Credit............................ 111,435,955 (114,435,955) (3,000,000)
------------ ------------- ------------
$ (3,686,235) $ 9,653,108 $ 5,966,873
============ ============= ============
</TABLE>
The Company's borrowing limit under its Line of Credit is $100 million. The
Company has received a commitment from its lenders to increase the line to $150
million. The Company will be required to utilize a portion of the net proceeds
from the Offering to fund the acquisition of certain of the Proposed
Acquisition Hotels.
(F) Net increase represents the following:
<TABLE>
<S> <C>
Deferred costs related to the acquisition of Days Inn Lake
Buena Vista................................................. $1,300,000
Franchise transfer costs relating to the Acquired Hotels and
Proposed Acquisition Hotels................................. 267,000
----------
1,567,000
Deferred loan costs related to the Line of Credit............ 825,000
----------
$2,392,000
==========
</TABLE>
Deferred loan costs related to the increase in the borrowing limit under the
Company's Line of Credit consist of a commitment fee, attorney fees, appraisal
costs, surveys, etc. to be paid from the proceeds of the Offering ($700,000)
and a fee payable at the date the Company exercises its option to extend the
term of the Line of Credit ($125,000).
F-12
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
(G) Represents debt assumed in connection with the acquisitions of the
Radisson Hotel Arlington Heights ($8,218,755) and the French Quarter Suites
Hotel ($9,559,810). The Radisson Hotel Arlington Heights debt bears interest at
a fixed rate of 7.5% and will mature on the first anniversary of the
acquisition by the Operating Partnership. The French Quarter Suites Hotel debt
bears interest at a fixed rate of 9.75% and matures on July 2002. Each hotel
collateralizes the related debt.
(H) Represents the repayment of borrowings after the purchase of the Acquired
Hotels and Proposed Acquisition Hotels and related transactions and use of the
net proceeds from the Offering. The Company's borrowing limit under its Line of
Credit is $100 million. The Company has received a commitment from its lenders
to increase the Line of Credit to $150 million.
(I) Represents deferred loan costs which are payable at the date the Company
exercises its option to extend the term of the Line of Credit.
(J) Represents the recognition of minority interest in the Operating
Partnership that will not be owned by the Company (12.1%).
(K) Represents the $0.01 par value of the 25,397 shares of Common Stock
issued in connection with the acquisition of the Days Inn Lake Buena Vista
hotel and the Offering.
(L) Represents the following proposed transactions:
<TABLE>
<S> <C>
Gross proceeds of the Offering............................ $134,062,500
Underwriters' discount.................................... (7,038,281)
Other estimated expenses of the Offering.................. (2,235,156)
Par value of Common Stock................................. (55,254)
Shares issued in connection with the acquisition of the
Days Inn Lake Buena Vista hotel ......................... 500,000
Allocation to minority interest in Operating
Partnership.............................................. (4,817,591)
------------
$120,416,218
============
</TABLE>
The pro forma consolidated balance sheet does not include any proceeds from
the sale of Common Stock or OP Units (the "Alliance Securities") under the
Wyndham Alliance. In connection with the conversion of certain hotels to the
Wyndham brand, Wyndham will acquire the Alliance Securities with a value equal
to nine times the estimated franchise fee that is payable to Wyndham during the
first twelve months such hotel is operated as a Wyndham hotel.
The Company anticipates the Le Baron Airport Hotel to be converted to the
Wyndham brand in April 1997. Accordingly, approximately $2.5 million of
Alliance Securities are anticipated being sold pursuant to the Wyndham Alliance
with respect to this hotel.
F-13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
American General Hospitality Corporation
We have audited the accompanying consolidated balance sheet and financial
statement schedule of American General Hospitality Corporation as of September
30, 1996 and the related consolidated statements of operations, shareholders'
equity and cash flows for the period from July 31, 1996 (inception of
operations) through September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
General Hospitality Corporation as of September 30, 1996 and the consolidated
results of their operations and their cash flows for the period from July 31,
1996 (inception of operations) through September 30, 1996 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Dallas, Texas
November 27, 1996, except for Note 10,
as to which the date is January 8, 1997
F-14
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investment in hotel properties:
Land and land improvements.......................................... $ 12,523,202
Buildings and improvements.......................................... 152,052,563
Furniture, fixtures and equipment................................... 10,018,789
Construction-in-progress............................................ 3,580,951
------------
178,175,505
Less: accumulated depreciation....................................... (2,561,692)
------------
Net investment in hotel properties................................... 175,613,813
Cash and cash equivalents............................................ 4,186,235
Percentage lease receivable--AGH Leasing, L.P........................ 4,093,764
Deferred expenses, net............................................... 3,106,315
Other assets......................................................... 544,965
Note receivable--Lessee.............................................. 315,000
------------
Total assets..................................................... $187,860,092
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt................................................................. $ 19,297,508
Debt, Line of Credit................................................. 3,000,000
Distributions payable................................................ 2,790,057
Accounts payable, accrued expenses and other liabilities............. 6,069,701
Minority interest in Operating Partnership........................... 29,303,428
------------
Total liabilities................................................ 60,460,694
------------
Commitments and contingencies (Notes 4 and 5)
Shareholders' equity:
Common stock $0.01 par value per share, 100,000,000 shares
authorized,
8,262,008 shares issued and outstanding............................. 82,620
Additional paid-in capital........................................... 128,163,784
Unearned officers' compensation...................................... (872,708)
Earnings in excess of distributions.................................. 25,702
------------
Total shareholders' equity....................................... 127,399,398
------------
Total liabilities and shareholders' equity....................... $187,860,092
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JULY 31, 1996 (INCEPTION OF OPERATIONS) THROUGH SEPTEMBER
30, 1996
<TABLE>
<S> <C>
Revenues:
Participating Lease revenue ....................................... $5,218,526
Interest income ................................................... 32,227
----------
Total revenue ................................................... 5,250,753
----------
Expenses:
Depreciation ...................................................... 1,008,874
Amortization of deferred loan costs ............................... 104,167
Amortization of franchise fees..................................... 10,877
Amortization of other deferred expenses............................ 1,528
Real estate and personal property taxes and property insurance .... 511,115
General and administrative ........................................ 194,226
Ground lease expense .............................................. 218,000
Amortization of unearned officers' compensation ................... 14,792
Interest expense .................................................. 347,622
----------
Total expenses .................................................. 2,411,201
----------
Income before minority interest ..................................... 2,839,552
Minority interest ................................................... 545,102
----------
Net income applicable to common shareholders .................... $2,294,450
==========
Per Common Share Information:
Net income per common share ..................................... $ 0.29
==========
Weighted average number of common shares outstanding ................ 8,002,331
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 12, 1996 (DATE OF CAPITALIZATION) THROUGH SEPTEMBER
30, 1996
<TABLE>
<CAPTION>
ADDITIONAL UNEARNED EARNINGS IN
COMMON STOCK PAID-IN OFFICERS' EXCESS OF
SHARES DOLLARS CAPITAL COMPENSATION DISTRIBUTIONS TOTAL
--------- ------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common
shares, net of offering
expenses and allocation
to minority interest
($1,974,994)........... 8,212,008 $82,120 $127,276,784 $127,358,904
Issuance of officers'
shares................. 50,000 500 887,000 $(887,500)
Distributions declared
September 28, 1996
($0.2746 per share).... $(2,268,748) (2,268,748)
Amortization of unearned
officers'
compensation........... 14,792 14,792
Net income.............. 2,294,450 2,294,450
--------- ------- ------------ --------- ----------- ------------
Balance at September 30,
1996................... 8,262,008 $82,620 $128,163,784 $(872,708) $ 25,702 $127,399,398
========= ======= ============ ========= =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JULY 31, 1996 (INCEPTION OF OPERATIONS) THROUGH SEPTEMBER
30, 1996
<TABLE>
<S> <C>
Cash flow from operating activities:
Net income................................................... $ 2,294,450
Adjustments to reconcile net income to net cash provided by
operating
activities, net of effects of acquisitions:
Depreciation............................................... 1,008,874
Amortization............................................... 131,364
Minority interest.......................................... 545,102
Changes in assets and liabilities:
Participating Lease rents receivable--AGH Leasing, L.P..... (4,093,764)
Payment of organization costs and franchise fees........... (722,887)
Other assets............................................... (544,965)
Accounts payable, accrued expenses and other liabilities... 6,069,701
-------------
Net cash flow provided by operating activities........... 4,687,875
-------------
Cash flows from investing activities:
Purchase of hotel properties and related assets.............. (126,645,935)
Improvements and additions to hotel properties............... (3,580,951)
-------------
Net cash flow used in investing activities............... (130,226,886)
-------------
Cash flows from financing activities:
Proceeds from borrowings..................................... 13,000,000
Net proceeds from public offering............................ 129,333,898
Principal payments on borrowings............................. (10,108,752)
Payments for deferred loan costs............................. (2,500,000)
-------------
Net cash flow provided by financing activities........... 129,725,146
-------------
Net change in cash and cash equivalents...................... 4,186,135
Cash and cash equivalents as of July 31, 1996 (inception of
operations)................................................... 0
-------------
Cash and cash equivalents as of September 30, 1996............. $ 4,186,135
=============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest..................... $ 309,435
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND INITIAL PUBLIC OFFERING
Organization--American General Hospitality Corporation (the "Company" or the
"Registrant") was incorporated and formed on April 12, 1996 as a Maryland
corporation which intends to qualify as a real estate investment trust
("REIT"). The Company commenced operations on July 31, 1996 (see Initial
Public Offering discussion below). Upon commencement of operations, the
Company acquired equity interests in 13 hotels (the "Initial Hotels"). Four of
the Initial Hotels (the "AGH Predecessor Hotels") were acquired primarily from
limited partnerships controlled by the shareholders of American General
Hospitality, Inc. (the "AGHI Affiliates"). The remaining nine Initial Hotels
(the "Other Initial Hotels") were acquired primarily from parties unaffiliated
with the Company through contracts with the sellers acquired from an AGHI
affiliate.
Upon completion of the initial public offering described below, the Company,
through wholly owned subsidiaries, acquired an approximate 81.3% equity
interest in American General Hospitality Operating Partnership, L.P. (the
"Operating Partnership"). A wholly owned subsidiary of the Company is the sole
general partner of the Operating Partnership. The Operating Partnership and
entities which it controls own the Initial Hotels and 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 the Initial Hotels are managed by
American General Hospitality, Inc. ("AGHI").
Initial Public Offering--As of July 31, 1996, the Company completed an
initial public offering of 7,500,000 shares of its Common Stock and an
additional 575,000 shares of common stock were issued by the Company on August
28, 1996 upon exercise of the underwriters' over-allotment option at a price
per share of $17.75 (the "IPO"). In addition, concurrently with the July 31,
1996 closing of the IPO, the Company acquired interests in five of the Initial
Hotels from the AGHI Employee Retirement Savings Plan (the "Retirement Plan")
in exchange for 137,008 shares. Upon consummation of the IPO, the Company
contributed all of the net proceeds of the IPO ($129.3 million after deducting
IPO expenses), together with interests in five of the Initial Hotels acquired
in connection with the Retirement Plan acquisition, to AGH GP, Inc. ("General
Partner") and AGH LP, Inc. ("Limited Partner"), which, in turn, contributed
such proceeds and interests to the Operating Partnership in exchange for an
approximate 81.3% equity interest in the Operating Partnership. The General
Partner, a wholly owned subsidiary of the Company, owns a 1.0% interest in the
Operating Partnership. The Limited Partner, also a wholly owned subsidiary of
the Company, owns an approximate 80.3% limited partnership interest in the
Operating Partnership.
Also on July 31, 1996 the Operating Partnership acquired directly or
indirectly the remaining interests in each of the Initial Hotels for an
aggregate of 1,896,996 units of limited partnership interest in the Operating
Partnership ("OP Units") (560,178 OP Units to the Primary Contributors, which
consist of the principals of AGHI and the Lessee and certain of their
respective affiliates and 1,336,818 OP Units to parties unaffiliated with the
Primary Contributors) and approximately $91.0 million in cash to parties
unaffiliated with the Primary Contributors. At the time of their acquisition,
the Initial Hotels were subject to approximately $52.9 million in mortgage
indebtedness of which approximately $33.5 million was repaid from the net
proceeds of the Offering and the initial draw from the Line of Credit. On
August 28, 1996, the outstanding borrowings under the Line of Credit were
repaid with proceeds of the exercise of the underwriters' over-allotment
option. The Operating Partnership reimbursed 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, concurrent with the consummation of the IPO, the
Operating Partnership sold certain personal property relating to certain of
the Initial Hotels to the Lessee in exchange for a series of three five-year
recourse promissory notes in the aggregate principal amount of $315,000 that
are collateralized by such personal property.
Upon the closing of the Offering, the Company closed a $100 million line of
credit with a consortium of banks led by Societe Generale, Southwest Agency
and Bank One, Texas, N.A. (the "Line of Credit"). The Line
F-19
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of Credit is collateralized by, among other things, first mortgage liens on
all of the Initial Hotels, other than the Holiday Inn Dallas DFW Airport South
and the Courtyard by Marriott-Meadowlands, which hotels collateralize other
indebtedness. The Line of Credit has 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 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 or one-half percent
in excess of the prime rate.
At September 30, 1996, the Company owned a 81.3% interest in the Operating
Partnership. The Operating Partnership owned 13 hotels and leased them to the
Lessee. The Lessee has entered into management agreements pursuant to which
all hotels are managed by AGHI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation--The consolidated financial statements include
the accounts of the Company and the Operating Partnership. All significant
intercompany balances and transactions have been eliminated.
Investment in Hotel Properties--Hotel properties are stated at cost and are
depreciated using the straight-line method over estimated useful lives of 39
years for buildings and improvements and 5 to 7 years for furniture, fixtures
and equipment.
The Company periodically reviews the carrying value of each of its
investments in hotel properties to determine if circumstances exist indicating
an impairment in the carrying value of the investment in hotel property or
that depreciation periods should be modified. If facts or circumstances
support the possibility of impairment, the Company will prepare a projection
of the undiscounted future cash flows, without interest charges, of the
specific hotel property and determine if the investment in hotel property is
recoverable based on the undiscounted future cash flows. Management of the
Company does not believe that their are any factors or circumstances
indicating impairment of any of its investment in hotel properties.
Maintenance and repairs are charged to operations as incurred; major
renewals and improvements are capitalized. Upon the sale or disposition of a
fixed asset, the asset and related accumulated depreciation accounts are
removed from the accounts and the related gain or loss is included in
operations.
Cash and Cash Equivalents--All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
Deferred Expenses--Organizational costs of approximately $40,287, deferred
loan costs of approximately $2,500,000 and franchise fees of approximately
$682,600 at September 30, 1996 are stated at cost. Amortization of
organization costs is computed using the straight-line method over five years.
Amortization of deferred loan costs is computed using the effective yield
method over the original term of the related debt of four years. Amortization
of franchise fees is computed using the straight-line method over the average
life of the franchise agreements of approximately 10 years. Accumulated
amortization at September 30, 1996 is $116,572.
Revenue Recognition--Participating Lease revenue is recognized when earned
from the Lessee under the Participating Lease agreements (see Note 4). The
Participating Lease revenue is based on a percentage of room revenues, food
and beverage revenues and telephone and other revenues. The departmental
revenue thresholds in the Participating Leases are seasonally adjusted for
interim periods and the Participating Lease formulas adjust effective January
1, 1997 by a percentage equal to the percentage increase in the Consumer Price
Index as compared to the prior year. Additionally, seven of the Initial Hotels
will have further adjustments to the Participating Lease formulas due to the
significant renovations expected to be completed on those hotels in 1997. The
Lessee is in compliance with its obligations stipulated in the Percentage
Leases.
F-20
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 1996, the Lessee owed the Company $4,093,764 under the
Participating Leases which was paid in November 1996.
Net Income Per Common Share--Net income per common share is computed by
dividing net income applicable to common shareholders by the weighted average
number of shares of common stock and equivalents outstanding. Common share
equivalents that have a dilutive effect represent the restricted shares issued
to certain officers. For the period from July 31, 1996 through September 30,
1996, the outstanding common stock options had an immaterial dilutive effect.
Distributions--The Company pays regular quarterly distributions which are
dependent on receipt of distributions from the Operating Partnership.
Income Taxes--The Company intends to qualify as a REIT under Section 856
through 860 of the Internal Revenue Code. Accordingly, no provision for
federal income taxes has been reflected in the consolidated financial
statements.
Earnings and profits, which will determine the taxability of distributions
to stockholders, will differ from income reported for financial reporting
purposes due to the differences for federal tax purposes primarily in the
estimated useful lives used to compute depreciation.
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--The Company places cash deposits at a major
bank. At September 30, 1996, bank account balances exceeded Federal Deposit
Insurance Corporation limits by approximately $2.5 million. Management
believes credit risk related to these deposits is minimal.
3. DEBT OBLIGATIONS
Debt at September 30, 1996 consists of the following:
<TABLE>
<S> <C>
First mortgage note payable in monthly installments including
interest at the fixed rate of 8.75%; maturing on February 1, 2011
at which time a balloon payment of approximately $6,120,000 will
be due and payable collateralized by the Holiday Inn Dallas DFW
Airport South hotel............................................... $14,069,257
First mortgage note payable in monthly installments including
interest at the fixed rate of 7.5%; maturing on December 1, 2001
at which time a balloon payment of approximately $3,985,000 will
be due and payable collateralized by the Courtyard by Marriott-
Meadowlands hotel................................................. 4,579,142
Construction loan payable in monthly installments including
interest at the fixed rate of 7.89%; maturing on January 1, 2001
collateralized by the Courtyard by Marriott-Meadowlands hotel..... 649,109
-----------
19,297,508
Line of Credit..................................................... 3,000,000
-----------
Total debt obligations............................................. $21,297,508
===========
</TABLE>
F-21
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has an $100 million Line of Credit which matures on July 31,
1999. At September 30, 1996, the Company has approximately $57 million
available for borrowing under the Line of Credit ($41.2 million after closing
the Days Inn Lake Buena Vista Hotel acquisition and its admission into the
approved borrowing base--see note 10). 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 hotels or the acquisition of additional hotels. Borrowings under the Line
of Credit bear interest at 30-day, 60-day or 90-day LIBOR, at the option of
the Company, plus 1.85% per annum (7.28% at September 30, 1996), payable
monthly in arrears or one-half percent in excess of prime rate.
The Line of Credit is collateralized by the Company's investment in hotel
properties other than the hotel properties collateralizing the previous debt
obligations.
Aggregate annual principal payments for the Company's debt at September 30,
1996 are as follows.
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
Remainder of 1996............................................. $ 135,499
1997.......................................................... 557,816
1998.......................................................... 584,965
1999.......................................................... 3,614,586
2000.......................................................... 646,906
2001 and thereafter........................................... 16,757,736
-----------
$22,297,508
===========
</TABLE>
4. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Franchise and Management Fees
Franchise costs represent the annual expense for franchise royalties and
reservation services under the terms of hotel franchise agreements which
expire from 1998 to 2013. Franchise costs are based upon varying percentages
of gross room revenue ranging from 1.0% to 5.0%. These fees are paid by the
Lessee. No franchise costs were incurred for the Le Baron Airport Hotel or the
Hotel Maison de Ville.
The hotels are managed by AGHI on behalf of the Lessee. The Lessee pays AGHI
a base management fee of 1.5% of total revenue and an incentive fee of up to
2.0% of total revenue. The incentive fee, if applicable, is equal to 0.025% of
annual total revenue for each 0.1% increase in annual total revenue over the
total revenues for the preceding twelve month period up to the maximum
incentive fee.
Each hotel, except the Le Baron Airport Hotel and the Hotel Maison de Ville,
is required to remit varying percentages of gross room revenues ranging from
1.0% to 5.0% to the various franchisors for sales and advertising expenses
incurred to promote the hotel at the national level. Additional sales and
advertising costs are incurred at the local property level. These fees are
paid by the Lessee.
Participating Leases
The Lessee has future lease commitments to the Company under the
Participating Leases which expire in July, 2008. Minimum future rental income
(i.e., base rents) under these noncancellable Participating Leases at
September 30, 1996 is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------------
<S> <C>
Remainder of 1996........................................... $ 5,109,002
1997........................................................ 20,096,208
1998........................................................ 20,849,816
1999........................................................ 21,631,684
2000........................................................ 22,442,872
2001 and thereafter......................................... 200,608,680
------------
Total................................................... $290,738,262
============
</TABLE>
F-22
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the Participating Leases, the Company is obligated to pay the costs of
real estate and personal property taxes, property insurance and maintaining
underground utilities and structural elements of the Initial Hotels.
Additionally, the Company is required to establish annual minimum reserves
equal to 4.0% of total revenue for each of the Hotels which will be utilized
by the Lessee for the replacement and refurbishment of furniture, fixtures &
equipment ("FF&E") and other capital expenditures to enhance the competitive
position of the Hotels. At September 30, 1996, $425,710 of cash is reserved
for capital investments.
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 Best Western 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 construction 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 Best Western Albuquerque Airport Hotel for the twelve
months ended September 30, 1996 was 81.8%.
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.
Minimum future rental payments for the Company at September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
Remainder of 1996............................................ $ 98,550
1997......................................................... 343,846
1998......................................................... 361,416
1999......................................................... 366,866
2000......................................................... 372,725
2001 and thereafter.......................................... 18,425,301
-----------
Total...................................................... $19,968,704
===========
</TABLE>
F-23
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. EMPLOYEE BENEFITS
The Board of Directors adopted 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.
Concurrent with the IPO, the Company granted to the Company's officers and
directors options ("Options") to acquire an aggregate 400,000 shares of Common
Stock at an exercise price of $17.75 per share (the Offering Price) and stock
awards ("Awards") representing 50,000 shares of restricted Common Stock. The
Options and Awards vest and are exercisable over five years. The Options
expire in 2006. As of September 30, 1996, no options had been exercised.
Employment Agreements--The Company entered into an employment agreement with
Mr. Steven D. Jorns, the Company's Chairman of the Board, President and Chief
Executive Officer for a term of five years at an initial annual base
compensation of $100,000, subject to any increases in base compensation
approved by the Compensation Committee. In addition, the Company entered into
employment agreements with three other executive officers each for a term of
five years at an aggregate annual base compensation of $230,000.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 requires all
entities to disclose the fair value of certain financial instruments in their
financial statements. Accordingly, the Company reports the carrying amount of
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other liabilities at cost which approximates fair value due to
the short maturity of these instruments. The carrying amount of the Company's
debt obligations approximates fair value due to the Company's ability to
obtain such borrowings at comparable interest rates.
7. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in
October 1995. This statement encourages companies to recognize stock-based
compensation using new fair value accounting rules and requires companies not
adopting such rules to include fair value financial disclosures. The Company
has elected to adopt the disclosure requirements and has determined that the
additional disclosures as a result of this pronouncement are not significant.
8. NON-CASH INVESTING AND FINANCING ACTIVITIES.
The Operating Partnership issued 506,825 OP Units to AGHI Affiliates,
137,008 shares of restricted common stock to the Retirement Plan and cash of
$282,229 in exchange for the AGH Predecessor Hotels' investment in hotel
properties of $22,757,560 (recorded at carryover historical cost) and assumed
related debt of $5,267,990.
F-24
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Operating Partnership issued 1,336,818 OP Units to parties unaffiliated
with the Primary Contributors, 53,353 OP Units to the Primary Contributors
which had an aggregate value of $25,473,288 and assumed $14,138,270 of
indebtedness in exchange for partial interests in four of the Other Initial
Hotels.
The Operating Partnership advanced $315,000 in the form of a note receivable
to the Lessee for the purchase of FF&E.
The Company issued 50,000 shares of restricted common stock to four
executive officers which, at the date of issuance, were valued at $17.75 per
share.
At September 28, 1996, $2,790,057 in distributions to common stock and OP
Unit holders had been declared but not yet paid.
9. PRO FORMA INFORMATION (UNAUDITED)
Due to the impact of the IPO and related Formation Transactions including
the acquisitions of the Initial Hotels, the historical results of operations
may not be indicative of future results of operations and net income per
common share. The following unaudited pro forma information for the year ended
December 31, 1995 and the nine months ended September 30, 1996 are presented
as if the transactions previously described had occurred on January 1, 1995,
and all of the hotels had been leased to the Lessee pursuant to the Percentage
Leases since that date.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
Participating lease revenue........... $24,754,071 $21,527,411
Net income applicable to common
shareholders......................... $ 8,552,010 $ 9,716,196
Net income per common share........... $ 1.04 $ 1.18
Weighted average number of common
shares outstanding................... 8,262,008 8,262,008
</TABLE>
10. SUBSEQUENT EVENTS
On October 22, 1996, the Company and the Operating Partnership purchased
100.0% of the limited and general partnership interest in the Lake Buena Vista
Partners, Ltd. (the "Partnership") from unrelated third parties. The
Partnership, which owns the 490 room Days Inn Lake Buena Vista Resort & Suites
in Lake Buena Vista, Florida (the "Days Inn Lake Buena Vista hotel"), was
acquired for a purchase price of $30,500,000, plus estimated closing costs of
$300,000, which is payable as follows: (i) $30,000,000 in cash, and (ii)
$500,000 through the issuance of 25,397 shares of restricted common stock of
the Company. In addition, in connection with this acquisition, the Company
purchased a license and an association membership from one of the sellers for
the membership in Grand Theme Hotels and exclusive use of the African royal
safari theme in the Orlando area for approximately $1.3 million payable in
installments through 1997, and will pay an additional $900,000 for certain
construction, design and other services related to the operation of the Days
Inn Lake Buena Vista hotel. The cash required to purchase the hotel was
provided by cash on hand and borrowings from the Line of Credit.
On November 21, 1996, the Company and the Operating Partnership purchased
the 204-room Holiday Inn Resort Monterey from an unrelated third party for a
purchase price of approximately $15.5 million in cash plus estimated closing
costs of $300,000. The cash required to acquire the hotel was provided from
borrowings under the Line of Credit.
On January 2, 1997, the Company's board of directors approved the filing of
a registration statement on Form S-11 for the issuance of 5,500,000 shares of
Common Stock.
On January 8, 1997, the Company and the Operating Partnership purchased the
152-room Hilton Hotel in Durham, North Carolina from an unrelated third party.
The acquisition cost of approximately $12.1 million was provided by cash on
hand and borrowings from the Line of Credit.
The Company has entered into contracts to purchase four hotels (the
"Proposed Acquisition Hotels") for an aggregate purchase price, including
closing costs, of approximately $72.9 million. The closing of the purchase of
each of the Proposed Acquisition Hotels is subject to satisfactory completion
of various closing conditions.
F-25
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
COST CAPITALIZED GROSS AMOUNTS AT
SUBSEQUENT TO WHICH CARRIED
INITIAL COST ACQUISITION AT COST OF PERIOD
------------------------ -------------------- ------------------------
ACCUMULATED
DEPRECIATION
BUILDING BUILDING BUILDING BUILDING
AND AND AND AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL IMPROVEMENTS
----------- ------------ ----------- ------------ ------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Courtyard by
Marriott
Meadowlands
Secaucus, NJ $ 5,228,251 $ 4,780,496 $ 965,831 $ 5,746,327 $ 5,746,327 $ 341,828
Hampton Inn
Richmond Airport
Richmond, VA $ 505,000 3,590,369 $28,405 464,211 $ 533,405 4,054,580 4,587,985 166,862
Holiday Inn
Dallas DFW
Airport West
Bedford, TX 816,515 6,532,118 23,442 1,173,901 839,957 7,706,019 8,545,976 203,264
Hotel Maison De
Ville
New Orleans, LA 175,000 1,641,777 39,126 1,040,180 214,126 2,681,957 2,896,083 107,981
Holiday Inn
Dallas DFW
Airport South
Dallas, TX 14,069,257 2,468,943 20,986,013 2,468,943 20,986,013 23,454,956 89,670
Holiday Inn Park
Center Plaza
San Jose, CA 1,249,414 10,869,901 1,249,414 10,869,901 12,119,315 46,442
Best Western
Albuquerque
Airport Hotel
Albuquerque, NM 9,037,689 9,037,689 9,037,689 38,607
Holiday Inn
Select--Madison
Madison, WI 2,135,059 18,148,002 2,135,059 18,148,002 20,283,061 77,526
Holiday Inn New
Orleans
International
Airport
Kenner, LA 2,391,580 20,328,433 2,391,580 20,328,433 22,720,013 86,819
Days Inn Ocean
City
Ocean City, MD 736,514 6,407,673 736,514 6,407,673 7,144,187 27,364
Le Baron Airport
Hotel
San Jose, CA 19,102,129 19,102,129 19,102,129 81,596
Holiday Inn
Mission Valley
San Diego, CA 1,954,204 17,001,577 1,954,204 17,001,577 18,955,781 72,613
Hilton Hotel--
Toledo
Toledo, OH 9,982,263 9,982,263 9,982,263 42,812
----------- ----------- ------------ ------- ---------- ----------- ------------ ------------ ----------
$19,297,508 $12,432,229 $148,408,440 $90,973 $3,644,123 $12,523,202 $152,052,563 $164,575,765 $1,383,384
=========== =========== ============ ======= ========== =========== ============ ============ ==========
<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>
Courtyard by
Marriott
Meadowlands
Secaucus, NJ $ 5,404,499 1989 1993 39 YRS
Hampton Inn
Richmond Airport
Richmond, VA 4,421,123 1972 1994 39 YRS
Holiday Inn
Dallas DFW
Airport West
Bedford, TX 8,342,712 1974 1995 39 YRS
Hotel Maison De
Ville
New Orleans, LA 2,788,102 1778 1994 39 YRS
Holiday Inn
Dallas DFW
Airport South
Dallas, TX 23,365,286 1974 1996 39 YRS
Holiday Inn Park
Center Plaza
San Jose, CA 12,072,873 1975 1996 39 YRS
Best Western
Albuquerque
Airport Hotel
Albuquerque, NM 8,999,082 1972 1996 39 YRS
Holiday Inn
Select--Madison
Madison, WI 20,205,535 1987 1996 39 YRS
Holiday Inn New
Orleans
International
Airport
Kenner, LA 22,633,194 1973 1996 39 YRS
Days Inn Ocean
City
Ocean City, MD 7,116,823 1989 1996 39 YRS
Le Baron Airport
Hotel
San Jose, CA 19,020,533 1974 1996 39 YRS
Holiday Inn
Mission Valley
San Diego, CA 18,883,168 1970 1996 39 YRS
Hilton Hotel--
Toledo
Toledo, OH 9,939,451 1987 1996 39 YRS
------------
$163,192,381
============
</TABLE>
<TABLE>
<CAPTION>
PERIOD JULY 31
THROUGH
SEPTEMBER 30,
1996
--------------
(a) Reconciliation of Land and Buildings and Improvements:
<S> <C> <C>
Balance at July 31,
1996(1) $ 20,078,175
Additions for the
period 144,497,590
------------
Balance at September
30, 1996 $164,575,765
============
(b) Reconciliation of Accumulated Depreciation:
Balance at July 31,
1996(1) $ 737,503
Depreciation for the
period 645,881
------------
Balance at September
30, 1996 $ 1,383,384
============
</TABLE>
- -----
(1) Represents amounts from AGH Predecessor Hotels as of July 30, 1996
F-26
<PAGE>
LESSEE
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995, THE TWELVE MONTHS ENDED SEPTEMBER 30,
1996 ANDTHE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
The following unaudited Pro Forma Combined Statements of Operations are
presented as if the consummation of the IPO and related Formation
Transactions, the acquisition of all Hotels, and the consummation of the
Offering and the application of the net proceeds therefrom had occurred on
January 1, 1995, and all of the Hotels had been leased by the Lessee pursuant
to the Participating Leases since that date. 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
Offering have been made.
The following unaudited Pro Forma Combined Statements of Operations are not
necessarily indicative of what results of operations of the 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------
REDUCTION
PROPOSED IN
INITIAL ACQUIRED ACQUISITION MANAGEMENT
HOTELS HOTELS HOTELS FEES TOTAL
----------- ----------- ----------- ---------- -----------
(A) (A) (A) (D)
<S> <C> <C> <C> <C> <C>
Revenues:
Room revenue (B)....... $55,330,171 $14,240,840 $17,353,861 $86,924,872
Food and beverage
revenue (B)........... 18,191,504 3,791,094 5,136,591 27,119,189
Other revenue (B)...... 4,363,432 2,107,943 1,099,925 7,571,300
----------- ----------- ----------- -----------
Total revenue........ 77,885,107 20,139,877 23,590,377 121,615,361
----------- ----------- ----------- -----------
Expenses:
Property operating
costs and expenses
(C) .................. 29,624,254 7,435,674 8,911,869 45,971,797
General and
administrative (C).... 7,020,088 1,655,888 2,007,890 10,683,866
Advertising and
promotion............. 4,625,086 1,282,980 1,593,413 7,501,479
Repairs and
maintenance........... 3,296,167 1,093,827 1,198,947 5,588,941
Utilities.............. 3,546,149 975,778 1,159,955 5,681,882
Management fees (D).... 2,352,918 290,533 825,494 $(621,625) 2,847,320
Franchise costs (E).... 2,117,338 531,368 423,279 3,071,985
Depreciation (F)....... 63,000 63,000
Amortization (G).......
Real estate and
personal property
taxes, and property
insurance (H).........
Interest expense (I)... 31,500 31,500
Other expense.......... 58,084 69,288 26,779 154,151
Participating Lease
expenses (J).......... 24,754,071 7,967,997 7,247,372 39,969,440
----------- ----------- ----------- --------- -----------
Total expenses....... 77,488,655 21,303,333 23,394,998 (621,625) 121,565,361
----------- ----------- ----------- --------- -----------
Net income (loss).... $ 396,452 $(1,163,456) $ 195,379 $ 621,625 $ 50,000
=========== =========== =========== ========= ===========
</TABLE>
See Notes to Pro Forma Combined Statements of Operations
F-27
<PAGE>
LESSEE
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30, 1996
HISTORICAL ---------------------------------------------------------------
JULY 31, 1996 REDUCTION
THROUGH PROPOSED IN
SEPTEMBER 30, PRO FORMA INITIAL ACQUIRED ACQUISITION MANAGEMENT
1996 ADJUSTMENTS HOTELS HOTELS HOTELS FEES TOTAL
------------- ----------- ----------- ----------- ----------- ----------- ------------
(K) (L) (A) (A) (A) (D)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room revenue(B)........ $11,185,140 $47,987,870 $59,173,010 $16,019,734 $19,129,484 $ 94,322,228
Food and beverage
revenue(B)............ 2,982,331 15,760,495 18,742,826 3,383,889 5,040,569 27,167,284
Other revenue(B)....... 623,824 3,706,521 4,330,345 2,191,319 1,057,461 7,579,125
----------- ----------- ----------- ----------- ----------- ------------
Total revenue........ 14,791,295 67,454,886 82,246,181 21,594,942 25,227,514 129,068,637
----------- ----------- ----------- ----------- ----------- ------------
Expenses:
Property operating
costs and
expenses(C)........... 5,396,204 26,036,759 31,432,963 7,491,963 9,199,720 48,124,646
General and
administrative(C)..... 1,205,355 6,473,025 7,678,380 1,695,474 1,947,405 11,321,259
Advertising and
promotion............. 772,999 3,990,029 4,763,028 1,270,207 1,685,641 7,718,876
Repairs and
maintenance........... 522,792 2,638,439 3,161,231 1,159,370 1,355,018 5,675,619
Utilities.............. 668,296 2,815,050 3,483,346 958,666 1,175,433 5,617,445
Management fees(D)..... 390,736 1,737,469 2,128,205 306,292 845,455 $(1,176,729) 2,103,223
Franchise costs(E)..... 404,025 1,874,711 2,278,736 597,206 439,681 3,315,623
Depreciation(F)........ 10,500 52,500 63,000 63,000
Amortization(G)........
Real estate and
personal property
taxes, and property
insurance(H)..........
Interest expense(I).... 5,250 26,250 31,500 31,500
Other expense.......... 17,448 229,223 246,671 42,316 103,230 392,217
Participating Lease
expenses(J)........... 5,218,526 22,246,651 27,465,177 8,739,652 8,450,400 44,655,229
----------- ----------- ----------- ----------- ----------- ----------- ------------
Total expenses....... 14,612,131 68,120,106 82,732,237 22,261,146 25,201,983 (1,176,729) 129,018,637
----------- ----------- ----------- ----------- ----------- ----------- ------------
Net income (loss).... $ 179,164 $ (665,220) $ (486,056) $ (666,204) $ 25,531 $ 1,176,729 $ 50,000
=========== =========== =========== =========== =========== =========== ============
</TABLE>
See Notes to Pro Forma Combined Statements of Operations
F-28
<PAGE>
LESSEE
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------------------------------------------
HISTORICAL
JULY 31, 1996 PROPOSED
THROUGH PRO FORMA INITIAL ACQUIRED ACQUISITION
SEPTEMBER 30, 1996 ADJUSTMENTS HOTELS HOTELS HOTELS TOTAL
------------------ ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues: (K) (L) (A) (A) (A)
Room revenue(B)........ $11,185,140 $35,215,932 $46,401,072 $13,007,136 $15,076,705 $ 74,484,913
Food and beverage
revenue(B)............ 2,982,331 10,885,595 13,867,926 2,506,558 3,807,353 20,181,837
Other revenue(B)....... 623,824 2,518,325 3,142,149 1,569,630 803,544 5,515,323
----------- ----------- ----------- ----------- ----------- ------------
Total revenue........ 14,791,295 48,619,852 63,411,147 17,083,324 19,687,602 100,182,073
----------- ----------- ----------- ----------- ----------- ------------
Expenses:
Property operating
costs and
expenses(C)........... 5,396,204 18,079,623 23,475,827 5,711,823 7,014,060 36,201,710
General and
administrative(C)..... 1,205,355 4,334,289 5,539,644 1,299,295 1,465,561 8,304,500
Advertising and
promotion............. 772,999 2,880,823 3,653,822 990,380 1,269,292 5,913,494
Repairs and
maintenance........... 522,792 1,989,338 2,512,130 912,824 1,057,226 4,482,180
Utilities.............. 668,296 1,961,997 2,630,293 723,214 892,165 4,245,672
Management fees(D)..... 390,736 1,185,515 1,576,251 243,952 651,657 2,471,860
Franchise costs(E)..... 404,025 1,266,021 1,670,046 483,131 356,035 2,509,212
Depreciation(F)........ 10,500 36,750 47,250 47,250
Amortization(G)........
Real estate and
personal property
taxes, and property
insurance(H)..........
Interest expense(I).... 5,250 18,375 23,625 23,625
Other expense.......... 17,448 171,139 188,587 6,211 78,927 273,725
Participating Lease
expenses(J)........... 5,218,526 16,308,885 21,527,411 6,798,749 6,830,070 35,156,230
----------- ----------- ----------- ----------- ----------- ------------
Total expenses....... 14,612,131 48,232,755 62,844,886 17,169,579 19,614,993 99,629,458
----------- ----------- ----------- ----------- ----------- ------------
Net income (loss).... $ 179,164 $ 387,097 $ 566,261 $ (86,255) $ 72,609 $ 552,615
=========== =========== =========== =========== =========== ============
</TABLE>
See Notes to Pro Forma Combined Statements of Operations
F-29
<PAGE>
LESSEE
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995
------------------------------------------------
PROPOSED
INITIAL ACQUIRED ACQUISITION
HOTELS HOTELS HOTELS TOTAL
----------- ----------- ----------- -----------
(A) (A) (A)
<S> <C> <C> <C> <C>
Revenues:
Room revenue(B).............. $42,558,233 $11,228,242 $13,301,082 $67,087,557
Food and beverage
revenue(B).................. 13,316,604 2,913,763 3,903,375 20,133,742
Other revenue(B)............. 3,175,236 1,486,254 846,008 5,507,498
----------- ----------- ----------- -----------
Total revenue.............. 59,050,073 15,628,259 18,050,465 92,728,797
----------- ----------- ----------- -----------
Expenses:
Property operating costs and
expenses(C)................. 21,667,118 5,656,273 6,726,209 34,049,600
General and
administrative(C)........... 4,881,352 1,259,709 1,526,046 7,667,107
Advertising and promotion.... 3,515,880 1,003,153 1,177,064 5,696,097
Repairs and maintenance...... 2,647,066 847,281 901,155 4,395,502
Utilities.................... 2,693,096 740,326 876,687 4,310,109
Management fees(D)........... 1,800,964 228,193 631,696 2,660,853
Franchise costs(E)........... 1,508,648 417,293 339,633 2,265,574
Depreciation(F).............. 47,250 47,250
Amortization(G)..............
Real estate and personal
property taxes, and
property insurance(H).......
Interest expense(I).......... 23,625 23,625
Other expense................ 33,183 2,476 35,659
Participating Lease
expenses(J)................. 18,816,305 6,027,094 5,627,042 30,470,441
----------- ----------- ----------- -----------
Total expenses............. 57,601,304 $16,212,505 $17,808,008 91,621,817
----------- ----------- ----------- -----------
Net income (loss).......... $ 1,448,769 $ (584,246) $ 242,457 $ 1,106,980
=========== =========== =========== ===========
</TABLE>
See Notes to Pro Forma Combined Statements of Operations
F-30
<PAGE>
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 American General
Hospitality Operating Partnership, L.P. (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
Company, which consent may not be unreasonably withheld. The Lessee, with the
written consent of the Company, has entered or expects to enter into
management agreements pursuant to which all of the Hotels will be managed by
AGHI, except for the Four Points by Sheraton which is expected to be managed
by Wyndham.
The Lessee's results of operations are seasonal. The aggregate room revenues
in the second and third quarters in the pro forma statements of operations are
generally higher than room revenues in the first and fourth quarters of each
fiscal year. Consequently, the following Lessee pro forma statements of
operations reflect net income in the second and third quarters and a net loss
in the fourth quarter.
(A) Represents the pro forma statements of operations of the Initial Hotels,
Acquired Hotels and Proposed Acquisition Hotels as if all of the Hotels were
leased by the Lessee pursuant to the Participating Leases commencing on
January 1, 1995.
(B) Represents historical room and food and beverage revenues of the Hotels
adjusted for telephone commissions totalling approximately $122,648 to conform
the Hotels' commission structure to the structure under new contracts AGHI
will have with its telecommunications providers. Also includes other revenue
of approximately $1.1 million, $1.0 million, $680,000, and $746,000 for the
year ended December 31, 1995, twelve months ended September 30, 1996, nine
months ended September 30, 1996 and nine months ended September 30, 1995,
respectively, in connection with a cash flow guarantee from one of the sellers
of the Days Inn Lake Buena Vista hotel.
(C) Reflects the historical expenses of the Hotels less expenses which are
not expected to be incurred by the Lessee. The expenses not expected to be
incurred by the Lessee consist primarily of the following:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED TWELVE MONTHS ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1995
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Property operating costs
and expenses:
Certain changes in
employee benefits...... $(155,002) $ (80,222) $ (41,168) $(115,947)
Operating lease
expense................ (277,673) (180,820) (110,930) (207,783)
--------- --------- --------- ---------
$(432,675) $(261,042) $(152,098) $(323,730)
========= ========= ========= =========
General and
administrative
expenses:
Certain changes in
employee benefits...... $ (24,431) $ (11,980) $ (6,209) $ (18,660)
Operating lease
expense................ (32,054) (24,038) (15,556) (23,572)
Owner related
expenses............... (264,448) (181,710) (119,059) (201,797)
--------- --------- --------- ---------
$(320,933) $(217,728) $(140,824) $(244,029)
========= ========= ========= =========
</TABLE>
The elimination of historical expenses for certain changes in employee
benefits represents changes in employee benefits at two hotels to conform to
the benefits provided by AGHI. The elimination of certain
F-31
<PAGE>
LESSEE
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS--(CONTINUED)
historical operating lease expenses results from the pay-off of certain
operating leases of the Hotels at closing. The elimination of historical owner
related expenses represents the elimination of various charges from the owners
at four of the Hotels, which related to personal expenditures.
(D) Represents management fees to be incurred under the Management
Agreements. The management fees payable to AGHI consist of a base fee of 1.5%
of total revenue and an incentive fee of up to 2.0% of total revenue. The
incentive fee, if applicable, is equal to 0.025% of annual total revenue for
each 0.1% increase in annual total revenues over the total revenues for the
preceding twelve month period up to the maximum incentive fee. Such incentive
fee is payable quarterly and is adjusted at the end of each calendar year to
reflect actual results. Every four years the basis upon which the incentive
fee is calculated 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 Lease. The full
management fees payable during 1996 and 1997 will be earned only to the extent
that the Lessee has net income equal to or greater than $50,000. If the
Lessee's net income is below $50,000 in 1996 and or 1997, management fees are
forfeited by AGHI to increase the Lessee's net income to $50,000.
The management fees expected to be paid to Wyndham for managing the Four
Points by Sheraton will provide for the payment of a base management fee equal
to 1.5% of total revenue at the hotel plus an incentive management fee of up
to 1.5% of total revenue. Wyndham will be entitled to secure the incentive
management fee during the first two years of the term of the agreement if (i)
annualized 1997 total revenue for the hotel exceeds 1996 total revenue for the
hotel by at least 6% and (ii) 1998 total revenue for the hotel exceeds 1996
total revenue for the hotel by at least 12%. Thereafter, the incentive
management fee will be earned if annual total revenue for the hotel exceeds
the total revenue for the hotel for the prior year by at least the percentage
increase in CPI for such year.
All historical management fees have been eliminated.
(E) Represents the historical franchise fees of the Hotels. Franchise fees
associated with the hotel conversions are not included in the pro forma
statements of operations since other impacts including possible revenue
enhancements and operating expense reductions are also not included.
(F) Historical depreciation expense at the Hotels has been eliminated due to
depreciation being recorded by the Operating Partnership. Represents
depreciation related to the $315,000 of furniture, fixtures and equipment
("FF&E") purchased by the Lessee from the Operating Partnership. The FF&E is
depreciated over an estimated useful life of 5 years.
(G) Historical deferred loan costs and the related amortization has been
eliminated since the Lessee is not expected to incur similar costs.
(H) Real estate and personal property taxes, and property insurance expense
at the Hotels has been eliminated since it is to be paid by the Operating
Partnership.
(I) Any future interest expense related to debt for the Hotels will be
incurred and paid by the Operating Partnership. 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
commencing July 31, 1996.
(J) 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 revenues of
the Hotels. The departmental revenue thresholds in the Participating Leases
are seasonally adjusted for interim periods and certain of the Participating
Lease formulas adjust beginning January 1, 1997. See "The Hotels--The
Participating Leases."
F-32
<PAGE>
LESSEE
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS--(CONTINUED)
The Participating Lease expense is comprised of the following:
<TABLE>
<CAPTION>
TWELVE NINE MONTHS NINE MONTHS
YEAR ENDED MONTHS ENDED ENDED ENDED
DECEMBER SEPTEMBER SEPTEMBER SEPTEMBER
31, 1995 30, 1996 30, 1996 30, 1995
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Base Rent.................... $28,677,000 $28,677,000 $21,507,750 $21,507,750
Excess of Participating Rent
over Base Rent.............. 11,292,440 15,978,229 13,648,480 8,962,691
----------- ----------- ----------- -----------
Total Participating Lease
expense................. $39,969,440 $44,655,229 $35,156,230 $30,470,441
=========== =========== =========== ===========
</TABLE>
(K) Represents the Lessee's historical statement of operations for the
period from July 31, 1996 (inception of operation) to September 30, 1996.
(L) Represents the Lessee's pro forma statement of operations for periods
prior to July 31, 1996 adjusted for the leasing of the Initial Hotels pursuant
to the Participating Leases commencing on January 1, 1996.
F-33
<PAGE>
AGH LEASING, L.P.
BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments in hotel properties, at cost:
Furniture, fixtures and equipment............................... $ 315,000
Less accumulated depreciation................................... (10,500)
----------
Net investment in hotel properties................................ 304,500
Cash and cash equivalents......................................... 5,994,553
Accounts receivable, net of allowance for doubtful accounts of
$5,500........................................................... 2,414,921
Inventories....................................................... 366,653
Prepaid expenses.................................................. 462,960
Other assets...................................................... 46,987
----------
Total assets.................................................... $9,590,574
==========
LIABILITIES AND PARTNERS CAPITAL
Accounts payable, trade........................................... $ 472,191
Participating rent payable, American General Hospitality Operating
Partnership, L.P. ............................................... 4,093,764
Advance from American General Hospitality Operating Partnership,
L.P. ............................................................ 315,000
Accrued expenses and other liabilities............................ 4,030,455
----------
Total liabilities............................................... 8,911,410
----------
Commitments and contingencies (Notes 1 and 2)
Partners' capital................................................. 500,000
Net income........................................................ 179,164
----------
Total partners' capital......................................... 679,164
----------
Total liabilities and partners' capital......................... $9,590,574
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
AGH LEASING, L.P.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JULY 31, 1996 (INCEPTION OF OPERATIONS) THROUGH SEPTEMBER
30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Revenues:
Room revenue..................................................... $11,185,140
Food and beverage revenue........................................ 2,982,331
Other revenue.................................................... 623,824
-----------
Total revenue.................................................. 14,791,295
-----------
Expenses:
Property operating costs and expenses............................ 3,135,269
Food and beverage costs and expenses............................. 2,260,935
General and administrative....................................... 1,205,355
Advertising and promotion........................................ 772,999
Repairs and maintenance.......................................... 522,792
Utilities........................................................ 668,296
Management fees.................................................. 390,736
Franchise costs.................................................. 404,025
Depreciation..................................................... 10,500
Interest expense................................................. 5,250
Other expense.................................................... 17,448
Participating Lease expenses..................................... 5,218,526
-----------
Total expenses................................................. 14,612,131
-----------
Net income..................................................... $ 179,164
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
AGH LEASING, L.P.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JULY 31, 1996 (INCEPTION OF OPERATIONS) THROUGH
SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Cash flow from operating activities:
Net income....................................................... $ 179,164
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................... 10,500
Changes in assets and liabilities:
Accounts receivable............................................ (2,414,921)
Inventories.................................................... (366,653)
Prepaid expenses............................................... (462,960)
Other assets................................................... (46,987)
Accounts payable, trade........................................ 472,191
Participating rent payable, American General Hospitality
Operating Partnership, L.P. .................................. 4,093,764
Accrued expenses and other liabilities......................... 4,030,455
-----------
Net cash provided by operating activities...................... 5,494,553
-----------
Cash flows from financing activities:
Capital contributions............................................ 500,000
-----------
Net change in cash and cash equivalents........................... 5,994,553
Cash and cash equivalents at beginning of period.................. 0
-----------
Cash and cash equivalents at end of period........................ $ 5,994,553
===========
Supplemental schedule of cash flow information and non cash investing and
financing activities:
Cash paid during the period for interest........................ $ 0
===========
</TABLE>
The Operating Partnership advanced $315,000 in the form of a note
receivable to the Lessee for the purchase of furniture, fixtures and
equipment.
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
AGH LEASING, L.P.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND 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 initial public
offering described below and commencement of operations on July 31, 1996,
American General Hospitality Corporation (the "Company") acquired an
approximate 81.3% 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 owns 13 hotels (the "Initial Hotels"), leases 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 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 are managed by AGHI. The Lessee is owned in part by certain
executive officers of the Company and AGHI.
The Lessee's results of operations are seasonal. The aggregate room revenues
in the second and third quarters of each fiscal year may be higher than room
revenues in the first quarter and may be much higher than room revenues in the
fourth quarter of each fiscal year. Consequently, the Lessee may have net
income in the second and third quarters and may have a net loss in the fourth
quarter.
Initial Public Offering--As of July 31, 1996, the Company completed an
initial public offering of 7,500,000 shares of its common stock and an
additional 575,000 shares of common stock were issued by the Company on August
28, 1996 upon exercise of the underwriters' over-allotment option at a price
per common share of $17.75 (the "IPO"). Upon consummation of the IPO, the
Company contributed all of the net proceeds of the IPO to the Operating
Partnership in exchange for an approximate 81.3% equity interest in the
Operating Partnership. The Operating Partnership used such funds to purchase
certain of the Initial Hotels, repay debt and other obligations of the Initial
Hotels, and for working capital.
Upon consummation of the IPO, the partners of the Lessee capitalized the
Lessee with $500,000 cash and pledged 275,000 units of limited partnership
interest in the Operating Partnership ("OP Units") to the Company to secure
the Lessee's obligations under the Participating Leases.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Hotel Properties--Hotel properties consist principally of FF&E
and are stated at the lower of cost or net realizable value and are
depreciated using the straight-line method over estimated useful lives ranging
from 3 to 7 years.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and the related accumulated depreciation are removed
from the accounts and the gain or loss is included in operations.
Cash and Cash Equivalents--All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
Inventories--Inventories consisting primarily of food and beverage items and
are stated at the lower of cost (generally, first-in first-out) or market.
F-37
<PAGE>
AGH LEASING, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Income Taxes--The Lessee is a Texas limited partnership which is not a
taxable entity. The results of operations are included in the tax returns of
the partners. The partnerships' tax returns and the amount of allocable income
or loss are subject to examination by federal and state taxing authorities. If
such examinations result in changes to income or loss, the tax liability of
the partners could be changed accordingly.
Revenue Recognition--Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.
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--The Lessee places cash deposits at a major
bank. At September 30, 1996, bank account balances exceeded Federal Deposit
Insurance Corporation limits by approximately $3.3 million. Management
believes credit risk related to these deposits is minimal.
3. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Franchise costs represent the annual expense for franchise royalties and
reservation services under the terms of hotel franchise agreements which
expire from 1998 to 2013. Franchise costs are based upon varying percentages
of gross room revenue ranging from 1.0% to 5.0%. These fees are paid by the
Lessee. No franchise costs were incurred for the Le Baron Airport Hotel or the
Hotel Maison de Ville.
The Initial Hotels are managed by AGHI on behalf of the Lessee. The Lessee
pays AGHI a base management fee of 1.5% of total revenue and an incentive fee
of up to 2.0% of total revenue. The incentive fee, if applicable, is equal to
0.025% of annual total revenue for each 0.1% increase in annual total revenue
over the total revenues for the preceding twelve month period up to the
maximum incentive fee. Such incentive fee is payable quarterly and is adjusted
at the end of each calendar year to reflect actual results. Every four years
the basis upon which the incentive fee is calculated 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 full management fees payable during 1996 and 1997,
will be earned only to the extent that the Lessee has net income equal to or
greater than $50,000. If the Lessee's net income is below $50,000 in 1996 and
or 1997 management fees are forfeited by AGHI to increase the Lessee's income
to $50,000.
Each hotel, except the Le Baron Airport Hotel and the Hotel Maison de Ville,
is required to remit varying percentages of gross room revenue ranging from
1.0% to 5.0% to the various franchisors for sales and advertising expenses
incurred to promote the hotel at the national level. Additional sales and
advertising costs are incurred at the local property level. These fees are
prepaid by the Lessee.
F-38
<PAGE>
The Lessee has future lease commitments to the Company under the
Participating Leases which expire in July, 2008. The Participating Lease
expenses are based on a percentage of room revenues, food and beverage
revenues and telephone and other revenues. The departmental revenue thresholds
in the Participating Leases are seasonally adjusted for interim periods and
the Participating Lease formulas adjust effective January 1, 1997 by a
percentage equal to the percentage increase in the Consumer Price Index as
compared to the prior year. Additionally, several of the Initial Hotels will
have further adjustments to the Participating Lease formulas due to the
significant renovations expected to be completed in those hotels in 1997.
Minimum future rental expense (i.e. base rents) under these noncancellable
Participating Leases is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------------
<S> <C>
Remainder of 1996............................................. $ 5,109,002
1997.......................................................... 20,096,208
1998.......................................................... 20,849,816
1999.......................................................... 21,631,684
2000.......................................................... 22,442,872
2001 and thereafter........................................... 200,608,680
------------
Total......................................................... $290,738,262
============
</TABLE>
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 Company is responsible for payments under the ground leases.
4. PRO FORMA INFORMATION
Due to the impact of the IPO and related Formation Transactions, the
historical results of operations may not be indicative of future results of
operations. The following unaudited pro forma information of the Lessee is
presented as if the consummation of IPO and the related Formation Transactions
had occurred on January 1, 1995 and all of the Initial Hotels had been leased
pursuant to the Participating Leases since that date.
In management's opinion, all adjustments necessary to reflect the effects of
the IPO and related Formation Transactions have been made. The pro forma
information does not purport to present what the actual results of operations
of the Lessee would have been if the previously mentioned transactions had
occurred on such date or to project the future financial position or results
of operations of the Lessee for any future period.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Room revenue.......................... $55,330,171 $46,401,072
Total revenue......................... $77,885,107 $63,411,147
Percentage lease expenses............. $24,754,071 $21,527,411
Net income............................ $ 396,452 $ 566,261
</TABLE>
5. SUBSEQUENT EVENTS
As of January 8, 1997, the Lessee and the Operating Partnership entered into
three operating lease agreements for three hotels which were acquired by the
Operating Partnership. The leases are substantially similar to the other
Participating Lease agreements between the Lessee and the Operating
Partnership. The base rent for the three hotels will be approximately
$7,456,000 for 1997, subject to completion of planned renovations and other
activities.
F-39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
American General Hospitality Corporation
We have audited the accompanying combined balance sheets and financial
statement schedule of the AGH Predecessor Hotels (described in Note 1) as of
December 30, 1994, December 29, 1995, and July 30, 1996, and the related
combined statements of operations, equity and cash flows for the period from
December 30, 1993 through December 31, 1993, the years ended December 30, 1994
and December 29, 1995 and for the period from December 30, 1995 through July
30, 1996. These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, December 29, 1995 and July 30,
1996 and the combined results of their operations and their cash flows for the
period from December 30, 1993 through December 31, 1993, the years ended
December 30, 1994 and December 29, 1995 and for the period from December 30,
1995 through July 30, 1996 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
Coopers & Lybrand L.L.P.
Dallas, Texas
September 19, 1996
F-40
<PAGE>
AGH PREDECESSOR HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, JULY 30,
1994 1995 1996
------------ ------------ -----------
ASSETS
<S> <C> <C> <C>
Investment in hotel properties, at
cost
Land............................... $ 680,000 $ 1,496,515 $ 1,496,515
Buildings and improvements......... 11,162,793 18,427,855 18,581,660
Furniture, fixtures and equipment.. 3,028,860 3,439,484 4,232,203
----------- ----------- -----------
14,871,653 23,363,854 24,310,378
Less accumulated depreciation........ (409,067) (945,502) (1,552,818)
----------- ----------- -----------
Net investment in hotel properties 14,462,586 22,418,352 22,757,560
Cash and cash equivalents............ 615,066 857,608 1,415,865
Restricted cash...................... 130,386 441,445 386,827
Accounts receivable, net............. 109,719 281,169 305,097
Inventories.......................... 41,407 55,611 63,937
Prepaid expenses..................... 44,400 166,463 162,985
Deferred expenses.................... 50,212 370,046 365,621
Other assets......................... 9,000 85,410 156,538
----------- ----------- -----------
Total assets..................... $15,462,776 $24,676,104 $25,614,430
=========== =========== ===========
<CAPTION>
LIABILITIES AND EQUITY
<S> <C> <C> <C>
Debt................................. $11,016,322 $19,277,646 $20,114,415
Accounts payable, trade.............. 199,312 560,862 481,993
Accrued expenses and other
liabilities......................... 419,643 832,889 719,213
----------- ----------- -----------
Total liabilities................ 11,635,277 20,671,397 21,315,621
----------- ----------- -----------
Commitments and contingencies (Note
4)
Capital.............................. 4,145,000 5,812,391 5,627,391
Accumulated deficit.................. (317,501) (1,807,684) (1,328,582)
----------- ----------- -----------
Total equity......................... 3,827,499 4,004,707 4,298,809
----------- ----------- -----------
Total liabilities and equity..... $15,462,776 $24,676,104 $25,614,430
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-41
<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
FOR THE PERIOD FROM DECEMBER 30, 1995 THROUGH JULY 30, 1996
<TABLE>
<CAPTION>
1993 1994 1995 1996
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Room revenue................. $ 17,941 $ 3,431,654 $ 9,020,479 $ 6,770,568
Food and beverage revenue.... 6,158 552,697 1,293,238 1,175,807
Other revenue................ 1,448 223,211 568,415 432,750
-------- ----------- ----------- -----------
Total revenue.............. 25,547 4,207,562 10,882,132 8,379,125
-------- ----------- ----------- -----------
Expenses:
Property operating costs and
expenses.................... 2,907 1,070,415 2,610,089 1,911,317
Food and beverage costs and
expenses.................... 1,115 503,537 1,318,712 1,072,852
General and administrative... 1,922 561,140 1,270,163 954,143
Advertising and promotion.... 966 308,497 663,285 468,248
Repairs and maintenance...... 809 195,279 478,552 338,456
Utilities.................... 217,496 509,142 370,969
Management fees.............. 1,022 162,151 383,607 295,538
Franchise costs.............. 155,206 332,274 270,950
Depreciation................. 46,982 362,085 2,409,211 607,316
Amortization................. 2,428 70,843 37,879
Real estate and personal
property taxes, and property
insurance................... 831 177,717 389,955 245,263
Interest expense............. 430,535 1,572,244 1,129,060
Other expense................ 347,570 364,238 198,032
-------- ----------- ----------- -----------
Total expenses............. 56,554 4,494,056 12,372,315 7,900,023
-------- ----------- ----------- -----------
Net income (loss).......... $(31,007) $ (286,494) $(1,490,183) $ 479,102
======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-42
<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....................................................... 479,102
Capital contributions............................................ 50,000
Distributions.................................................... (235,000)
-----------
Balance, July 30, 1996............................................ $ 4,298,809
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-43
<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
FOR THE PERIOD FROM DECEMBER 30, 1995 THROUGH JULY 30, 1996
<TABLE>
<CAPTION>
1993 1994 1995 1996
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Cash flow from operating
activities:
Net income (loss)........... $ (31,007) $ (286,494) $ (1,490,183) $ 479,102
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation .............. 46,982 362,085 2,409,211 607,316
Amortization............... 2,428 70,843 37,879
Changes in assets and
liabilities...............
Restricted cash........... (130,386) (311,059) (23,928)
Accounts receivable....... (8,120) (101,599) (171,450) (8,326)
Inventories............... (8,275) (33,132) (14,204) 3,478
Prepaid expenses.......... (15,770) (28,630) (122,063) (71,128)
Other assets.............. (9,000) (76,410)
Franchise agreements...... (170,500) (13,680)
Organization costs........ (13,139) (108,677) (86,691)
Accounts payable, trade... 440 198,872 361,550 (105,854)
Accrued expenses and other
liabilities.............. 163,366 256,277 413,246 54,618
---------- ---------- ------------ ----------
Net cash provided by
operating activities.... 147,616 217,282 790,304 872,786
---------- ---------- ------------ ----------
Cash flows from investing
activities:
Improvements and additions
to hotel
properties................. (1,294,387) (2,199,840) (946,524)
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) (946,524)
---------- ---------- ------------ ----------
Cash flows from financing
activities:.................
Proceeds from borrowings.... 4,875,000 6,350,000 10,357,250 1,056,237
Principal payments on
borrowings................. (208,678) (2,095,926) (219,468)
Payments for deferred loan
costs...................... (39,500) (111,500) (19,774)
Capital contributions....... 1,600,000 3,086,000 1,863,118 50,000
Distributions paid.......... (541,000) (195,727) (235,000)
---------- ---------- ------------ ----------
Net cash provided by
financing
activities.............. 6,475,000 8,646,822 9,817,215 631,995
---------- ---------- ------------ ----------
Net change in cash and cash
equivalents................. 743,116 (128,050) 242,542 558,257
Cash and cash equivalents at
beginning of
periods..................... 743,116 615,066 857,608
---------- ---------- ------------ ----------
Cash and cash equivalents at
end of periods.............. $ 743,116 $ 615,066 $ 857,608 $1,415,865
========== ========== ============ ==========
Supplemental disclosures of
cash flow
information:
Cash paid during the year
for interest............... $ 430,535 $ 1,572,244 $1,017,316
========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements
F-44
<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" or the
"Registrant") was incorporated and formed on April 12, 1996, as a Maryland
corporation which intends to qualify as a real estate investment trust
("REIT"). The Company commenced operations on July 31, 1996 (see Initial
Public Offering discussion below). Upon commencement of operations, the
Company acquired equity interests in 13 hotels (the "Initial Hotels"). Four of
the Initial Hotels (the "AGH Predecessor Hotels") were acquired primarily from
limited partnerships controlled by the shareholders of American General
Hospitality, Inc. (the "AGHI Affiliates"). The remaining nine Initial Hotels
(the "Other Initial Hotels") were acquired primarily from parties unaffiliated
with the Company through contracts with the sellers acquired from an AGHI
affiliate.
Upon completion of the initial public offering described below, the Company,
through wholly owned subsidiaries, acquired an approximate 81.3% equity
interest in American General Hospitality Operating Partnership, L.P. (the
"Operating Partnership"). A wholly owned subsidiary of the Company is the sole
general partner of the Operating Partnership. The Operating Partnership and
entities which it controls own the Initial Hotels and 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 are 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 were 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 ("FF&E") 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 FF&E 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 FF&E 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 FF&E 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.
Initial Public Offering--As of July 31, 1996, the Company completed an
initial public offering of 7,500,000 shares of its common stock and an
additional 575,000 shares of common stock were issued by the Company on August
28, 1996 upon exercise of the underwriters' over-allotment option at a price
per common share of $17.75 (the "IPO"). Upon consummation of the IPO, the
Company contributed all of the net proceeds of the IPO to the Operating
Partnership in exchange for an approximate 81.3% equity interest in the
Operating Partnership. The Operating Partnership used such funds to purchase
certain of the Initial Hotels, repay debt and other obligations of the Initial
Hotels, and for working capital.
F-45
<PAGE>
AGH PREDECESSOR 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 39 years for building and
improvements and 3 to 7 years for FF&E.
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 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 and are recorded at cost.
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 July 30, 1996, is
$111,150.
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 intends 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-46
<PAGE>
AGH PREDECESSOR HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Concentration of Credit Risk--Management of the AGHI Affiliates places cash
deposits at a major bank. At July 30, 1996, bank account balances exceeded
Federal Deposit Insurance Corporation limits by approximately $700,000.
Management believes credit risk related to these deposits is minimal.
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 has no material effect on the AGH Predecessor
Hotels' financial statements.
3. DEBT
Debt as of December 30, 1994, December 29, 1995 and July 30, 1996, consists
of the following:
<TABLE>
<CAPTION>
JULY 30,
1994 1995 1996
----------- ----------- -----------
<S> <C> <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 $17,547,924
Product improvement plan note payable in
various monthly installments including
interest at LIBOR plus 4.25%............. 1,511,352 1,907,090
Note payable to AGHI...................... 100,000 100,000
Construction loan payable in monthly
installments including interest at the
fixed rate of 7.89%; maturing on January
1, 2001.................................. 659,401
----------- ----------- -----------
$11,016,322 $19,277,646 $20,114,415
=========== =========== ===========
</TABLE>
All debt is collateralized by the investment in hotel properties.
Aggregate annual principal payments for the AGHI Affiliates' debt at July
30, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
Remaining five months of 1996................................ $ 825,647
1997......................................................... 786,928
1998......................................................... 818,102
1999......................................................... 2,225,175
2000......................................................... 12,952,549
2001 and thereafter.......................................... 2,506,014
-----------
$20,114,415
===========
</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-47
<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 revenue which for the periods ended December 30,
1994, December 29, 1995 and July 30, 1996 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 July 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
Remaining five months of 1996 ............................... $ 95,975
1997 ........................................................ 175,300
1998 ........................................................ 187,800
1999 ........................................................ 187,800
2000 ........................................................ 189,690
2001 and thereafter.......................................... 14,242,650
-----------
$15,079,215
===========
</TABLE>
Rental expense was $311,007 and $360,011 and $192,190 for the years ended
December 30, 1994, December 29, 1995 and the period ended July 30, 1996,
respectively.
As a result of the IPO and the resulting prepayment of debt, a portion of
the proceeds of the IPO was utilized to pay prepayment penalties on two notes
payable totaling approximately $734,000.
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 Affiliates'
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-48
<PAGE>
AGH PREDECESSOR HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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...................................... 2,543,015 1,973,765
Other corporate expenses...................... 761,215 791,599
----------- ------------
Net loss...................................... $(1,587,835) $ (1,361,381)
=========== ============
</TABLE>
7. SUBSEQUENT EVENT
As discussed in Note 1, the four AGH Predecessor Hotels were acquired by the
Operating Partnership on July 31, 1996. The Company and the Operating
Partnership exchanged shares of Common Stock and OP Units for interests in the
selling entities and certain net assets were transferred at historical cost
basis. In addition, the hotels were refinanced upon acquisition and post-
acquisition debt is different than the historical debt reflected in the
accompanying financial statements. Furthermore, all management agreements were
terminated and new management agreements were implemented. The combined
financial statements do not reflect any of the transactions in connection with
the IPO 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-49
<PAGE>
AGH PREDECESSOR HOTELS
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF JULY 30, 1996
<TABLE>
<CAPTION>
COST CAPITALIZED
SUBSEQUENT GROSS AMOUNTS AT WHICH ACCUMULATED
INITIAL COST TO ACQUISITION CARRIED AT CLOSE OF PERIOD DEPRECIATIONS
----------------------- -------------------- ----------------------------------- BUILDINGS
ENCUM- BUILDING AND BUILDING AND BUILDING AND AND IMPROV-
DESCRIPTION BRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL EMENTS
----------- ----------- ---------- ------------ ------- ------------ ---------- ------------ ----------- -------------
(A) (B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Courtyard by $ 5,257,770 $ 4,780,496 $ 259,189 $ 5,039,685 $ 5,039,685 $317,967
Marriott
Meadowlands
Secaucus, N.J.
Hampton Inn 4,763,550 $505,000 3,590,369 246,049 $ 505,000 3,836,418 4,341,418 150,258
Richmond Airport
Richmond, VA
Holiday Inn DFW 8,557,090 816,515 6,532,118 963,609 816,515 7,495,727 8,312,242 171,138
West
Bedford, TX
Hotel Mason 1,536,005 175,000 1,641,777 568,053 175,000 2,209,830 2,384,830 98,140
DeVille
New Orleans, LA
----------- ---------- ----------- ------- ---------- ---------- ----------- ----------- --------
$20,114,415 $1,496,515 $16,544,760 $2,036,900 $1,496,515 $18,581,660 $20,078,175 $737,503
=========== ========== =========== ======= ========== ========== =========== =========== ========
<CAPTION>
NET BOOK LIFE UPON
VALUE WHICH
BUILDINGS DATE OF DATE DEPRECIATION
AND IMPROV- CON- OF AC- IN STATEMENT
DESCRIPTION EMENTS STRUCTION QUISITION IS COMPUTED
----------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C>
Courtyard by $ 4,721,718 1989 12/30/93 40 YRS
Marriott
Meadowlands
Secaucus, N.J.
Hampton Inn 4,191,160 1972 12/29/94 40 YRS
Richmond Airport
Richmond, VA
Holiday Inn DFW 8,141,104 1974 6/7/95 40 YRS
West
Bedford, TX
Hotel Mason 2,286,690 1788 8/8/94 40 YRS
DeVille
New Orleans, LA
-----------
$19,340,672
===========
</TABLE>
(a) Reconciliation of land and buildings and improvements:
<TABLE>
<S> <C>
Balance at January 1, 1995 $ 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
Additions for the year to date
July 30, 1996: 153,805
-----------
Balance at July 30, 1996 $20,078,175
===========
(b) Reconciliation of Accumulated Depreciation
Balance at beginning of year
January 1, 1994 $ 46,982
Depreciation for the year 1994: 185,175
-----------
Balance at December 30, 1994 232,157
Depreciation for the year 1995: 274,250
-----------
Balance at December 29, 1995 506,407
Depreciation for the year to date
July 30, 199 231,096
-----------
Balance at July 30, 1996 $ 737,503
===========
</TABLE>
F-50
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
American General Hospitality Corporation
We have audited the accompanying combined balance sheets and financial
statement schedule of the Other Initial 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 and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Other Initial Hotels.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Other Initial
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. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
Coopers & Lybrand L.L.P.
Dallas, Texas
April 8, 1996
F-51
<PAGE>
OTHER INITIAL HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
ASSETS ------------ ------------ ------------
(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 71,582,742
Furniture, fixtures and
equipment........................ 21,948,731 21,999,984 24,438,661
------------ ------------ ------------
101,697,539 104,222,555 105,196,126
Less accumulated depreciation....... (33,171,163) (36,842,175) (38,542,112)
------------ ------------ ------------
Net investment in hotel properties.. 68,526,376 67,380,380 66,654,014
Cash and cash equivalents........... 2,514,782 4,247,740 5,847,809
Restricted cash..................... 1,006,323 1,454,731 1,957,813
Accounts receivable, net............ 1,917,888 1,677,438 2,856,684
Inventories......................... 571,883 735,266 647,266
Prepaid expenses.................... 379,842 477,443 486,957
Deferred expenses................... 462,933 558,706 650,306
Other assets........................ 661,774 90,669 30,218
------------ ------------ ------------
Total assets.................... $ 76,041,801 $ 76,622,373 $ 79,131,067
============ ============ ============
<CAPTION>
LIABILITIES AND EQUITY
<S> <C> <C> <C>
Debt................................ $ 46,013,273 $ 43,861,547 $ 51,374,169
Capital lease obligation............ 2,862,995 2,625,082 2,499,589
Accounts payable, trade............. 884,218 768,251 957,638
Payable to affiliates............... 2,145,068 2,231,449 1,998,191
Accrued expenses and other
liabilities........................ 3,819,118 3,847,515 3,535,184
------------ ------------ ------------
Total liabilities............... 55,724,672 53,333,844 60,364,771
------------ ------------ ------------
Commitments and contingencies (Note
4)
Capital............................. 11,960,065 6,588,382 (3,569,391)
Retained earnings................... 8,357,064 16,700,147 22,335,687
------------ ------------ ------------
Total equity.................... 20,317,129 23,288,529 18,766,296
------------ ------------ ------------
Total liabilities and equity.... $ 76,041,801 $ 76,622,373 $ 79,131,067
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-52
<PAGE>
OTHER INITIAL HOTELS
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996
<TABLE>
<CAPTION>
JUNE 30,
1993 1994 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Room revenue................. $36,811,936 $40,109,552 $44,736,447 $23,779,491
Food and beverage revenue.... 15,446,922 15,826,164 16,424,522 8,260,931
Other revenue................ 4,678,562 3,169,064 3,579,485 1,827,603
----------- ----------- ----------- -----------
Total revenue.............. 56,937,420 59,104,780 64,740,454 33,868,025
----------- ----------- ----------- -----------
Expenses:
Property operating costs and
expenses.................... 11,639,735 11,611,249 12,583,203 6,519,270
Food and beverage costs and
expenses.................... 12,023,204 12,331,905 12,741,884 6,312,164
General and administrative... 4,877,037 5,398,014 5,780,741 2,904,924
Advertising and promotion.... 3,735,277 3,822,370 3,874,160 2,237,109
Repairs and maintenance...... 2,744,397 2,564,251 2,719,954 1,437,289
Utilities.................... 2,898,837 3,021,303 2,945,878 1,326,429
Management fees.............. 799,987 933,961 1,285,385 723,653
Franchise costs.............. 1,403,567 1,492,504 1,701,346 714,856
Depreciation................. 5,550,188 5,344,060 5,498,602 2,110,088
Amortization................. 250,459 277,887 152,588 192,777
Real estate and personal
property taxes, and property
insurance................... 1,632,849 1,651,113 1,481,258 722,903
Interest expense............. 4,667,281 4,340,948 4,734,958 2,161,521
Other expense................ 909,555 820,168 897,414 869,511
----------- ----------- ----------- -----------
Total expenses............. 53,132,373 53,609,733 56,397,371 28,232,494
----------- ----------- ----------- -----------
Revenues over expenses..... $ 3,805,047 $ 5,495,047 $ 8,343,083 $ 5,635,531
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-53
<PAGE>
OTHER INITIAL 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
Revenues over expenses (unaudited)............................... 5,635,531
Capital contributions (unaudited)................................ 1,674,711
Distributions.................................................... (11,832,475)
-----------
Balance, June 30, 1996 (unaudited)................................. $18,766,296
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-54
<PAGE>
OTHER INITIAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
JUNE 30,
1993 1994 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flow from operating
activities: (UNAUDITED)
Revenues over expenses.. $ 3,805,047 $ 5,495,047 $ 8,343,083 $ 5,635,531
Adjustments to reconcile
revenues over expenses
to net cash provided by
operating activities:
Depreciation.......... 5,550,188 5,344,060 5,498,602 2,110,088
Amortization.......... 250,459 277,887 152,588 192,777
Changes in assets and
liabilities:
Restricted cash....... (501,015) 128,081 (448,408)
Accounts receivable... 208,742 393,847 240,450 (1,179,246)
Inventories........... 17,473 17,928 (163,383) 88,000
Prepaid expenses...... (84,011) (53,658) (97,601) (9,514)
Other assets.......... (511,774) 1,546,499 571,105 60,451
Franchise agreements.. (78,804) (4,000)
Organization costs.... (135,928) (3,239) (82,727)
Accounts payable,
trade................ (311,030) 141,223 (115,967) 189,387
Payable to
affiliates........... 129,927 66,559 86,381 (233,258)
Accrued expenses and
other liabilities.... 881,626 357,616 28,397 (312,331)
Restricted cash....... (503,082)
----------- ----------- ----------- -----------
Net cash provided by
operating
activities......... 9,220,900 13,711,089 14,092,008 5,956,076
----------- ----------- ----------- -----------
Cash flows from investing
activities:
Improvements and
additions to hotel
properties............. (1,274,727) (4,903,592) (4,352,606) (1,383,722)
----------- ----------- ----------- -----------
Cash flows from financing
activities:
Proceeds from
borrowings............. 493,713 202,287 638,538 7,965,739
Principal payments on
borrowings............. (4,374,090) (2,662,272) (2,790,264) (453,117)
Payments on capital
lease obligation....... (206,194) (221,486) (237,913) (125,493)
Payments for deferred
loan costs............. (189,152) (245,122) (201,650)
Capital contributions... 1,803,806 1,486,050 1,674,711
Distributions paid...... (3,743,317) (6,750,264) (6,857,733) (11,832,475)
----------- ----------- ----------- -----------
Net cash used in
financing
activities......... (7,829,888) (7,817,081) (8,006,444) (2,972,285)
----------- ----------- ----------- -----------
Net change in cash and
cash equivalents......... 116,285 990,416 1,732,958 1,600,069
Cash and cash equivalents
at beginning of period... 1,408,081 1,524,366 2,514,782 4,247,740
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period......... $ 1,524,366 $ 2,514,782 $ 4,247,740 $ 5,847,809
=========== =========== =========== ===========
Supplemental disclosures
of cash flow information:
Cash paid during the
year for interest...... $ 4,793,349 $ 4,275,522 $ 4,590,280 $ 2,215,191
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-55
<PAGE>
OTHER INITIAL 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") were acquired primarily from limited partnerships
controlled by the shareholders of American General Hospitality, Inc. (the
"AGHI Affiliates"). The remaining nine Initial Hotels (the "Other Initial
Hotels") were acquired primarily from parties controlled by persons
unaffiliated with AGHI.
Upon completion of the proposed initial public offering described below, the
Company acquired a 80.2% equity interest in American General Hospitality
Operating Partnership, L.P. (the "Operating Partnership"). A wholly owned
subsidiary of the Company is the sole general partner of the Operating
Partnership. The Operating Partnership owns the Initial Hotels and leases 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
Other Initial 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 Other Initial 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
Best Western 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 Other Initial Hotels,
substantially all of whose assets and operations have been 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.
Initial Public Offering--As of July 31, 1996, the Company completed an
initial public offering of 7,500,000 shares of its common stock and an
additional 575,000 shares of common stock were issued by the Company on August
28, 1996, upon exercise of the underwriters' over-allotment option at a price
per common share of $17.75 (the "IPO"). Upon consummation of the IPO, the
Company contributed all of the net proceeds of the IPO to the Operating
Partnership in exchange for an approximate 81.3% equity interest in the
Operating Partnership. The Operating Partnership used such funds to purchase
certain of the Initial Hotels, repay debt and other obligations of the Initial
Hotels, and for working capital.
F-56
<PAGE>
OTHER INITIAL 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 Other Initial 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 Other Initial 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 Other Initial 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-57
<PAGE>
OTHER INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Concentration of Credit Risk--The Other Initial Hotels place cash deposits
at major banks. At December 31, 1995, bank account balances exceeded Federal
Deposit Insurance Corporation 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 Other
Initial 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.
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.
Aggregate annual principal payments for the Other Initial 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>
F-58
<PAGE>
OTHER INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 Best Western 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 Best Western 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 Best Western Albuquerque Airport Hotel land lease requires
the owner to add 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>
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.
F-59
<PAGE>
OTHER INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 IPO and the resulting prepayment of debt, a selling
partnership will pay prepayment penalties on one note payable totalling
approximately $504,000.
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 Other Initial 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 Other
Initial Hotels' debt approximates fair value due to the Other Initial Hotels'
ability to obtain such borrowings at comparable interest rates.
7. RELATED PARTY TRANSACTIONS
During 1993, 1994, and 1995, the owner of the Best Western 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 Best Western
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.
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.
F-60
<PAGE>
OTHER INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
As discussed in Note 1, the nine Other Initial Hotels were acquired by the
Company subsequent to April 8, 1996. The acquisitions were accounted for by
the Company under the purchase method of accounting. Accordingly, the cost
basis of the hotels changed 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 were refinanced upon acquisition and postacquisition
debt is different than the historical debt reflected in the accompanying
financial statements. All management agreements were 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-61
<PAGE>
OTHER INITIAL 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
Best Western
Albuquerque
Airport Hotel;
Albuquerque,
NM.............. 7,995,562 1,655,118 9,650,680 9,650,680 302,770
Holiday Inn
Select-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
Mission 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-
Toledo; 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
Best Western
Albuquerque
Airport Hotel;
Albuquerque,
NM.............. 9,347,910 1972 1988 27 YRS
Holiday Inn
Select-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
Mission Valley;
San Diego, CA... 8,562,345 1970 1991 40 YRS
Hilton Hotel-
Toledo; 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-62
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
American General Hospitality Corporation
We have audited the accompanying balance sheet of the Days Inn Lake Buena
Vista hotel (described in Note 1) as of December 31, 1995 and the related
statements of operations, equity and cash flows for the period then ended.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Days Inn Lake Buena
Vista hotel as of December 31, 1995, and the result of its operations and its
cash flows for the period then ended in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
November 26, 1996
F-63
<PAGE>
DAYS INN LAKE BUENA VISTA HOTEL
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER
1995 30 1996
ASSETS ----------- -----------
(UNAUDITED)
<S> <C> <C>
Investments in hotel properties, at cost:
Land and land improvement........................... $ 2,096,028 $ 2,096,028
Buildings and improvements.......................... 18,859,256 18,889,376
Furniture, fixtures and equipment................... 3,165,265 3,623,972
----------- -----------
24,120,549 24,609,376
Less accumulated depreciation......................... (1,003,306) (1,754,155)
----------- -----------
Net investment in hotel properties.................... 23,117,243 22,855,221
Cash and cash equivalents............................. 73,606 258,807
Restricted cash....................................... 8,340 418,947
Accounts receivable, net.............................. 409,542 323,559
Inventories........................................... 20,972 13,925
Prepaid expenses...................................... 58,580 98,168
Deferred expenses..................................... 304,581 246,407
Other assets.......................................... 2,151
----------- -----------
Total assets...................................... $23,995,015 $24,215,034
=========== ===========
LIABILITIES AND EQUITY
Debt.................................................. $20,000,000 $20,000,000
Capital lease obligation.............................. 253,506
Accounts payable, trade............................... 261,583 130,769
Accrued expenses and other liabilities................ 50,660 790,740
----------- -----------
Total liabilities................................. 20,312,243 21,175,015
----------- -----------
Commitments and contingencies (Note 4)................
Capital............................................... 4,292,000 3,242,000
Accumulated deficit................................... (609,228) (201,981)
----------- -----------
Total equity...................................... 3,682,772 3,040,019
----------- -----------
Total liabilities and equity...................... $23,995,015 $24,215,034
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
DAYS INN LAKE BUENA VISTA HOTEL
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE NINE MONTHS ENDED SEPTEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
DECEMBER ----------------------
31 1995 1995 1996
---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Room revenue............................. $6,825,271 $5,438,660 $6,337,410
Food and beverage revenue................ 810,066 671,266 561,985
Other revenue............................ 668,959 511,060 594,208
---------- ---------- ----------
Total revenue.......................... 8,304,296 6,620,986 7,493,603
---------- ---------- ----------
Expenses:
Property operating costs and expenses.... 2,054,677 1,632,694 1,703,115
Food and beverage costs and expenses..... 627,923 496,344 478,086
General and administrative............... 782,649 575,386 623,056
Advertising and promotion................ 468,824 328,469 441,557
Repairs and maintenance.................. 485,870 354,280 400,059
Utilities................................ 512,447 415,098 409,586
Management fees.......................... 131,004 98,253 144,007
Franchise costs.......................... 443,643 353,513 411,932
Depreciation............................. 929,559 697,170 750,849
Amortization............................. 77,043 57,651 58,174
Real estate and personal property taxes,
and property insurance ................. 459,228 399,197 424,267
Interest expense......................... 1,770,833 1,333,333 1,241,668
---------- ---------- ----------
Total expense.......................... 8,743,700 6,741,388 7,086,356
---------- ---------- ----------
Net income (loss)...................... $ (439,404) $ (120,402) $ 407,247
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-65
<PAGE>
DAYS INN LAKE BUENA VISTA HOTEL
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
EQUITY
----------
<S> <C>
Balance, December 31, 1994 $4,430,176
Net loss.......................................................... (439,404)
Distributions..................................................... (308,000)
----------
Balance December 31, 1995 3,682,772
Net income (unaudited)............................................ 407,247
Distributions (unaudited)......................................... (1,050,000)
----------
Balance, September 30, 1996 (unaudited)............................. $3,040,019
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
DAYS INN LAKE BUENA VISTA HOTEL
STATEMENTS OF CASH FLOWS
FOR THE YEAR MONTHS ENDED DECEMBER 31, 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
DECEMBER 31 ------------------------
1995 1995 1996
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)....................... $ (439,404) $ (120,402) $ 407,247
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation.......................... 929,559 697,170 750,849
Amortization.......................... 77,043 57,651 58,174
Changes in assets and liabilities:
Restricted cash....................... 30,827 (686,417) (410,607)
Accounts receivable................... (125,246) (121,875) 85,983
Inventories........................... (1,833) (1,609) 7,047
Prepaid expenses...................... 69,876 88,342 (39,588)
Other assets.......................... (2,151) (2,151) 2,151
Organization costs.................... (15,679) (15,679)
Accounts payable, trade............... 113,824 (29,042) (130,814)
Accrued expenses and other
liabilities.......................... (369,360) 347,603 740,080
---------- ---------- -----------
Net cash provided by operating
activities......................... 267,456 213,591 1,470,522
---------- ---------- -----------
Cash flows from investing activities:
Improvements and additions to hotel
properties............................. (496,076) (380,902) (224,299)
---------- ---------- -----------
Cash flows from financing activities:
Payments on capital lease obligation.... (11,022)
Distributions paid...................... (308,000) (108,000) (1,050,000)
---------- ---------- -----------
Net cash used in financing
activities......................... (308,000) (108,000) (1,061,022)
---------- ---------- -----------
Net change in cash and cash equivalents .. (536,620) (275,311) 185,201
Cash and cash equivalents at beginning of
period................................... 610,226 610,226 73,606
---------- ---------- -----------
Cash and cash equivalents at end of
periods.................................. $ 73,606 $ 334,915 $ 258,807
========== ========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest.. $1,770,833 $1,333,333 $ 1,241,668
========== ========== ===========
</TABLE>
Supplemental schedule of non cash financing activities:
The Partnership entered into a capital lease obligation in the amount of
$264,528 in August 1996.
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
DAYS INN LAKE BUENA VISTA HOTEL
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization--American General Hospitality Operating Partnership, L.P.
acquired a 100% ownership interest in a 490 room Days Inn hotel located in
Lake Buena Vista, Florida (the "Days Inn Lake Buena Vista hotel") from persons
unaffiliated with the Operating Partnership on October 22, 1996. The Operating
Partnership, a subsidiary of American General Hospitality Corporation (the
"Company") which is a Maryland corporation that intends to qualify as a real
estate investment trust ("REIT"), was established to acquire, own and lease
hotel properties. The Company completed its initial public offering on July
31, 1996.
Basis of Presentation--The accompanying financial statements of the Days Inn
Lake Buena Vista hotel have been presented on a basis consistent with the
Company due to the anticipated common ownership and management since the
entity will be the subject of a business combination with the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Hotel Property--The hotel property is stated at the lower of
cost or net realizable value and is depreciated using the straight-line method
over estimated useful lives ranging from 39 years for building and
improvements and 3 to 7 years for furniture, fixtures and equipment.
The owners of the Days Inn Lake Buena Vista hotel review the carrying value
of the 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 owners of the Days Inn Lake Buena Vista hotel
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 owners of the Days Inn Lake Buena Vista hotel 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 of food and beverage items and are stated
at the lower of cost (generally, first-in first-out) or market.
Deferred Expenses--Deferred expenses primarily consist of organization
costs. Amortization of organization costs is computed using the straight-line
method over five years. Accumulated amortization at December 31, 1995 is
$83,245.
Income Taxes--The Days Inn Lake Buena Vista hotel is included in a limited
partnership which is not a taxable entity. The results of operations are
included in the tax returns of the partners. The partnership's tax return 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.
F-68
<PAGE>
DAYS INN LAKE BUENA VISTA HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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--At December 31, 1995, bank account balances
exceeded Federal Deposit Insurance Corporation limits by approximately
$148,642.
Recently Issued Statement of Financial Accounting Standards--The Days Inn
Lake Buena Vista hotel 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 Orlando
Acquisition Hotel's financial statements.
Interim Financial Information--The unaudited interim financial statements as
of September 30, 1996 and for the nine months ended September 31, 1995 and
1996 have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("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 as of December 31, 1995, consists of a $20,000,000 first mortgage note
payable in monthly interest-only payments at the prime rate (8.5% at December
31, 1995) through December 31, 1997, and monthly principal plus interest
payments at prime plus 1.5% from January 1998 through the maturity date of
November 30, 2004. A final principal payment of $17,642,267 is due at
maturity. All debt is collateralized by the investment in hotel property.
Aggregate annual principal payments for the Days Inn Lake Buena Vista
hotel's debt at December 31, 1995, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1998.......................................................... $ 261,764
1999.......................................................... 306,837
2000 and thereafter........................................... 19,431,399
-----------
Total..................................................... $20,000,000
===========
</TABLE>
F-69
<PAGE>
DAYS INN LAKE BUENA VISTA HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. COMMITMENTS
Management fees represent amounts paid to an affiliated party. The basic
management fee is $10,917 per month. The incentive management fee is paid
based on net cash flow as follows:
Net Cash Flow ("NCF") Incentive Fee
Less than $600,000.........................................................None
$ 600,000-$ 750,000....................$ 29,000 x [NCF--$600,000) / $150,000]
$ 750,001-$ 900,000...........$ 29,000 +[31,000 x (NCF--$750,000) / $150,000]
$ 900,001-$1,000,000.........$ 60,000 + [$14,000 x (NCF--$900,000) / $100,000]
$1,000,001-$1,200,000......$ 74,000 + [$101,000 x (NCF--$1,000,000) / $200,000]
$1,200,001-$1,500,000......$175,000 + [$116,000 x (NCF--$1,200,000) / $300,000]
Greater than $1,500,000...$291,000 + [$.0045 x (annual gross room revenues less
gross room revenues at date on which
NCF surpassed $1,500,000)] to a
maximum of 20% x (NCF--$1,500,000)
An incentive management fee of $45,754 was paid as of September 30, 1996. No
incentive fee was paid in 1995. Net cash flow for a particular year is defined
in the management agreement as gross revenues attributable to the property
less (i) all amounts required to service indebtedness, (ii) operating expenses
including the basic management fee, and (iii) all reserves including but not
limited to the 3% FF&E reserve.
Franchise costs represent the annual expense for franchise royalties and
reservation services under the terms of the franchise agreement expiring in
2004. Franchise costs are based upon 6.5% of gross room revenue.
The Days Inn Lake Buena Vista hotel pays, on a program by program basis, the
franchisor for sales and advertising expenses incurred to promote the hotel at
the national level. These costs are included in advertising and promotion
expenses in the Statements of Operations. Additional sales and advertising
costs are incurred at the local property level.
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 Days Inn Lake Buena Vista hotel reports 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 Days Inn Lake Buena Vista hotel's debt approximates fair value due to
the Days Inn Lake Buena Vista hotel's ability to obtain such borrowings at
comparable interest rates.
6. RELATED PARTY TRANSACTIONS
The Days Inn Lake Buena Vista hotel's annual management fee for all periods
presented was paid to a company owned by Richard Kessler, a partner of the
Days Inn Lake Buena Vista hotel.
The Days Inn Lake Buena Vista hotel purchased property insurance for all
periods presented from an entity affiliated with Howard Milstein, a partner of
the Days Inn Lake Buena Vista hotel.
7. SUBSEQUENT EVENTS
In August 1996, the Days Inn Lake Buena Vista hotel entered into a capital
lease obligation in exchange for equipment. Leased capital assets included in
furniture, fixtures, and equipment as of September 30, 1996, were $264,528
with $6,613 in accumulated depreciation.
F-70
<PAGE>
DAYS INN LAKE BUENA VISTA HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On October 22, 1996, the Company and the Operating Partnership purchased
100.0% of the partnership interest in Lake Buena Vista Partners, Ltd. (the
"Partnership") from unrelated third parties. The Partnership, which owns the
Days Inn Lake Buena Vista hotel was acquired for a purchase price of
$30,500,000, plus estimated closing costs of $300,000, which is payable as
follows: (i) $30,000,000 in cash, and (ii) $500,000 through the issuance of
25,397 shares of restricted common stock of the Company. In addition, in
connection with this acquisition, the Company purchased a license and an
association membership from the seller for the membership in Grand Theme
Hotels and the exclusive use of the African royal safari theme in the Orlando
area for approximately $1.3 million payable in installments through 1997, and
will pay an additional $900,000 for certain construction, design and other
services related to the operation of the Days Inn Lake Buena Vista hotel.
The cash required to acquire the Partnership was provided from borrowings
under the Company's Line of Credit.
F-71
<PAGE>
There are six pictures on this page which appear counter-clockwise as follows:
1) A photograph of the Hilton Hotel - Toledo with the text "Hilton Hotel;
Toledo, OH" appearing beside the picture.
2) A rendering of the LeBaron Airport Hotel as it will appear following the
completion of proposed renovations and its conversion to the Wyndham brand.
The text "Proposed" is superimposed on the picture.
3) A photograph of the LeBaron Airport Hotel. The text "Existing" is
superimposed on the photograph.
The text "Wyndham Hotel Albuquerque Airport; Albuquerque, NM (Currently
Best Western)" appears besides pictures 2) and 3).
4) A rendering of the Holiday Inn Park Center Plaza, as it will appear
following the completion of proposed renovations and its conversion to the
Wyndham brand. The text "Proposed" is superimposed on the picture.
5) A photograph of the Holiday Inn Park Center Plaza. The text "Existing" is
superimposed on the photograph.
The text "Crowne Plaza Downtown; San Jose, CA (Currently Holiday Inn)"
appears between pictures 4) and 5).
6) A photograph of the Four Points by Sheraton with the text "Wyndham Garden
Hotel; Marietta, GA (Currently Four Points by Sheraton) (Proposed
Acquisition Hotel)" appearing beside the picture.
The text "American General Hospitality Corporation" and the Company's
symbol appear on the lower left hand corner of the page.
<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............................................................. 16
The Company.............................................................. 28
Use of Proceeds.......................................................... 38
Price Range of Common Stock and Distribution Policy...................... 39
Capitalization........................................................... 40
Selected Financial Information........................................... 41
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 46
The Hotel Industry....................................................... 54
The Hotels............................................................... 55
Formation Transactions................................................... 86
Management............................................................... 89
Certain Relationships and Transactions................................... 99
AGHI, the Lessee and Other Operators..................................... 101
Principal Stockholders................................................... 104
Description of Capital Stock............................................. 106
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws.................................................................. 110
Policies and Objectives with Respect to Certain Activities............... 114
Shares Available for Future Sale......................................... 118
Partnership Agreement.................................................... 120
Federal Income Tax Considerations........................................ 123
Underwriting............................................................. 141
Experts.................................................................. 142
Legal Matters............................................................ 142
Additional Information................................................... 142
Glossary................................................................. 144
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,500,000 Shares
[LOGO OF AMERICAN GENERAL HOSPITALITY CORPORATION APPEARS HERE]
Common Stock
-----------
PROSPECTUS
, 1997
-----------
Smith Barney Inc.
Legg Mason Wood Walker
Incorporated
Montgomery Securities
Prudential Securities 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 shares of
Common Stock.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 45,881
NASD filing fee................................................ 15,522
NYSE listing fee............................................... 14,800
Printing, engraving and mailing expenses....................... 300,000
Accountant's fees and expenses................................. 250,000
Blue Sky fees and expenses..................................... 5,000
Legal fees..................................................... 500,000
Transfer agent's fees.......................................... 1,500
Miscellaneous expenses......................................... 1,102,297
----------
Total........................................................ $2,235,000
==========
</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 were 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 were redeemed by the Company for $100
upon closing of the IPO. In connection with the IPO, the Company also issued
137,008 shares of Common Stock to the Plan, valued at approximately $2.4
million, based on the offering price of the shares in the IPO, in exchange for
its interests in five of the Initial Hotels. 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 were purchased by the Plan and issued by the Company in reliance on the
exemption provided by Section 4(2) of the Act.
In connection with the acquisition of the Days Inn Lake Buena Vista on
October 22, 1996, the Company issued 25,397 shares of Common Stock to an
investor, valued at approximately $500,000 based on the value of the shares at
the time of closing of the transaction, in exchange for his interest in the
hotel. The shares of Common Stock were issued for investment purposes only,
and not with a view to any resale, fractionalization or distribution thereof.
The shares of Common Stock were purchased by that investor and 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.
II-1
<PAGE>
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 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 has purchased 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
Pro Forma Statements of Operations for the Year Ended December 31, 1995,
the Twelve Months Ended September 30, 1996 and the Nine Months Ended
September 30, 1996 and 1995 (unaudited)................................ F-3
Pro Forma Consolidated Balance Sheet as of September 30, 1996
(unaudited)............................................................ F-10
Report of Independent Accountants....................................... F-14
Consolidated Balance Sheet as of September 30, 1996..................... F-15
Consolidated Statement of Operations for the Period from July 31, 1996
(inception of operations) through September 30, 1996................... F-16
Consolidated Statement of Shareholders' Equity for the Period from April
12, 1996 (date of capitalization) through September 30, 1996........... F-17
Consolidated Statement of Cash Flows for the Period from July 31, 1996
(inception of operations) through September 30, 1996................... F-18
Notes to Consolidated Financial Statements.............................. F-19
Schedule III--Real Estate and Accumulated Depreciation as of September
30, 1996............................................................... F-26
AGH Leasing, L.P.
Pro Forma Combined Statements of Operations for the Year Ended December
31, 1995, the Twelve Months Ended September 30, 1996 and the Nine
Months Ended September 30, 1996 and 1995 (unaudited)................... F-27
Balance Sheet as of September 30, 1996 (unaudited)...................... F-34
Statement of Operations for the Period from July 31, 1996 (inception of
operations) through September 30, 1996 (unaudited)..................... F-35
Statement of Cash Flows for the Period from July 31, 1996 (inception of
operations) through September 30, 1996 (unaudited)..................... F-36
Notes to Financial Statements........................................... F-37
AGH Predecessor Hotels
Report of Independent Accountants....................................... F-40
Combined Balance Sheets as of December 30, 1994, December 29, 1995 and
July 30, 1996.......................................................... F-41
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 for the period from December 30, 1995 through
July 30, 1996.......................................................... F-42
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 and for the period from December 30, 1995 through
July 30, 1996.......................................................... F-43
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 for the period from December 30, 1995 through
July 30, 1996.......................................................... F-44
Notes to Combined Financial Statements.................................. F-45
Schedule III--Real Estate and Accumulated Depreciation as of July 30,
1996................................................................... F-50
Other Initial Hotels
The Other Initial Hotels represent nine of the Initial Hotels acquired,
concurrent with the Company's initial public offering, primarily from
parties unaffiliated with the Company through contracts with the
sellers acquired from an AGHI affiliate.
Report of Independent Accountants....................................... F-51
Combined Balance Sheets as of December 31, 1994 and 1995 (audited) and
June 30, 1996 (unaudited).............................................. F-52
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
Combined Statements of Operations for each of the Three Years in the
Period Ended
December 31, 1995 (audited) and the Six Months Ended June 30, 1996
(unaudited)........................................................... F-53
Combined Statements of Equity for each of the Three Years in the Period
Ended
December 31, 1995 (audited) and the Six Months Ended June 30, 1996
(unaudited)........................................................... F-54
</TABLE>
<TABLE>
<S> <C>
Combined Statements of Cash Flows for each of the Three Years in the
Period Ended
December 31, 1995 (audited) and the Six Months ended June 30, 1996
(unaudited)............................................................ F-55
Notes to Combined Financial Statements.................................. F-56
Schedule III--Real Estate and Accumulated Depreciation as of December
31, 1995............................................................... F-62
Days Inn Lake Buena Vista Hotel
Represents the Days Inn Lake Buena Vista hotel in Orlando, Florida (one
of the Acquired Hotels) acquired by the Company on October 22, 1996.
Audited financial statements are provided in accordance with the
significant business acquisition rules and regulations of the
Securities and Exchange Commission.
Report of Independent Accountants....................................... F-63
Balance Sheets as of December 31, 1995 (audited) and September 30, 1996
(unaudited)............................................................ F-64
Statements of Operations for the Year Ended December 31, 1995 (audited)
and the Nine Months Ended September 30, 1996 and 1995 (unaudited)...... F-65
Statements of Equity for the Year Ended December 31, 1995 (audited) and
the Nine Months Ended September 30, 1996 and 1995 (unaudited).......... F-66
Statements of Cash Flows for the Year Ended December 31, 1995 (audited)
and the Nine Months Ended September 30, 1996 and 1995 (unaudited)...... F-67
Notes to Financial Statements........................................... F-68
</TABLE>
II-4
<PAGE>
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
*1.1 --Form of Underwriting Agreement
**2.1 --Sale and Contribution Agreement for Holiday Inn Select-Madison
**2.2 --Purchase and Sale Agreement for Holiday Inn Park Center Plaza
**2.3 --Hotel Purchase Agreement for Best Western Albuquerque Airport Hotel
**2.4 --Hotel Purchase Agreement for Le Baron Airport Hotel
**2.5 --Real Estate Sale Agreement for Days Inn Ocean City
--Purchase and Sale Agreement and Escrow Instructions for Holiday Inn
**2.6 Mission Valley
***2.7 --Purchase Agreement for Days Inn Lake Buena Vista
+2.8 --Purchase and Sale Agreement by and between Theodore H. Kruttschnitt,
III & Catherine M. Kruttschnitt and American General Hospitality
Operating Partnership, L.P.
+2.9 --Hotel Purchase Agreement by and between American General Hospitality
Operating Partnership, L.P. and Renthotel Durham, L.L.C.
+2.10 --Hotel Purchase Agreement by and between SNA of Georgia, Inc. and
American General Hospitality Operating Partnership, L.P.
+2.11 --Hotel Purchase Agreement by and between SKL of Florida, Inc. and
American General Hospitality Operating Partnership, L.P.
+2.12 --Hotel Purchase Agreement by and between French Quarter Suites, Inc.
and American General Hospitality Operating Partnership, L.P.
2.13 --Hotel Purchase Agreement by and between American General Hospitality
Operating Partnership, L.P. or its Assigns and I-90 Hotel, Inc. and
ACQ, Inc. (Radisson Hotel Arlington Heights)
--Contribution Agreement for Holiday Inn New Orleans International
**2.14 Airport
**2.15 --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
**2.16 --Contribution Agreement (GP) for Holiday Inn Dallas DFW Airport South
--Omnibus Option Agreement (Cash) for Holiday Inn Dallas DFW Airport
**2.17 South
--Omnibus Option Agreement (OP Units) for Holiday Inn Dallas DFW
**2.18 Airport South
**2.19 --Option Agreement for Holiday Inn Dallas DFW Airport West
**2.20 --Omnibus Option Agreement (OP Units) for Hotel Maison de Ville
**2.21 --Omnibus Option Agreement (Cash) for Hotel Maison de Ville
**2.22 --Option Agreement for Hotel Maison de Ville
**2.23 --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
**3.1 --Articles of Incorporation of the Registrant
**3.2 --Articles of Amendment and Restatement of the Registrant
**3.3 --Bylaws of the Registrant
--Form of Second Articles of Amendment and Restatement of the
**3.4 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
--American General Hospitality Partnership, L.P. Limited Partnership
**10.1 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.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
--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 --Credit Agreement among the American General Hospitality Operating
Partnership, L.P., Societe Generale, Southwest Agency, Bank One,
Texas, N.A. and the banks named therein
--Form of American General Hospitality Corporation 1996 Incentive
**10.11 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)
--Form of Indemnification Agreement between the Registrant and its
**10.19 executive officers and directors
**10.20 --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)
**10.21 --Form of Management Company Master Agreement among AGH Leasing,
L.P., American General Hospitality, Inc., Steven D. Jorns and
Bruce G. Wiles.
10.22 --Master Alliance Agreement by and among American General Hospitality
Corporation, American General Hospitality Operating Partnership,
L.P. and WHC Franchise Corporation, WHC Development Corporation
*10.23 --Commitment Letter for Line of Credit
21.1 --Subsidiaries of the Company
--Consent of Battle Fowler LLP (included in Exhibits 5.1 and 8.1
*23.1 hereto)
**23.2 --Consent of Coopers & Lybrand L.L.P. as to its 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)
</TABLE>
- --------
+Previously filed.
* To be filed by Amendment.
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-11 (Registration No. 333-4568) and incorporated by reference as an
exhibit to this Registration Statement.
*** Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated October 22, 1996, filed with the Commission on November 5, 1996.
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.
II-6
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the 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.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<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. 2
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 JANUARY
16, 1997.
AMERICAN GENERAL HOSPITALITY CORPORATION
a Maryland corporation (Registrant)
By: /s/ Steven D. Jorns
--------------------------------
STEVEN D. JORNS
Chairman of the Board, Chief
Executive Officer, and President
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES
INDICATED ON JANUARY 16, 1997.
SIGNATURE TITLE DATE
* Chairman of the January 16, 1997
- ------------------------------------- Board, Chief
STEVEN D. JORNS Executive Officer,
and President
/s/ Kenneth E. Barr Executive Vice January 16, 1997
- ------------------------------------- President, Chief
KENNETH E. BARR Financial Officer,
Principal
Accounting Officer,
Secretary and
Treasurer
* Director January 16, 1997
- -------------------------------------
H. CABOT LODGE III
* Director January 16, 1997
- -------------------------------------
JAMES R. WORMS
* Director January 16, 1997
- -------------------------------------
JAMES MCCURRY
* Director January 16, 1997
- -------------------------------------
KENT R. HANCE
*By: /s/ Steven D. Jorns January 16, 1997
--------------------------------
STEVEN D. JORNS
Attorney-in-Fact
II-8
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
*1.1 --Form of Underwriting Agreement
**2.1 --Sale and Contribution Agreement for Holiday Inn Select-Madison
**2.2 --Purchase and Sale Agreement for Holiday Inn Park Center Plaza
**2.3 --Hotel Purchase Agreement for Best Western Albuquerque Airport Hotel
**2.4 --Hotel Purchase Agreement for Le Baron Airport Hotel
**2.5 --Real Estate Sale Agreement for Days Inn Ocean City
--Purchase and Sale Agreement and Escrow Instructions for Holiday Inn
**2.6 Mission Valley
***2.7 --Purchase Agreement for Days Inn Lake Buena Vista
+2.8 --Purchase and Sale Agreement by and between Theodore H. Kruttschnitt,
III & Catherine M. Kruttschnitt and American General Hospitality
Operating Partnership, L.P.
+2.9 --Hotel Purchase Agreement by and between American General Hospitality
Operating Partnership, L.P. and Renthotel Durham, L.L.C.
+2.10 --Hotel Purchase Agreement by and between SNA of Georgia, Inc. and
American General Hospitality Operating Partnership, L.P.
+2.11 --Hotel Purchase Agreement by and between SKL of Florida, Inc. and
American General Hospitality Operating Partnership, L.P.
+2.12 --Hotel Purchase Agreement by and between French Quarter Suites, Inc.
and American General Hospitality Operating Partnership, L.P.
2.13 --Hotel Purchase Agreement by and between American General Hospitality
Operating Partnership, L.P. or its Assigns and I-90 Hotel, Inc. and
ACQ, Inc. (Radisson Hotel Arlington Heights)
--Contribution Agreement for Holiday Inn New Orleans International
**2.14 Airport
**2.15 --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
**2.16 --Contribution Agreement (GP) for Holiday Inn Dallas DFW Airport South
--Omnibus Option Agreement (Cash) for Holiday Inn Dallas DFW Airport
**2.17 South
--Omnibus Option Agreement (OP Units) for Holiday Inn Dallas DFW
**2.18 Airport South
**2.19 --Option Agreement for Holiday Inn Dallas DFW Airport West
**2.20 --Omnibus Option Agreement (OP Units) for Hotel Maison de Ville
**2.21 --Omnibus Option Agreement (Cash) for Hotel Maison de Ville
**2.22 --Option Agreement for Hotel Maison de Ville
**2.23 --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
**3.1 --Articles of Incorporation of the Registrant
**3.2 --Articles of Amendment and Restatement of the Registrant
**3.3 --Bylaws of the Registrant
--Form of Second Articles of Amendment and Restatement of the
**3.4 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
--American General Hospitality Partnership, L.P. Limited Partnership
**10.1 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
--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 --Credit Agreement among the American General Hospitality Operating
Partnership, L.P., Societe Generale, Southwest Agency, Bank One,
Texas, N.A. and the banks named therein
--Form of American General Hospitality Corporation 1996 Incentive
**10.11 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)
--Form of Indemnification Agreement between the Registrant and its
**10.19 executive officers and directors
**10.20 --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)
**10.21 --Form of Management Company Master Agreement among AGH Leasing,
L.P., American General Hospitality, Inc., Steven D. Jorns and
Bruce G. Wiles.
10.22 --Master Alliance Agreement by and among American General Hospitality
Corporation, American General Hospitality Operating Partnership,
L.P. and WHC Franchise Corportion, WHC Development Corporation
*10.23 --Commitment Letter for Line of Credit
21.1 --Subsidiaries of the Company
--Consent of Battle Fowler LLP (included in Exhibits 5.1 and 8.1
*23.1 hereto)
**23.2 --Consent of Coopers & Lybrand L.L.P. as to its 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)
</TABLE>
- --------
+Previously filed.
* To be filed by Amendment.
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-11 (Registration No. 333-4568) and incorporated by reference as an
exhibit to this Registration Statement.
*** Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated October 22, 1996, filed with the Commission on November 5, 1996.
<PAGE>
EXHIBIT 2.13
HOTEL PURCHASE AGREEMENT
------------------------
THIS HOTEL PURCHASE AGREEMENT (this "Agreement") is made as of this __ day
of January, 1997 by and between I-90 HOTEL, INC., an Illinois corporation
("SELLER"), ACQ, INC., an Illinois corporation ("ACQ") and AMERICAN GENERAL
------ ---
HOSPITALITY OPERATING PARTNERSHIP, L.P., a Delaware limited partnership,
together with its successors and assigns ("PURCHASER").
---------
RECITALS:
--------
A. Seller is the owner of the Hotel (as hereinafter defined) known as the
Radisson Arlington Heights located in Arlington Heights, Cook County, Illinois.
B. Seller desires to sell the Hotel to Purchaser, and Purchaser desires
to purchase the Hotel from Seller, on the terms and conditions hereinafter set
forth.
AGREEMENT:
---------
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE 1
THE CONTRACT
------------
For and in consideration of the mutual benefits enjoyed by one another
under this Agreement, Seller agrees to sell and convey the Hotel to Purchaser
and Purchaser agrees to purchase and accept conveyance of the Hotel pursuant to
the terms and conditions set forth in this Agreement.
ARTICLE 2
HOTEL
-----
As used in this Agreement, the term "HOTEL" shall mean and refer to the
-----
following:
(a) The real property located at 75 West Algonquin Rd., Arlington
Heights, Cook County, Illinois, more particularly described on Exhibit A
---------
attached hereto, together with all rights, alleys, streets, strips, gores,
waters, privileges, appurtenances, advantages and easements belonging thereto or
in any way appertaining thereto (collectively the "LAND");
----
<PAGE>
(b) The 6 story, 201 room hotel and all other buildings, structures,
fixtures, parking areas, and other improvements presently located upon the Land
(collectively, the "IMPROVEMENTS");
------------
(c) Seller's right, title and interest in, to and under all tangible
personal property and fixtures (which are not part of the Improvements) of any
kind attached to, or located upon and used in connection with the ownership,
maintenance, use or operation of the Land or Improvements as of the date hereof
(or acquired by Seller and so employed prior to Closing, as defined below),
including, but not limited to, all furniture, fixtures, equipment, signs; all
heating, lighting, plumbing, drainage, electrical, air conditioning, and other
mechanical fixtures and equipment and systems; all copy machines, computers,
software, facsimile machines and other office equipment; all elevators,
escalators, and related motors and electrical equipment and systems; all hot
water heaters, furnaces, heating controls, motors and boiler pressure systems
and equipment, all shelving and partitions, all ventilating equipment, and all
incinerating and disposal equipment; all tennis, pool and health club and
fitness equipment and furnishings; all vans, automobiles and other motor
vehicles; all carpet, drapes, beds, furniture, televisions, telephones and other
furnishings; and all stoves, ovens, freezers, refrigerators, dishwashers,
disposals, kitchen equipment and utensils, tables, chairs, plates and other
dishes, glasses, silverware, serving pieces and other restaurant and bar
equipment, apparatus and utensils (collectively, the "FF&E"). Seller agrees
----
that as of the date hereof and the Closing Date (as hereinafter defined), Seller
will not cause or permit the removal of FF&E from the Hotel except for the
purpose of discarding worn and valueless items, and provided that such discarded
items are replaced with items equal or greater in value to the original value of
such discarded items;
(d) Seller's right, title and interest in, to and under all
merchandise, supplies, inventory and other items used for the operation and
maintenance of guest rooms, guest services, restaurants, lounges, swimming
pools, health clubs, and other common areas and recreational areas located
within or relating to the Improvements, including, without limitation, all food
and beverage (alcoholic and non-alcoholic) inventory, office supplies and
stationery, advertising and promotional materials, towels, washcloths, linen and
bedding, guest cleaning, paper and other supplies, napkins and tablecloths,
upholstery material, carpets, rugs, furniture, engineers' supplies, paint and
painters' supplies, employee uniforms, and pool, tennis court and other
recreational area cleaning and maintenance supplies (collectively, the
"SUPPLIES"). Seller agrees that between the date hereof and the Closing Date,
--------
Seller will not cause or permit depletion of Supplies except in the ordinary
course of business, but will cause the Supplies to be maintained in normal
quantities considering the season and in accordance with Section 8.1(g) hereof;
(e) All leases, licenses, occupancy agreements, "trade-out"
agreements, advance bookings, convention reservations, or other agreements
demising space in, providing for the use or occupancy of, or otherwise similarly
affecting or relating to the use or occupancy of, the Improvements or Land,
together with all amendments, modifications, renewals and extensions thereof,
and all guaranties by third parties of the obligations of the
-2-
<PAGE>
tenants, licensees, concessionaires or other entities thereunder (collectively,
the "LEASES" and individually, the "LEASE"), including, without limitation, that
------ -----
certain lease (as amended, the "SAGES LEASE") dated as of November 20, 1979,
-----------
between American National Bank & Trust Company of Chicago, as trustee under
Trust Agreement dated November 8, 1978 known as Trust No. 45170, Seller's
predecessor-in-interest, as landlord, and Arley's, Inc., an Illinois
corporation, predecessor-in-interest to the current tenant thereunder, Sage's
Sages, Inc. ("SAGES"), as tenant (which Sages Lease is subject to the terms and
-----
conditions of that certain settlement agreement between Sages and Seller dated
as of August 15, 1996 the "SAGES SETTLEMENT AGREEMENT");
--------------------------
(f) All prepaid rents and deposits held by Seller or its managing
agent, including, but not limited to, refundable security deposits and rental
deposits, and all other deposits for advance reservations, banquets or future
services, made in connection with the use or occupancy of the Improvements
(collectively the "DEPOSITS"); provided, however, that to the extent Purchaser
--------
does not receive the Deposits at Closing, Purchaser shall be entitled to a
credit against the cash portion of the Purchase Price (as defined below) in an
amount equal to the Deposits;
(g) To the extent assignable, any and all of the following that relate
to or affect, in any way, the design, construction, ownership, use, occupancy,
leasing, maintenance, service, or operation of the Land, Improvements, Leases,
Deposits, Supplies, or FF&E:
(i) Contracts and agreements, such as labor, collective bargaining,
service or maintenance contracts, management or employment agreements,
utility contracts, contracts for the purchase of supplies, insurance
contracts, airline agreements, corporate account agreements, travel agency
agreements, telephone service agreements, cable service agreements and
yellow pages or other advertising agreements, but only to the extent
assumed hereunder by Purchaser (collectively, the "SERVICE CONTRACTS");
-----------------
(ii) Warranties, guaranties, indemnities, and claims for the
benefit of Seller (collectively the "WARRANTIES");
----------
(iii) Licenses (including without limitation liquor, beer, wine,
bar and similar licenses), permits (including without limitation health,
swimming pool and elevator permits), franchises (including without
limitation hotel franchise license agreements), utility reservations,
certificates of occupancy, and similar documents issued by any federal,
state, or municipal authority or by any private party so long as assignment
can be made without material cost to Seller, but only to the extent assumed
hereunder by Purchaser (collectively the "LICENSES");
--------
(iv) Telephone numbers, trade names, trade styles, trade marks,
service marks, and other identifying material, and all variations thereof,
together with all
-3-
<PAGE>
related goodwill (collectively, the "TRADENAMES") (it being understood and
----------
agreed that the name of the hotel chain to which the Hotel is affiliated by
franchise or other license agreement is a protected name or registered
service mark of such hotel chain and cannot be transferred to Purchaser by
this Agreement);
(v) Plans, drawings, specifications, surveys, soil reports,
engineering reports, inspection reports, environmental audits and other
technical descriptions and reports to the extent in Seller's possession or
control (collectively, the "PLANS AND SPECS");
---------------
(vi) Leases of any FF&E and other contracts permitting the use of
any FF&E at the Improvements, but only to the extent assumed hereunder by
Purchaser (collectively, the "FF&E LEASES");
-----------
(h) Seller's right, title and interest if any, in the right to receive
immediately on and after Closing and continuously consume thereafter water
service, sanitary and storm sewer service, electrical service, gas service, and
telephone service on and for the Land and Improvements in capacities that are
adequate to operate the Improvements for the purposes for which they were
intended, free and clear of all qualifications and encumbrances other than the
obligation to pay the applicable utility company the published rate for utility
consumption after Closing, and the foregoing right shall include, but not be
limited to (i) the right to the present and future use of wastewater, drainage,
water and other utility facilities to the extent such use benefits the Land or
Improvements, (ii) all reservations of or commitments covering any such use in
the future, (iii) all wastewater capacity reservations ever issued and relating
to the Land or Improvements, and (iv) all deposits held by any such utility
suppliers (all of the foregoing are referred to in this Agreement collectively
as the "UTILITY RESERVATIONS");
--------------------
(i) All rights, titles, and interests of Seller, if any, appurtenant
to the Land and Improvements, including, but not limited to, (i) all easements,
rights of way, rights of ingress and egress, tenements, hereditaments,
privileges, and appurtenances in any way belonging to the Land or Improvements,
(ii) any land lying in the bed of any alley, highway, street, road or avenue,
open or proposed, in front of or abutting or adjoining the Land, (iii) any
strips or gores of real estate adjacent to the Land, (iv) any leases of adjacent
land of facilities used in connection with the operation of the Hotel, and (v)
the use of all alleys, easements and rights-of-way, if any, abutting, adjacent
or contiguous to or adjoining the Land (collectively, the "APPURTENANCES");
-------------
(j) All books and records, promotional material, tenant data,
marketing and leasing material and forms, market studies, keys, and other
materials of any kind owned by Seller and in Seller's possession or control, or
to which Seller has access or may obtain and has the right to convey and deliver
which are or may be used in Seller's ownership or use of the Land, the
Improvements or the FF&E, whether any of the foregoing are in hard copy form or
in computerized data storage form (collectively, the "RECORDS"); provided,
-------
-4-
<PAGE>
however, that a copy of any such material which constitutes a part of Seller's
continuing business or financial records may be retained by Seller;
(k) Seller's active guest ledger and cash drawers and house accounts
as of 2:00 A.M. on the Closing Date (the "CASH AND EQUIVALENTS"); and
--------------------
(l) the existing Radisson franchise or license agreement with respect
to the Hotel (the "FRANCHISE" or "FRANCHISE AGREEMENT"), provided that any
--------- -------------------
requisite franchisor consents have been obtained; provided, however,
(i) the term "Hotel" shall not include any of
Seller's right, title or interest in and to any payment or refund of taxes
paid for the tax years 1992, 1993, 1994 or 1995, which are the subject of
tax appeals instituted by Seller (the "PRIOR TAX APPEALS") and currently
-----------------
pending, all such rights being hereby reserved by Seller; and
(ii) the Hotel shall be conveyed, assigned, and
transferred to Purchaser at Closing free and clear of all mortgages, debts,
liens, (except that Purchaser shall take subject to the lien of the First
Mortgage (hereinafter defined) as set forth in Section 3.5 hereof)
encumbrances, management agreements, leases, licenses, franchises,
concession agreements, security interests, conditions, restrictions,
rights-of-way, easements, encroachments, claims and other matters affecting
title, except for those matters specifically approved in writing by
Purchaser or otherwise permitted by the express terms of this Agreement.
ARTICLE 3
PURCHASE PRICE
--------------
3.1. Purchase Price. The price for which Seller agrees to sell and convey
--------------
the Hotel to Purchaser, and which Purchaser agrees to pay or deliver to Seller
(herein, the "PURCHASE PRICE") for the Hotel shall be an aggregate amount to be
--------------
finally determined as of the Closing Date, but which shall be comprised of the
amounts or values of the components of the Purchase Price described below.
Except as set out below, the Purchase Price shall be paid at Closing in cash or
by wire transfer of immediately available funds.
(a) Fixed Cash Payment. Purchaser shall at Closing make payment to
------------------
ACQ (for the account of Seller) a cash payment in the amount of Three Million
Three Hundred Thousand Dollars ($3,300,000), which payment (the "FIXED CASH
----------
PAYMENT") shall not be subject to adjustment. Purchaser has, concurrently
- -------
herewith, delivered to ACQ a letter of credit in the amount of $300,000 (the
"LETTER OF CREDIT") which shall be held by ACQ and (i) returned to Purchaser if
----------------
Purchaser terminates this Agreement in accordance with the terms hereof, whether
as a result of a Seller default, Purchaser's termination during the Review
Period or Purchaser's termination as a result of casualty, condemnation, failure
of title or failure to satisfy Purchaser's conditions precedent to close on the
Closing Date, (ii)
-5-
<PAGE>
returned to Purchaser concurrently with Closing or (iii) drawn down by ACQ on
not less than ten (10) days notice to Purchaser if Purchaser defaults in its
obligations to close hereunder following the expiration of applicable notice,
grace and cure periods (unless Purchaser delivers $300,000 to ACQ prior to the
close of business on the last day of said ten (10) day period, in which event
ACQ shall return the Letter of Credit to Purchaser).
(b) First Mortgage Debt. Purchase shall take title to the Hotel
-------------------
subject to (subject to Section 3.4 below) that certain mortgage, assignment of
rents and security agreement dated as of February 1, 1996 (the "FIRST MORTGAGE")
--------------
made by Seller in favor of First Lender which secures Seller's obligations to
Farmer's State Bank ("FIRST LENDER") under that certain Mortgage Note dated as
------------
of February 1, 1996 made by Seller in favor of First Lender in the Principal
Amount of Eight Million Two Hundred Eighteen Thousand Seven Hundred Fifty Five
and 05/100ths ($8,218,755.05) Dollars (the "FIRST MORTGAGE NOTE"; the First
-------------------
Mortgage Note, the First Mortgage and any UCC Financing Statements made by
Seller in favor of First Lender as additional security therefor are collectively
defined as the "FIRST MORTGAGE LOAN DOCUMENTS"); provided, however, Purchaser
-----------------------------
agrees that the First Mortgage Loan Documents may be amended by Seller prior to
Closing in only one (1) respect, by accelerating the maturity date of the First
Mortgage Note to a date not earlier than the earlier to occur of (x) the date
that is one (1) year and one (1) day after the Closing Date hereunder and (y)
March 31, 1998. All accrued and unpaid interest due under the First Mortgage
Note as of the Closing Date shall be apportioned between Purchaser and Seller as
of the Closing Date and Seller shall pay any other late penalties, default
interest and other charges and expenses due under the First Mortgage Loan
Documents which have accrued prior to the Closing Date.
(c) Profits Interest. As part of the consideration for the sale and
----------------
conveyance of the Hotel, Purchaser shall deliver to ACQ or its designee
("PARTICIPANT") a profit participation interest in the Hotel (the "PROFITS
- ------------- -------
INTEREST") by executing and delivering to Participant at Closing an agreement in
- --------
the form of Exhibit C attached hereto (the "PROFITS INTEREST AGREEMENT").
--------- --------------------------
(d) Sages Settlement Payments. As part of the consideration for the
-------------------------
sale and conveyance of the Hotel, Purchaser shall deposit into an escrow account
all of the remaining fixed payment obligations of Seller under the Sages
Settlement Agreement.
3.2. Allocations. Subject to adjustments in accordance with the terms of
-----------
this Agreement, the Purchase Price shall be allocated among the Land,
Improvements, FF&E, and the other components of the Hotel as follows:
<TABLE>
<CAPTION>
Component Allocated Purchase Price
- ------------------- -------------------------
<S> <C>
Land 10%
Improvements 87%
FF&E 3%
</TABLE>
-6-
<PAGE>
This allocation has been made in accordance with the residual method set forth
in Treasury Regulations promulgated under Section 338(b)(5) of the Internal
Revenue Code of 1986, as amended. The parties agree that such allocation has
been arrived at by a process of arm's-length negotiations, including the
parties' best judgment as to the fair market value of each respective asset, and
the parties specifically agree to the allocation as final and binding, and will
consistently reflect those allocations on their respective Federal, State and
local tax returns.
3.3. Consent of Acq. Inc. ACQ is the present owner and holder of a certain
--------------------
$14,425,555.91 Promissory Note dated as of February 1, 1996 made by Seller to
the order of VRN, Inc. (the "ACQ NOTE") ACQ agrees to discharge the Acq Note at
--------
Closing upon satisfaction of only the following: (a) receipt of the Fixed Cash
Payment, which Seller hereby agrees should be made at Closing directly to ACQ or
as ACQ may otherwise direct in a notice to Purchaser made prior to the Closing
Date; (b) the execution and delivery to Participant of the Profits Interest
Agreement; and (c) the execution and delivery to ACQ of an assignment (the
"PRIOR TAX APPEALS ASSIGNMENT") in form reasonably acceptable to the parties,
----------------------------
with respect to the assignment to ACQ or its designee by Seller of Seller's
rights to any recovery under the Prior Tax Appeals.
3.4. Assumption of First Mortgage. Purchaser's "taking subject to" the
----------------------------
First Mortgage Loan may take the form of an amendment to the First Mortgage Note
or the execution by Purchaser of a substitute First Mortgage Note (in either
case, providing for the new, accelerated maturity date discussed above),
provided, in any event, (i) the "assumption" shall not alter the absolutely non-
recourse nature of the First Mortgage Note obligation, (ii) Purchaser shall not
be required to modify its formation documents or execute or deliver any further
documentation with respect to same, including, without limitation, an opinion of
counsel with respect to the enforceability of the First Mortgage Loan Documents
(provided, however, that Purchaser shall, if requested by First Lender, provide
an opinion of counsel that Purchaser has duly authorized, executed and delivered
such substitute First Mortgage Note), (iii) Seller shall pay for any endorsement
to the First Lender's policy of title insurance reflecting the change in
ownership of the Hotel and (iv) Seller shall pay any fees and expenses of First
Lender's counsel incurred in connection with the foregoing.
3.5. Other Considerations; Final Payment under the Acq Note.
------------------------------------------------------
(a) In addition to the payment of the Purchase Price, it is
acknowledged and agreed by Purchaser that the Hotel shall be delivered to
Purchaser subject to the operating payables and other obligations related
thereto which are outstanding as of the Closing Date, including the obligations
related to payment of real estate taxes for the year 1996 and subsequent years.
These items shall be apportioned as provided herein and shall not be reflected
in an adjustment of the Fixed Cash Payment. It is also agreed by the parties
that all cash accounts held by the Hotel as of Closing shall be assigned to
Purchaser at
-7-
<PAGE>
Closing, including, without limitation, any escrow accounts for the payment of
real estate taxes and/or insurance held by the Hotel, its manager, or the First
Lender, and these items shall be also apportioned as provided herein.
(b) Notwithstanding anything to the contrary contained in this
Agreement, it is acknowledged by the parties that pursuant to the terms of the
Acq Note, as of December 31, 1996, a payment of "Net Cash Flow" in the amount of
$200,000 is due and owing ACQ (the "FOURTH QUARTER NET CASH FLOW AMOUNT"). This
-----------------------------------
amount, together with all funds at the Hotel or in Seller's accounts as of
Closing (the "1997 SELLER CASH FLOW") shall remain with the Hotel and shall not
---------------------
be paid to Acq and/or Seller, as applicable, if at all, until the date which is
75 days after Closing (the "POST CLOSING ADJUSTMENT DATE") and final
----------------------------
apportionment and proration as provided in Section 11.6. ACQ covenants and
agrees that the cost and expenses of Seller incurred in connection with this
transaction shall be payable from the Fourth Quarter Net Cash Flow Amount and
1997 Seller Cash Flow, and the balance of that amount remaining after payment of
such expenses shall be available to pay, to the extent necessary, the net
prorations required to be made under this Agreement to the extent the same are
due as a credit to Purchaser at closing. To the extent that such net prorations
exceed the amount of the remaining Fourth Quarter Net Cash Flow Amount and 1997
Seller Cash Flow, then Purchaser shall be responsible for the payment of such
excess and Seller shall have no further liability with respect to same. In the
event that net prorations due Purchaser are less than the remaining balance of
the Fourth Quarter Net Cash Flow Amount and 1997 Seller Cash Flow, then such
balance shall be paid to ACQ promptly after the Post Closing Adjustment Date.
If, at Closing, it is determined that the net prorations under this Contract
result in a credit to Seller, then such amount shall be held in trust by
Purchaser until the final apportionments and prorations are completed and such
credit shall be paid to ACQ on the Post Closing Adjustment Date (after payment
of closing expenses of Seller, as aforesaid).
3.6. Sages Settlement. As a part of the Closing, Seller shall assign to
----------------
Purchaser all of its right, title, and interest under the Sages Settlement
Agreement, including, without limitation, any right, title and interest under
the Note Purchase Agreement executed in connection therewith, and Purchaser
shall assume all obligations of Seller thereunder. To the extent any amounts
are held in any escrow agreement under the Settlement Agreement, all rights of
Seller to same, and all obligations of Seller respecting same, shall be assigned
to Purchaser by Seller, and Purchaser shall be substituted as a party to the
escrow for Seller. Seller shall execute such assignments and other agreements
as shall be reasonably requested by Purchaser in connection with the foregoing
assignment and assumption.
ARTICLE 4
TITLE DELIVERIES
----------------
-8-
<PAGE>
4.1. Title Commitment. On or before January 15, 1997, Seller shall obtain
----------------
and deliver to Purchaser, at Purchaser's sole cost and expense, the following:
(a) A Commitment for Title Insurance (the "TITLE COMMITMENT") issued
----------------
by First American Title Insurance Company, through an agency or law firm
designated by Purchaser (the "TITLE COMPANY"), for the most recent form of ALTA
-------------
owner's policy, covering the Land and Improvements, in the full amount of the
Purchase Price allocable to the Land and the Improvements, with access, zoning,
subdivision, contiguity and survey endorsements and any other endorsements as
Purchaser or its lender may reasonably require, setting forth the current status
of the title to the Land and Improvements, showing all liens, claims,
encumbrances, easements, rights of way, encroachments, reservations,
restrictions, and any other matters affecting the Land and Improvements, and
pursuant to which the Title Company agrees to issue to Purchaser at Closing an
Owner Policy of Title Insurance (the "TITLE POLICY") on the most recent form of
------------
ALTA comprehensive coverage owner's policy as endorsed as Purchaser or its
lender may reasonably require; and
(b) A true, complete, and legible copy of all documents and
instruments (as recorded, where applicable) (the "SUPPORTING DOCUMENTS")
--------------------
referred to or identified in the Title Commitment, including, but not limited
to, all deeds and other conveyance documents evidencing transfer of title into
Seller, lien instruments, leases, plats, surveys, reservations, restrictions,
and easements.
4.2. UCC Search. On or before January 15, 1997, Seller shall obtain and
----------
deliver to Purchaser, at Purchaser's sole cost and expense, current written
reports (the "UCC SEARCHES") from the Office of the Secretary of State of the
------------
State where the Hotel is located and the deed recording offices of the county
where the Hotel is located reflecting the results of current searches of the
Uniform Commercial Code Records maintained by such offices, said UCC Searches to
be made under the name of Seller and any trade names used by Seller at the
Hotel.
4.3. Survey. Prior to the execution of this Agreement, Seller has provided
------
to Purchaser its most recent "as built" survey (the "SURVEY") of the Land and
------
Improvements. Purchaser, at Purchaser's sole cost and expense, shall be
responsible for obtaining any updated survey from this or any other surveyor
(the "NEW SURVEY"). If different from the description contained in Exhibit A
---------- ---------
attached to this Agreement, the legal description of the Land contained in the
New Survey, once the correctness thereof has been confirmed by Seller, Purchaser
and the Title Company, shall be substituted for the description of the Land
contained in said Exhibit A and this Agreement shall be deemed amended by the
---------
substitution of the legal description of the Land contained in the New Survey as
a new Exhibit A without the necessity of the parties executing any additional
---------
written amendments to this Agreement. In addition, such description shall be
used in the Title Policy and in the deed.
-9-
<PAGE>
ARTICLE 5
HOTEL DOCUMENTS, INSPECTING AND OBJECTIONS
------------------------------------------
5.1. Inspections. Seller shall give Purchaser and Purchaser's agents
-----------
and representatives reasonable access to the Hotel during normal business hours
prior to Closing and the right to physically inspect the Hotel, to conduct soil
tests, environmental tests and inspections, and other tests and inspections (so
long as such tests and inspections do not unreasonably interfere with the use
and occupancy of the Hotel by Seller, by guests or patrons of the Hotel, or by
tenants) and to examine any books, records and other financial information
pertaining to the Hotel located at the Hotel. The costs and expenses of
Purchaser's investigation shall be borne solely by Purchaser. In the event that
the transaction contemplated by this Agreement does not close for any reason
other than Seller's default, Purchaser shall have the obligation to repair any
damage caused by Purchaser's inspections and tests to the condition prior to
Purchaser's entry, which obligation shall survive any termination of this
Agreement. The terms of this Agreement and all information furnished by Seller
to Purchaser in accordance with the provisions of this Agreement or obtained by
Purchaser in the course of its investigations shall be treated as confidential
information by Purchaser, subject to the provisions of Article 6 below.
5.2. Hotel Documents. As soon as practicable but in no event later
---------------
than January 15, 1997, Seller, at Seller's sole cost and expense, will deliver
to Purchaser true, correct and complete copies (or where specifically indicated,
original counterparts) of the following, together with all amendments,
modifications, renewals or extensions thereof, provided that Seller shall only
be obligated to deliver same (and/or prepare/update Schedules and Exhibits with
respect to same) to the extent that same are in the possession or control of ACQ
and not Manager:
(i) All Warranties relating to the Hotel or any part thereof which
are still in effect;
(ii) Financial statements, balance sheets, income statements,
general ledgers, budgets and Federal and State income tax returns for the
Hotel, for the current year to date and each of the two (2) years prior to
the year of this Agreement (the "FINANCIAL STATEMENTS"), including the
--------------------
itemization of (1) annual insurance premiums for each such year for fire,
extended coverage, workers' compensation, vandalism and malicious mischief,
general liability, business interruption, rents and other forms of
insurance shown thereon; (2) expenses incurred for water, electricity,
natural gas, sewer and other utility charges; (3) total rents and revenues
collected from tenants and from hotel guests and other patrons of the
Hotel; (4) management fees; (5) maintenance, repairs and other expenses
relating to the management and operation of the Hotel; (6) historical
occupancy statistics for the Hotel; and (7) all capital expenditures made
during the aforementioned periods;
(iii) All Licenses;
-10-
<PAGE>
(iv) All of the most recent real estate and personal property tax
statements with respect to the Hotel and notices of appraised value for the
Land and Improvements;
(v) To the extent in Seller's possession or control or readily
obtainable without material expense, all engineering and architectural
plans, drawings and specifications relating to the Hotel, as well as copies
of any environmental reports, boundary surveys, engineering reports and
subsurface studies affecting the Hotel. If the Hotel is purchased by
Purchaser, all such documents and information shall thereupon be and become
the property of Purchaser without payment of any additional consideration
therefor; provided, however, in the event that the Closing does not
actually occur, Purchaser shall return such information to Seller;
(vi) All Service Contracts and a schedule of such Service Contracts
(the "SCHEDULE OF SERVICE CONTRACTS");
-----------------------------
(vii) All Leases (other than guest or room booking and reservation
contracts), a schedule of such Leases (the "SCHEDULE OF LEASES") and all
------------------
agreements for real estate commissions, brokerage fees, finder's fees or
other compensation payable by Seller in connection therewith which would be
binding on Purchaser after Closing;
(viii) A rent roll including for each Lease (1) the name of the
tenant; (2) the suite; (3) the base rental rate; (4) the amount of prepaid
rent; (5) the amount of each security deposit; (6) the applicable
percentage rental rate, if any, and the means of calculation thereof; (7)
the date of the Lease; and (8) the expiration date of the Lease;
(ix) To the extent in Seller's possession or control all notices
received from governmental authorities in connection with the Hotel;
(x) A list of all current Hotel employees and their salaries or
wages and all employment benefits accompanied by copies of their employment
agreements and/or union contracts, if any;
(xi) All FF&E Leases and a schedule of such FF&E Leases (the
"SCHEDULE OF FF&E LEASES");
------------------------
(xii) The Franchise Agreement and a current deficiency report and
the two most recent inspection reports of the franchisor of the Hotel;
(xiii) An inventory of the FF&E and Supplies;
(xiv) A schedule of the Deposits and the Utility Reservations (the
"SCHEDULE OF DEPOSITS AND UTILITY RESERVATIONS");
---------------------------------------------
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<PAGE>
(xv) A description of the existing insurance covering the Hotel;
(xvi) An unaudited balance sheet (the "BALANCE SHEET") of the
-------------
Hotel as of September 30, 1996 (the "BALANCE SHEET DATE"), listing all
------------------
liabilities, accounts payable and accounts receivable of the Hotel and the
Partnership as of such date. The Balance Sheet (i) will be in accordance
with the books and records of the Hotel, (ii) will fairly present the
financial condition of the Hotel at the Balance Sheet Date and the
financial results for the entities and periods therein specified and (iii)
will have been prepared in accordance with generally accepted accounting
principles consistently applied;
(xvii) A schedule of any litigation, arbitration or administrative
proceedings pending or threatened with respect to the Hotel;
(xviii) All documents evidencing or securing the First Mortgage
(the "FIRST MORTGAGE DOCUMENTS");
------------------------
(xix) The Sages Lease and the Sages Settlement Agreement; and
(xx) Such other documents or information as may be reasonably
requested by Purchaser no later than twenty (20) days after the execution
hereof.
Seller shall promptly notify Purchaser in writing upon learning of any material
inaccuracy, misstatement or omission in any of the information furnished to
Purchaser and shall supply Purchaser with updated information or schedules, as
required.
Seller covenants and agrees to deliver all documents and agreements pertaining
to the Hotel which are in the possession or control of Seller or ACQ but not
Manager.
5.3. Purchaser's Review Period Termination Right. Purchaser shall
-------------------------------------------
have until 5:00 P.M. Eastern Time on January 25, 1997 (the "REVIEW PERIOD"), to
-------------
evaluate the Hotel and the matters reflected in Sections 4.1, 4.2, 4.3, 5.1,
5.2, 5.4 and 9.5 and to obtain the approval of the boards of directors of
Purchaser and American General Hospitality Corporation (the "REIT") to the terms
----
and conditions of, and the transactions contemplated by, this Agreement. In the
event Purchaser shall determine, in Purchaser's sole discretion, that the
results of the inspection and review are unsatisfactory, or either of the
Purchaser or the REIT are unable to obtain the requisite approval of their
respective board of directors, or for any other reason whatsoever, then, in such
event, Purchaser shall have the right to terminate this Agreement upon written
notice to Seller delivered at any time on or before the expiration of the Review
Period. Upon the termination of this Agreement by Purchaser, the Letter of
Credit shall be returned to Purchaser and thereafter neither party shall have
any further obligation or liability to the other under this Agreement, except
for the obligation to pay the cost of repairs, if any, set forth in Section 5.1
and the return of the materials pursuant to Section 5.2(v) hereof. If Purchaser
fails to notify Seller of its election to proceed
-12-
<PAGE>
to closing on or before the expiration of the Review Period, then the Letter of
Credit shall be returned to Purchaser.
5.4. Operational Licenses. During the Review Period Purchaser shall have
--------------------
obtained, or determined that it will be able to obtain, all permits, licenses,
approvals and other authorizations necessary or desirable to operate the Hotel
and all restaurants, bars and lounges presently located in the Hotel, including,
without limitation, the Liquor Licenses (hereinafter defined). To that end,
Sellers and Purchaser shall cooperate with each other, and each shall execute
such transfer forms, license applications and other documents as may be
necessary or desirable for Purchaser or its designees to obtain such permits,
licenses, approvals and other authorizations.
5.5. Procedure for Purchaser's Objections. At any time during the Review
------------------------------------
Period Purchaser may notify Seller in writing of any objections Purchaser may
have with respect to the Hotel or to any matters reflected in or concerning the
Title Commitment, the Supporting Documents, the Survey, the UCC Searches, any of
the other documents or items delivered by Seller to Purchaser, or to the results
of the inspections, tests, and studies under Section 5.1 and any other tests or
inspections of the Hotel made by Purchaser, or to any Service Contracts, Leases,
FF&E Leases, or Licenses or any other matters pursuant to Sections 4.1, 4.2,
4.3, 5.1, 5.2, 5.4 and 9.5. If Purchaser shall so notify Seller of any
objections, Seller may elect to cure any or all such objections by giving
Purchaser notice of its intent to cure, whereupon Seller shall be obligated to
cure or remove the objections identified in its notice on or before the Closing
Date. In no event shall Seller be obligated to cure any objection(s) of
Purchaser, except that Seller shall be obligated to remove any existing
mortgages and other monetary liens encumbering the Hotel, as well as any other
encumbrances created by Seller other than the First Mortgage or real estate
taxes for 1996 and subsequent years. By Closing, Seller shall, at Seller's
expense, cancel any and all management agreements affecting the Hotel, and any
of such other Service Contracts, Leases (to the extent terminable at the option
of Seller) and FF&E Leases objected to by Purchaser. If Purchaser notifies
Seller that it wants to acquire the Hotel free and clear of the existing
Franchise, Purchaser shall cause such Franchise to be terminated effective as of
the Closing Date, provided that Purchaser shall be responsible for the payment
of any termination fees or penalties payable to the franchisor in order to
obtain such termination. If Purchaser does not object to the existing Franchise,
Purchaser shall be obligated, at its sole cost and expense, to obtain the
franchisor's consent to the assignment of the existing Franchise Agreement
either to the entity acquiring title to the Hotel or to such entity's net lessee
(in either case, the "NEW FRANCHISEE") or to the execution of a new
--------------
franchise agreement with the New Franchise on terms and conditions
substantially similar to those in the existing Franchise Agreement. If
Purchaser objects to the existing Franchise, Purchaser shall be solely
responsible for obtaining, at its sole cost and expense, any replacement
franchise it may desire.
5.6. Permitted Exceptions. Any title exceptions, test items, or
--------------------
deliveries to which the Purchaser does not object in accordance with Section
5.5, and any title exceptions, test items, or deliveries to which Purchaser
objects that are not cured and which Purchaser
-13-
<PAGE>
thereafter accepts and approves in writing shall be hereinafter referred to as
the "PERMITTED EXCEPTIONS."
--------------------
ARTICLE 6
CONFIDENTIALITY
---------------
6.1. Press Releases. Neither Seller nor any Affiliate thereof (as used
--------------
in this Agreement "AFFILIATE" shall have the meaning ascribed to it in Rule
---------
12b-2 of the General Rules and Regulations under the Securities and Exchange
Act of 1934, as amended, and, when used in connection with Seller or Purchaser
shall include each officer, director, and partner thereof) shall issue any press
release nor otherwise make public any information with respect to this Agreement
or the transactions contemplated hereby prior to the Closing Date, without the
prior written consent of Purchaser. Purchaser or its Affiliates may issue press
releases, and Purchaser or its Affiliates may refer to this Agreement and the
transactions contemplated hereby in any filing pursuant to securities laws or
stock exchange listing obligations or as required by law or advised by counsel
to be in accordance with law, provided that, with respect to any press release,
(i) Purchaser has provided Seller with an opportunity to review and comment upon
such release, although any changes to such release suggested by Seller shall be
made in the sole discretion of Purchaser or its Affiliates, and (ii) no such
press release shall be issued prior to the expiration of the Review Period.
6.2. Confidentiality. Except to the extent otherwise provided herein,
---------------
required by law or advised by counsel to be in accordance with law, or
contemplated by Section 6.1, until the consummation of the transactions
contemplated by this Agreement, the parties hereto shall hold, and shall cause
each of their respective Affiliates to hold, all information and documents
obtained in connection with the transactions contemplated hereby confidential
including, any oral and written information concerning the Seller and the Hotel
received from the Seller or from a third party at the direction of the Seller
(collectively the "DUE DILIGENCE MATERIAL"). The Due Diligence Material shall
----------------------
not be disclosed, discussed or made known without the prior written consent of
the Seller, except to the Purchaser's or the Purchaser's board of directors',
Purchaser's lender and its counsel, any hotel franchisors, any marketing company
employed to do feasibility studies, or any investment banking, accounting or
legal advisers, or any environmental or engineering consultants with whom
Purchaser desires to consult in connection with the proposed transaction. If
the purchase and sale contemplated hereby are not consummated for any reason
whatever, each party hereto shall, as soon as practicable, return all such
information and documents (and any copies thereof in such party's possession) to
such other party hereto.
ARTICLE 7
LEASES, FF&E LEASES, AND SERVICE CONTRACTS
------------------------------------------
7.1. Schedules. Seller represents, warrants and certifies to Purchaser,
---------
to its actual knowledge (i) that the Schedule of Service Contracts, Schedule of
FF&E Leases, Schedule of Leases, and Schedule of Deposits and Utility
Reservations, when delivered, will be a true,
-14-
<PAGE>
correct and complete list of all Service Contracts, all FF&E Leases, the Sages
Lease and all other Leases (other than guest or room booking and reservation
contracts), and all Deposits and Utility Reservations in effect at that time,
(ii) that the copies of the Service Contracts, FF&E Leases, and Leases, when
delivered to Purchaser, will be true, complete and correct copies of such
Service Contracts, FF&E Leases, the Sages Lease and all other Leases (including,
without limitation, all amendments, modifications, renewals, and extensions
thereof), (iii) that there are and will be no written or oral agreements of the
nature of the Service Contracts or the FF&E Leases binding on the Hotel or on
Purchaser after Closing, other than the Service Contracts, the FF&E Leases, and
the Leases assumed hereunder by Purchaser including, without limitation, the
Sages Lease as modified by the Sages Settlement Agreement, (iv) that there are
and will be no other written or oral agreements binding on the Hotel or on
Purchaser after Closing with any tenants, licensees, franchisees,
concessionaires or other persons or entities (collectively, "TENANTS", and
-------
individually, "TENANT") or any guarantors of the Tenants' obligations
------
(collectively "GUARANTORS", and individually, "GUARANTOR") relating to their use
---------- ---------
or occupancy other than those permitted under Section 8.1(e) of this Agreement,
(v) that the Service Contracts, FF&E Leases, the Sages Lease (subject to the
limitations set forth in the Sages Settlement Agreement) and all other Leases
are in full force and effect and no default exists thereunder and no condition
exists that, with the giving of notice or passage of time, or both, would
constitute a default, and (vi) that no Tenant has made any claim of any right of
offset. The term "Tenant" shall refer only to tenants under Leases and not
guests of the Hotel.
ARTICLE 8
OPERATION OF HOTEL
------------------
8.1. Interim Operation. Seller and ACQ hereby covenant and agree that
-----------------
between the date of this Agreement and the Closing, or sooner termination of
this Agreement, neither Seller nor ACQ shall take any action with respect to the
Hotel without the prior written consent of American General Hospitality, Inc.
("MANAGER"), the current manager under the existing management agreement for the
-------
Hotel, which consent shall (x) not be unreasonably withheld prior to the end of
the Review Period and (y) may be withheld in its sole discretion following the
end of the Review Period. In furtherance of the foregoing, Seller and ACQ shall
direct Manager to:
(a) Operate, manage, and maintain the Hotel consistent with Seller's
prior practice and as a reasonable and prudent operator of like-kind hotels in
the same competitive market would operate, manage, and maintain the Hotel,
including, without limitation, (i) using reasonable efforts to keep available
the services of its present employees at the Improvements and to preserve its
relations with guests, suppliers and other parties doing business with Seller
with respect to the Hotel, (ii) accepting booking contracts for the use of the
Hotel facilities on terms not less favorable than the terms typically arranged
by Seller as of the date of this Agreement and retaining such bookings, (iii)
maintaining the current level of advertising and other promotional activities
for Hotel facilities, (iv) maintaining its books of accounts and records in the
usual, regular and ordinary manner, in accordance with
-15-
<PAGE>
generally accepted accounting principles applied on a basis consistent with the
basis used in keeping its books in prior years, and (v) remaining in substantial
compliance with all current license and franchise agreements;
(b) Not commit waste of any portion of the Hotel;
(c) Keep and maintain the Hotel in a state of repair and condition
consistent with the requirements of clause (a) above;
(d) Keep, observe, and perform all its obligations under the Leases,
the FF&E Leases, the Service Contracts, the Licenses (in particular, the license
agreement between Seller and Franchisor (as hereinafter defined) for the Hotel),
and all other applicable contractual arrangements relating to the Hotel;
(e) Not enter into any new agreements of the nature of the Service
Contracts, FF&E Leases, the Sages Lease or any other Leases or any amendments,
modifications, renewals or extensions of any existing Service Contracts, FF&E
Leases, or Leases without Purchaser's prior written consent, except that Seller
shall not be required to obtain Purchaser's consent to any new agreement or any
renewal or extension of existing agreements which may be terminated on not more
than thirty (30) days prior notice without cost or expense. Any such new
agreement or renewal or extension of existing agreements to which Purchaser's
consent was not obtained, whether or not such consent is required under this
Section 8.1(e), shall subject the applicable agreement to Purchaser's review
under Section 5.5;
(f) Not cause or permit the removal of FF&E from the Hotel except for
the purpose of discarding and replacing, where needed or appropriate, worn
items, and timely make all repairs, maintenance, and replacements to keep the
Hotel and all FF&E in good operating condition;
(g) Keep Supplies adequately stocked, consistent with good business
practice, as if the sale of the Hotel hereunder were not to occur, including
without limitation, maintaining linens and bath towels and washcloths at least
at a 3-par level for all guest rooms in the Hotel;
(h) Not grant any bonus, free rent, rebate or other concession to any
present or future Tenant, without Purchaser's prior written consent;
(i) Advise Purchaser promptly of any litigation, arbitration, or
administrative hearing before any court or governmental agency concerning or
affecting the Hotel which is instituted or threatened after the date of this
Agreement or if any representation or warranty contained in this Agreement shall
become materially misleading or false;
-16-
<PAGE>
(j) Not take, or omit to take, any action that would have the effect
of violating any of the representations, warranties, covenants or agreements of
Seller contained in this Agreement;
(k) Comply with all federal, state, and municipal laws, ordinances,
regulations, and orders relating to the Hotel;
(l) Not sell or assign or enter into any agreement to sell or assign,
or to create or permit to exist any lien or encumbrance (other than a Permitted
Exception) on, the Hotel or any portion thereof;
(m) Not allow any License or other right currently in existence with
respect to the operation, use, occupancy or maintenance of the Hotel to expire,
be canceled or otherwise terminated without Purchaser's prior written consent;
(n) Not cancel any existing booking contracts for the use of Hotel
facilities or new booking contracts obtained by Seller after the date of this
Agreement, and continue to book contracts and reservations consistent with prior
practices;
(o) Pay or cause to be paid all taxes, assessments and other
impositions levied or assessed on the Hotel or any part thereof on or before the
date on which the payment thereof is due; and
(p) Keep the existing insurance coverage for the Hotel in full
force and effect.
8.2. Intentionally Deleted.
---------------------
8.3. Mechanics Liens. Seller and ACQ hereby covenant (x) not to take any
---------------
action which could give rise to a mechanics' or materialmen's lien without the
consent of Manager and (y) to discharge or bond and all mechanics' and
materialmen's liens arising from any labor or material furnished prior to the
Closing Date so as to cause same to be omitted from Purchaser's Title Policy.
8.4. Notices of Violation. Seller and ACQ hereby covenant and agree that
--------------------
to their respective actual knowledge, all notices of violation of federal, state
or municipal laws, ordinances, orders, regulations or requirements ("NOTICES OF
----------
VIOLATION") issued, filed, or served by any governmental agency having
- ---------
jurisdiction over the Hotel against or affecting the Hotel on or before the
Closing Date shall be promptly disclosed to Purchaser. If Seller or ACQ do not
remove any Notices of Violation first disclosed to Purchaser after the last day
of the Review Period, then Purchaser shall have the right to terminate this
Agreement and receive a return of the Letter of Credit, following which neither
Seller nor Purchaser shall have any obligation hereunder except as expressly
provided herein.
-17-
<PAGE>
8.5. Third Party Consents. Prior to the Closing Date, Seller shall, at
--------------------
Seller's expense, use reasonable good faith efforts and cooperate with Purchaser
to obtain all third party consents and approvals required in order for Purchaser
to purchase the Hotel, including but not limited to the consent of the
franchisor under the Franchise Agreement, provided Purchaser has elected prior
to the expiration of the Review Period to take an assignment of same.
8.6. Estoppel Letters.
----------------
(a) Seller shall employ reasonable good faith efforts to obtain from
each Tenant (including Sages) under any Lease affecting the Hotel (but not from
current or prospective occupants of hotel rooms within the Hotel), and to
deliver to Purchaser not less than five (5) days before the expiration of the
Review Period, an estoppel letter substantially in the form attached to this
Agreement as Exhibit D. In the event that Seller is unable to obtain an
---------
estoppel letter from any such Tenant by said date, Seller and ACQ shall deliver
to Purchaser a certificate in which Seller and ACQ certify, to their respective
actual knowledge, the information required by the form of estoppel letter
attached to the Agreement as Exhibit D.
----------
(b) Seller shall obtain from Lender an estoppel certificate/consent in
form reasonably satisfactory to Purchaser confirming, among other things, the
absence of defaults under the First Mortgage, a principal balance as of Closing
in the amount of $8,218,755.05, its consent to Purchaser taking title subject to
the First Mortgage and confirmation of no modifications, amendments or waivers
of or under the First Mortgage Loan Documents except for the acceleration of the
maturity date as contemplated herein.
8.7. Management Agreement Termination. Seller hereby covenants to
--------------------------------
Purchaser that Seller shall use good faith efforts to terminate any agreement
with Seller's existing managing agent, and that as of the Closing Date there
will be no management agreement or other contract with respect to the management
of the Hotel in effect at the Hotel. Failure of Manager to agree to such
termination shall not be a default hereunder.
8.8. Hotel Employees. Seller and Purchaser agree that Purchaser shall
---------------
assume all employee-related obligations accruing after the Closing Date with
respect to employees working at or for the Hotel (the "HOTEL EMPLOYEES") whom
---------------
Purchaser elects to rehire and Seller shall be responsible for making payment to
Purchaser, as a closing apportionment, of all sums due Hotel Employees if all of
such Hotel Employees were terminated as of the Closing Date and, in connection
therewith, Seller shall be and remain liable for all accrued salaries, wages,
bonuses, profit-sharing, and other compensation, vacation, sick leave, worker's
compensation, and welfare benefits, deferred compensation, savings, pension,
profit sharing, 401K, and retirement plan, and insurance and other benefits
through the day preceding the Closing Date of all Hotel Employees, whether or
not employed by Purchaser. Seller hereby indemnifies, defends and saves
harmless Purchaser with respect to the foregoing. Seller shall terminate or
cause its managing agent to terminate the Hotel
-18-
<PAGE>
Employees effective as of 11:59 p.m. on the day before the Closing Date (it
being understood that if for any reason the Closing does not occur, such
termination shall be deemed to be rescinded ab initio) and to pay to such
---------
employees all amounts owed to such employees including amounts owed on account
of accrued and unpaid benefits including vacation pay and sick leave. Purchaser
shall cause all of those Hotel Employees it desires to hire to be immediately
rehired effective as of 12:01 A.M. on the Closing Date (it being understood that
if for any reason the Closing does not occur, such rehiring shall be deemed void
ab initio) upon such terms as Purchaser (or such other person or entity who may
- ---------
be responsible for the rehiring) may elect, provided that the failure to hire
less than all of the Hotel Employees and the hiring of Hotel Employees on
different terms does not result in a violation of, or cause the applicability
of, the Worker Adjustment and Retraining Notification Act, 29 U.S.C. (S) 2101
et. seq. (the "WARN ACT") and Purchaser shall be responsible for all employee
- -- --- --------
obligations in respect of the rehired Hotel Employees accruing from and after
such rehiring. Seller hereby agrees that neither it nor its managing agent
shall induce or cause any Hotel Employee to be hired by any affiliate of the
Seller or its managing agent. Each of Seller and Purchaser shall indemnify and
hold the other harmless from and against any loss, cost, expense (including
reasonable attorneys' fees and disbursements actually incurred), damage or
liability any such party may suffer by reason of the other's default under this
Section.
8.9. Shadow Management. Seller shall permit Purchaser to establish and
-----------------
maintain a shadow management operation with respect to the Hotel prior to the
Closing Date. Personnel from Purchaser's shadow management operation shall have
reasonable access during normal business hours to all books, records and other
information in the possession or control of Seller or its agents concerning the
Hotel and shall have the right (at Purchaser's expense) to establish duplicate
books and records in order to effect a smooth transition in the ownership and
management of the Hotel; provided, however, that Purchaser and its shadow
management operation and employees (a) shall not unreasonably interfere with the
normal management and operation of the Hotel, (b) shall hold all information
acquired from such books and records confidential in accordance with the
provisions of this Agreement, (c) shall repair any damage to the physical
condition of the Hotel caused by Purchaser or its agents in any such shadow
management operation, and (d) shall not be deemed to have assumed management
responsibilities prior to Closing by virtue of such shadow management.
8.10. Access to Records and Financial Information. Subject to the
-------------------------------------------
restrictions contained in Section 5.1 above, Purchaser and Purchaser's
authorized representatives and employees shall have the right, at Purchaser's
sole cost, risk and expense, from time to time to enter upon and pass through
the Hotel during normal business hours and upon reasonable notice to Seller to
examine and inspect all of the then existing books, records, surveys, plans,
specifications, permits, certificates of occupancy and other files that are
relevant to the management, ownership, operation, use, occupancy, construction
or leasing of the Hotel, are in Seller's possession or control, and have not
been otherwise provided to Purchaser as required elsewhere herein. Further, and
not in limitation of Section 5.2(ii) above, Purchaser's representatives shall
have access to all financial and other information relating to
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<PAGE>
the Hotel sufficient to enable them to prepare audited financial statements in
conformity with Regulation S-X of the Securities and Exchange Commission (the
"SEC") and to enable them to prepare a registration statement, report or
---
disclosure statement for filing with the SEC on behalf of the REIT and/or its
affiliates. Prior to the end of the Review Period, Seller shall also provide to
Purchaser's representatives a signed representation letter sufficient to enable
an independent public accountant to render an opinion on the financial
statements related to the Hotel, such letter to be in the form of Exhibit E
---------
hereto subject to the further requirements of such accountant. To the extent
that the Financial Statements provided by Seller pursuant to Subsection 5.2(ii)
hereof for the current year do not include any period up to and including the
Closing Date, Seller shall, within twenty-five (25) days after the Closing Date,
provide Purchaser with monthly unaudited Financial Statements, including Balance
Sheets and income statements applicable to such period inclusive of the Closing
Date.
ARTICLE 9
REPRESENTATIONS AND COVENANTS
-----------------------------
9.1. Representations by Purchaser. Purchaser hereby represents and
----------------------------
warrants unto Seller that each and every one of the following statements is
true, correct and complete in every material respect as of the date of this
Agreement and will be true, correct and complete as of the Closing Date:
(a) Purchaser is a duly organized, validly existing and in good
standing under the laws of the State of Delaware, and, other than qualifying to
do business in the state where the Hotel is located, has full right, power and
authority to enter into this Agreement and to assume and perform all of its
obligations under this Agreement; and the execution and delivery of this
Agreement and the performance by Purchaser of its obligations under this
Agreement require no further action or approval of Purchaser's shareholders,
directors, members, managers or partners (as the case may be) or of any other
individuals or entities in order to constitute this Agreement as a binding and
enforceable obligation of Purchaser. The individuals and/or entities signing
below in the indicated representative capacities are fully authorized so to act.
(b) Purchaser is not a foreign entity, foreign corporation, foreign
partnership, foreign trust or foreign estate (as those terms are defined in the
Internal Revenue Code and Income Tax Regulations).
(c) None among the entry into, performance of, or compliance with this
Agreement by Purchaser has resulted, or will result, in any violation of,
default under, or acceleration of any obligation under any existing corporate
charter, certificate of incorporation, bylaw, articles of organization, limited
liability company agreement or regulations, partnership agreement, mortgage
indenture, lien agreement, note, contract, permit, judgment, decree, order,
restrictive covenant, statute, rule or regulation applicable to Purchaser.
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<PAGE>
9.2. Representations by Seller. Seller hereby represents and warrants
-------------------------
unto Purchaser that to its actual knowledge, each and every one of the following
statements is true, correct and complete in every material respect as of the
date of this Agreement and will be true, correct and complete as of the Closing
Date:
(a) Seller is duly organized, validly existing and in good standing
under the laws of the State of Illinois and has full right, power and authority
to enter into this Agreement and to assume and perform all of its obligations
under this Agreement; and the execution and delivery of this Agreement and the
performance by Seller of its obligations under this Agreement require no further
action or approval of Seller's shareholders, directors, members, managers or
partners (as the case may be) or of any other individuals or entities in order
to constitute this Agreement as a binding and enforceable obligation of Seller.
The individuals and/or entities signing below in the indicated representative
capacities are fully authorized so to act.
(b) Seller is not a foreign entity, foreign corporation, foreign
partnership, foreign trust or foreign estate (as those terms are defined in the
Internal Revenue Code and Income Tax Regulations).
(c) Neither the entry into, the performance of, nor compliance with
this Agreement by Seller has resulted, or will result, in any violation of,
default under, or acceleration of any obligation under any existing corporate
charter, certificate of incorporation, bylaw, articles of organization, limited
liability company agreement or regulations, partnership agreement, mortgage
indenture, lien agreement, note, contract, permit, judgment, decree, order,
restrictive covenant, statute, rule or regulation applicable to Seller or to the
Hotel; nor will any of the foregoing require the consent of any party not
otherwise provided for in this Agreement.
(d) There are no leases, management agreements, leasing agent's
agreements, equipment leases, building service agreements, maintenance
contracts, suppliers contracts, warranty contracts, operating agreements, or
other agreements (i) to which Seller is a party or an assignee or (ii) binding
upon the Hotel, relating to the ownership, occupancy, operation or maintenance
of the Land, Improvements, FF&E or Supplies, except for those Service Contracts,
Leases, Warranties and FF&E Leases previously disclosed to Purchaser in writing.
(e) No party has any right or option to acquire the Property or any
portion thereof, other than Purchaser.
(f) There are, with respect to the Hotel or to Seller, no:
(i) pending arbitration proceedings or unsatisfied arbitration
awards, or judicial proceedings or orders respecting awards;
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<PAGE>
(ii) pending unfair labor practice charges or complaints,
unsatisfied unfair labor practice orders or judicial proceedings or orders
with respect thereto;
(iii) pending charges or complaints with or by city, state or
federal civil or human rights agencies, unremedied orders by such agencies
or judicial proceedings or orders with respect to obligations under city,
state or federal civil or human rights or antidiscrimination laws or
executive orders;
(iv) condemnation proceeding pending or threatened with regard to
all or any part of the Hotel;
(v) other pending, or threatened or actual litigation claims,
charges, complaints, petitions or unsatisfied orders by or before any
administrative agency or court; or
(vi) uncured Notices of Violation, whether threatened
or pending
(all, collectively, the "PENDING CLAIMS").
--------------
(g) Seller and the Hotel are in compliance in all material respects
(i) with all terms and conditions of all notices, permits, licenses,
registrations, certificates of occupancy, applications, consents, zoning and/or
building code restrictions, variances, notices of intent, and/or other
authorizations which are required for the use or operation of the Hotel, (ii)
with all applicable laws, rules, regulations, ordinances and orders in effect as
of the date hereof promulgated by any federal, state or local executive,
legislative, judicial, regulatory or administrative agency, board or authority,
or any applicable judicial or administrative decision that relate to the Hotel,
including without limitation the Americans With Disabilities Act of 1990, as
amended, and regulations or orders promulgated thereunder, and all such laws,
rules and regulations that relate to the environment or the pollution,
preservation, protection, clean-up or remediation thereof, or the treatment,
storage, disposal or other management of "hazardous substances," as such term is
currently defined in the Comprehensive Environmental Response, Compensation
Liability Act of 1980, with respect to the Hotel, and (iii) with all
limitations, requirements, restrictions, conditions, standards, prohibitions,
schedules and timetables contained in any of the foregoing.
(h) The use by Purchaser of any of the Tradenames will not infringe
any United States or state trademark, service mark, or tradename laws existing
at the Closing, or constitute actionable appropriation of rights with respect to
any other person, business or entity.
(i) The documents delivered by Seller under Section 5.2 are the only
documents or agreements pertaining to the Hotel which are in the possession or
control of Seller or ACQ but not Manager.
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<PAGE>
9.3. Representations by ACQ. ACQ hereby represents and warrants unto
----------------------
Purchaser that each and every one of the following statements is true, correct
and complete in every material respect as of the date of this Agreement and will
be true, correct and complete as of the Closing Date (except for the
representations and warranties set forth in clause (g) below, which is limited
to the actual knowledge of ACQ):
(a) ACQ is duly organized, validly existing and in good standing under
the laws of the State of Illinois and has full right, power and authority to
enter into this Agreement and to assume and perform all of its obligations under
this Agreement; and the execution and delivery of this Agreement and the
performance by ACQ of its obligations under this Agreement require no further
action or approval of ACQ's shareholders, directors, members, managers or
partners (as the case may be) or of any other individuals or entities in order
to constitute this Agreement as a binding and enforceable obligation of ACQ.
The individuals and/or entities signing below in the indicated representative
capacities are fully authorized so to act.
(b) ACQ is not a foreign entity, foreign corporation, foreign
partnership, foreign trust or foreign estate (as those terms are defined in the
Internal Revenue Code and Income Tax Regulations).
(c) Neither the entry into, the performance of, nor compliance with
this Agreement by ACQ has resulted, or will result, in any violation of, default
under, or acceleration of any obligation under any existing corporate charter,
certificate of incorporation, bylaw, articles of organization, limited liability
company agreement or regulations, partnership agreement, mortgage indenture,
lien agreement, note, contract, permit, judgment, decree, order, restrictive
covenant, statute, rule or regulation applicable to ACQ; nor will any of the
foregoing require the consent of any party not otherwise provided for in this
Agreement.
(d) ACQ is the sole owner and holder of Acq Note and ACQ has not
conveyed, hypothecated, assigned (whether collaterally or otherwise) any right,
title or interest in, to or under the Acq Note or any proceeds, income or profit
therefrom.
(e) The indebtedness evidenced by the Acq Note represents the entirety
of the indebtedness owed by Seller to ACQ or its affiliates.
(f) There are no documents or agreements, including, without
limitation, UCC Financing Statement, Deeds of Trust, Mortgages or Assignments of
Revenue, Income or Profit, securing or otherwise modifying or amending the Acq
Note that will be binding upon, or otherwise give rise to liability to or
obligation by, Purchaser or the Hotel from and after the Closing Date.
(g) The representations and warranties made by Seller in this
agreement are true and correct in all material respects and Seller has not made
any representation or
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<PAGE>
warranty in a manner which is, and has not omitted information which causes a
representation or warranty made by Seller to be, materially misleading.
The representation and warranty made in clause (g) of Section 9.3 by
ACQ is limited to the actual knowledge of James Fosdick, David Dibo and Eric
Bridges and in order to give rise to liability under such representation and
warranty, ACQ must have received written notice from a governmental authority or
other third party (x) such that a reasonable person in the position of ACQ would
believe that such representation and warranty might be false or misleading in
any material respect and (y) that was not received by, or delivered by ACQ to,
Manager.
9.4. INTENTIONALLY DELETED.
9.5. Subsequent Developmemts. After the date of this Agreement and until
-----------------------
the Closing Date, Seller and ACQ shall keep Purchaser fully informed of all
subsequent developments ("SUBSEQUENT DEVELOPMENTS") which would cause any of
-----------------------
Seller's and/or ACQ's representations and warranties contained in this Agreement
to be inaccurate or misleading.
9.6. Limitation on Further Sales Efforts. Seller shall not market the
-----------------------------------
Hotel or execute other offers prior to the termination of this Agreement in
accordance with its terms.
9.7. Seller's Indemnity. Seller agrees to indemnify and hold Purchaser
------------------
harmless of and from all liabilities, losses, damages, costs, expenses
(including reasonable attorneys' fees) which the Purchaser may suffer or incur
by reason of any liability, debt, act or cause of action occurring or accruing
prior to the Closing Date and arising from the ownership or operation of the
Hotel prior to the Closing Date, including but not limited to (i) any claims by
employees of Seller or third parties covered by insurance carried by Seller and
(y) breach by Seller of any representation, warranty or covenant herein;
provided, however, any such indemnity shall only apply if and to the extent
Manager did not cause, was not actually aware of (no independent investigation
or inquiry being required by Manager) or was not made aware of by Seller in a
written notice, any such liability, debt, act or cause of action prior to the
last day of the Review Period.
9.8. Purchaser's Indemnity. Purchaser agrees to indemnify and hold Seller
---------------------
harmless of and from all liabilities, losses, damages, costs, expenses
(including reasonable attorneys' fees) which the Seller may suffer or incur by
reason of any liability, debt, act or cause of action occurring and accruing
subsequent to the Closing Date and arising from the ownership or operation of
the Hotel by Purchaser subsequent to the Closing Date, including but not limited
to any claims by employees of Purchaser or third parties covered by insurance
carried by Purchaser.
9.9. Liquor Licenses. If allowed by law, and if Purchaser so elects,
---------------
Seller shall assign its alcoholic beverage, liquor, beer and/or wine licenses
and/or permits with respect to
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<PAGE>
the Hotel (the "LIQUOR LICENSES") to Purchaser or its lessee or management
---------------
company at Closing as part of the Licenses. Otherwise, Purchaser or its lessee
or management company (hereinafter "OPERATOR") for the Hotel shall execute such
--------
forms, license applications and other documents as may be necessary for the
Operator to obtain all Liquor Licenses necessary to operate any restaurants,
bars and lounges presently located within the Hotel. If permitted under the
laws of the jurisdiction in which the Hotel is located, Operator shall execute
and file all necessary forms, applications and other documents (and Seller shall
reasonably cooperate with the Operator in filing such forms, applications and
other documents) with the appropriate liquor and alcoholic beverage authorities
prior to the Closing so that such acquisition of the necessary Liquor Licenses
shall take effect, if possible, simultaneously with or upon completion of
Closing. If not so permitted, Operator agrees that it will promptly execute all
forms, applications and other documents required to effect such acquisition of
such Liquor Licenses at the earliest date reasonably practicable, consistent
with the laws of the States where the Hotel is located, in order that all Liquor
Licenses may be acquired by Operator at the earliest reasonably practicable time
after Closing. Operator's attempts to obtain the Liquor Licenses shall not
diminish, prior to the Closing, the full force and effect of the Liquor Licenses
maintained by Seller in its operation of the restaurants, lounges and bars
presently located within the Hotel. If such Liquor Licenses cannot be obtained
by Operator until after Closing, then Seller covenants and agrees that Seller
shall cooperate reasonably with Operator in keeping open the bars and lounges
and liquor facilities of the Hotel between the Closing and the time when such
Liquor Licenses are obtained by Operator, or a period not to exceed sixty (60)
days following the Closing Date, whichever is less (unless Operator has during
this time period following Closing diligently and continuously sought to obtain
such Liquor Licenses, in which event Operator shall have the right to obtain an
extension of such time period from Seller, not to exceed two (2) thirty-day (30
day) extensions) by entering into a "LIQUOR LICENSE AGREEMENT" for the continued
------------------------
operation of and under the Liquor Licenses with respect to the Hotel, mutually
acceptable to Seller and Operator in their reasonable discretion, pursuant to
which (i) Operator shall indemnify, defend and hold Seller harmless from any
liability, damages, claims, costs, penalties, losses or expenses (including
reasonable attorney's fees) encountered by Seller in connection with, arising
out of, or growing from such operations and the sale of alcoholic beverages at
and from the restaurants, bars and lounges located at the Hotel during said
period of time, and (ii) Operator shall reimburse Seller for Seller's costs in
maintaining the Liquor Licenses in full force and effect. In no event shall
Seller be required to obtain any additional liquor or alcoholic beverage
licenses which Seller does not possess at the time of Closing.
ARTICLE 10
CONDITIONS PRECEDENT TO THE CLOSING
-----------------------------------
In addition to any other conditions set forth in this Agreement,
Purchaser's obligations to consummate the Closing are subject to the timely
satisfaction of each and every one of the conditions and requirements set forth
in this Article 10, all of which shall be conditions precedent to Purchaser's
obligations under this Agreement. Notwithstanding the
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<PAGE>
foregoing, Purchaser, in its sole discretion, may waive any such condition by
notice to Seller.
10.1. Seller's and ACQ's Obligations. Seller and ACQ shall have
------------------------------
materially performed all their respective obligations and covenants hereunder
which are to be performed prior to Closing.
10.2. Seller's and ACQ's Representations and Warranties. Seller's and
-------------------------------------------------
ACQ's representations and warranties set forth in this Agreement, and the
representations and warranties of Van Kampen American Capital Distributor, Inc.,
a Delaware corporation ("VK/AC") set forth in that certain letter dated as of
-----
the date hereof given by VK/AC to Purchaser, shall be true and correct in all
material respects as if made again on the Closing Date.
10.3. Transfer Subject Only to Permitted Encumbrances. On the Closing
-----------------------------------------------
Date, the Hotel shall be subject only to the Permitted Encumbrances.
10.4. Operational Licenses. Purchaser shall have obtained all permits,
--------------------
licenses, approvals and other authorizations necessary or desirable to operate
the Hotel and all restaurants, bars and lounges presently located in the Hotel,
including, without limitation, the Liquor Licenses. To that end, Seller and
Purchaser shall have cooperated with each other, and each shall have executed
such transfer forms, license applications and other documents as may be
necessary or desirable for Purchaser to obtain such permits, licenses, approvals
and other authorizations.
10.5. Franchise. Either (i) if Purchaser shall have elected to take an
---------
assignment of the Franchise (or to enter into a New Franchise), the franchisor
shall have consented thereto and all documents required for such assignment or
New Franchise shall have been executed by such franchisor, or (ii) if Purchaser
shall have elected to terminate the Franchise, such Franchise is terminated (or
will be terminated upon payment by Purchaser of the requisite termination fees
or penalties).
10.6. First Mortgage. The First Mortgage debt shall be in full force and
--------------
effect with no material defaults under any of the First Mortgage Loan Documents.
Lender shall have consented in writing to the sale of the Property subject to
the First Mortgage without any modification of the terms or the imposition of
any fees, except as expressly provided herein.
ARTICLE 11
CLOSING AND CLOSING DOCUMENTS
-----------------------------
11.1. Closing. The consummation and closing (the "CLOSING") of the
------- -------
transaction contemplated under this Agreement shall take place at the offices of
the Title Company, at the Dallas, Texas office where the closing of the public
equity or debt offering of Purchaser
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<PAGE>
or its affiliate shall be occurring or such other place as is mutually agreeable
to the parties, on or prior to March 31, 1997 (the "CLOSING DATE") or as
------------
otherwise set by agreement of the parties.
11.2. Seller's Deliveries. At the Closing and at Seller's sole cost and
-------------------
expense, Seller shall deliver the following to Purchaser, in addition to all
other items required to be delivered to Purchaser by Seller:
(a) Seller's Deed. Seller's special or limited warranty deed in a
-------------
form reasonably acceptable to both Purchaser and the Title Company ("SELLER'S
--------
DEED") conveying good, indefeasible, and insurable fee simple title to the Land
- ----
and Improvements, free and clear of all mortgages, liens, encumbrances, leases,
conditions, restrictions, rights of way, easements, encroachments, claims, and
other matters of title except only Permitted Exceptions.
(b) Bill of Sale. A "special warranty" bill of sale transferring
------------
Seller's interest in all FF&E, Supplies, Warranties, Licenses, Tradenames, Plans
and Specs, Utility Reservations, Records, Deposits, Cash and Equivalents, and
other personal property in a form reasonably acceptable to both Purchaser and
Seller (the "BILL OF SALE").
------------
(c) Assignment and Assumption of Accounts Receivable, Leases, FF&E
--------------------------------------------------------------
Leases, Service Contracts and the Sages Lease and Settlement Agreement. An
- ----------------------------------------------------------------------
Assignment and Assumption of (x) all accounts receivable of Seller for room,
food and beverage and other guest charges incurred at the Property prior to the
Closing Date (the "ACCOUNTS RECEIVABLE") and (y) all of the Leases, FF&E Leases,
-------------------
Service Contracts, and the Sages Lease and Settlement Agreement (subject to the
limitations set forth in the Sages Settlement Agreement) which Purchaser has
accepted hereunder, in a form reasonably acceptable to, and duly executed by,
both Purchaser and Seller, containing indemnities similar to those set forth in
Sections 9.7 and 9.8 above (the "ASSIGNMENT");
----------
(d) FIRPTA Affidavit. An affidavit from Seller in form and substance
----------------
acceptable to Purchaser, as required by Section 1445 of the Internal Revenue
Code, specifying (i) that Seller is not a foreign entity, foreign corporation,
foreign partnership, foreign trust or foreign estate (as those terms are defined
in the Internal Revenue Code and Income tax regulations), (ii) Seller's taxpayer
identification number or U.S. employer identification number, (iii) Seller's
office address, and (iv) such other matters as Purchaser may reasonably require
in order to satisfy itself that no withholding is required under Section 1445 of
the Internal Revenue Code including an indemnity against any claim for taxes
which should have been withheld;
(e) Vehicle Titles. The necessary certificates of titles duly
--------------
endorsed for transfer together with any required affidavits and other
documentation necessary for the transfer of title from Seller to Purchaser (or
Purchaser's designee) of any motor vehicles used in connection with the Hotel's
operations;
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<PAGE>
(f) Authority Documents. Evidence satisfactory to Purchaser that the
-------------------
person or persons executing the closing documents on behalf of Seller and ACQ
have full right, power and authority to do so, and the following documentation:
(i) Certificates of the Secretaries of Seller and ACQ certifying attached copies
of the Articles of Incorporation, By-Laws, and enabling resolutions as true and
correct, unamended, and continuing, and of the incumbency of its officers, (ii)
Certificates of Existence and Good Standing from the Secretary of State of
Seller's and ACQ's incorporation, and (iii) from the Secretary of State of the
state where the Hotel is located, a Certificate of Existence and Qualification
to Do Business in such state;
(g) Title Policy. An Owner's Policy of Title Insurance issued
------------
pursuant to the Title Commitment as approved by Purchaser and issued by the
Title Company to Purchaser insuring good and indefeasible fee simple title to
the Land and Improvements (and full rights to any of the Appurtenances evidenced
by a recorded document or otherwise adequate for the Title Company to include in
affirmative coverage as part of the insured estate), subject only to the
Permitted Exceptions;
(h) Title Affidavit. Any affidavits or indemnities of Seller in form
---------------
and substance acceptable to the Title Company, in order that the Title Policy
may be issued free and clear of the standard exceptions which the Title Company
is permitted under applicable law to remove or modify upon delivery of such
affidavits or indemnities;
(i) Franchise Documents. The Franchise assignment, the New Franchise
-------------------
or the Franchise termination, as elected by Purchaser;
(j) Acq Note. The Acq Note, marked "cancelled";
--------
(k) Miscellaneous. Such other instruments as are customarily executed
-------------
in the county and State where the Hotel is located to effectuate the conveyance
of property similar to the Hotel, with the effect that, after the Closing,
Purchaser will have succeeded to all of the rights, titles, and interests of
Seller related to the Hotel and Seller will no longer have any rights, titles,
or interests in and to the Hotel. Such instruments shall include, if
appropriate, any documents required effectively to transfer the Utility
Reservations by Seller to Purchaser and the Prior Tax Appeals Assignment;
(l) Plans, Keys and Records. To the extent not previously delivered
-----------------------
to and in the possession of Purchaser, all Plans and Specs, all keys, access
cards, and combinations for the Hotel (which shall be properly tagged for
identification), all Records, and all Licenses;
(m) Original Documents. Originals of all of the documents and
------------------
agreements covered by the foregoing that have not already been delivered to
Purchaser;
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<PAGE>
(n) Updates. A complete list of all advance room reservations,
-------
functions and the like, in reasonable detail specified by Purchaser, and updated
UCC Searches;
(o) Estoppel Letters and Consents. Either the estoppel letters or
-----------------------------
Seller's certificates as described in Sections 8.5 and 8.6 above; and
(p) Termination of Agreements. Fully executed and effective
-------------------------
terminations of all management and other agreements with respect to the Hotel
that are not assigned to and assumed by Purchaser under the terms hereof.
On the Closing Date, Seller shall deliver to Purchaser possession of the Hotel
free and clear of all tenancies of every kind and parties in possession, except
for the Tenants under the Leases assumed by Purchaser under the terms hereof and
guests in the Hotel, and with all parts of the Hotel (including, without
limitation, the Improvements and FF&E) in substantially the same condition as
the same were on the date of this Agreement, normal wear only excepted.
11.3. Purchaser's Deliveries. At the Closing and at Purchaser's sole cost
----------------------
and expense, Purchaser shall deliver the following to Seller (unless otherwise
specified in this Agreement):
(a) Purchase Price. The Fixed Cash Payment, plus the net amount of
--------------
any prorations to the extent payable by Purchaser in accordance with the terms
of this Agreement;
(b) Assignment. The Assignment;
----------
(c) Profits Interest Agreement. The Profits Interest Agreement, duly
--------------------------
executed and delivered by Purchaser to ACQ or its disclosed Participant;
(d) Authority Documents. Evidence satisfactory to Seller that the
-------------------
person or persons executing the closing documents on behalf of Purchaser have
full right, power and authority to do so; and
(e) Miscellaneous. Such other instruments as are customarily executed
-------------
by the purchaser in the county and State where the Hotel is located to
effectuate the purchase of property similar to the Hotel.
11.4. Prorations. At Closing, the following items of revenue and expense
----------
shall be prorated and adjusted as of 12:01 A.M. (except as otherwise provided)
on the Closing Date:
(a) Hotel Taxes. Real estate taxes, personal property or use taxes,
-----------
assessments, and sewer rents, if any, for the tax period in which the Closing
occurs shall be apportioned between Seller and Purchaser on a per diem basis
through and including 11:59
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<PAGE>
P.M. of the day preceding the Closing Date. If the rate or amount of such taxes
and sewer rents, if any, shall not be fixed prior to the Closing Date, the
adjustment thereof on the Closing Date shall be on the basis of the best
available estimates for such taxes, assessments and rents that will be due and
payable on the Hotel for the tax period in which the Closing occurs. As soon as
the exact amount of such taxes, assessments and rents for such period is
ascertained, Seller and Purchaser shall readjust the amounts thereof to be paid
by each party to the end that Seller shall pay for such taxes, assessments and
rents attributable to the period of time prior to the Closing Date and Purchaser
shall pay for the period from and after the Closing Date. Special assessments
of any public or taxing authority constituting liens or encumbrances on the
Hotel or attributable to improvements benefiting the Hotel or property in the
vicinity of the Hotel which have been commenced prior to the Closing Date,
whether or not assessment therefor has been levied or a lien has been imposed
upon the Hotel, shall be paid by and discharged of record by Seller on or before
the Closing Date. If any such special assessments for improvements benefiting
the Hotel or property in the vicinity of the Hotel may be paid in installments
and Seller has elected the installment method of payment, all installments shall
be deemed payable as of the day prior to the Closing Date and shall be
discharged of record by Seller on or before the Closing Date.
(b) Operating Costs. All costs and expenses of operating the Hotel,
---------------
including without limitation amounts paid or payable under the Service Contracts
or the FF&E Leases; but Seller shall be responsible for the payment of all
accounts payable with respect to the Hotel relating to services rendered or
goods provided prior to the Closing Date.
(c) Lease Rents. Rents under Leases and other revenues as and when
-----------
collected. If Purchaser receives any rents from Tenants after the Closing Date
then such collections shall first be applied to rents accruing on or after the
Closing Date, and Purchaser shall promptly remit the balance, if any, to Seller
to the extent any pre-Closing Date rental obligation under such Tenant's Lease
remains unpaid to Seller. Nothing in this paragraph shall restrict Seller's
right to collect delinquent rents directly from a tenant by any legal means or
shall obligate Purchaser to attempt to collect such delinquent rents on Seller's
behalf.
(d) Revenues. Guest, convention, room, food, beverage, and all other
--------
charges and revenues for services rendered and the operation of all departments
of the Hotel, including, but not limited to, advance payments under booking
agreements for rooms, facilities and services of the Hotel and any other
revenues, as and when collected, provided, however, that (x) food, room service
and restaurant revenue shall be apportioned as of the closing of dinner service
hours at each restaurant on the evening preceding the Closing Date, and bar
revenues shall be read, measured (and tapes preserved) and apportioned as of
2:00 A.M. on the Closing Date and provided further that room rental receipts for
the night before Closing shall be apportioned fifty percent (50%) to Seller and
fifty percent (50%) to Purchaser (less a charge of $4.50 per occupied room which
shall be credited to Purchaser representing 50% of the agreed upon cost of
cleaning such occupied rooms), (y) all cash,
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<PAGE>
checks, and other funds, and all other notes, security and other evidence of
indebtedness located at the Hotel on the Closing Date and balances on deposit to
the credit of Seller with banking institutions are and shall remain the property
of Seller and are not included in this sale except for the Cash and Equivalents
to be purchased by Purchaser at par to the extent not required to fully credit
Purchaser with all closing prorations in its favor. The balance due on the city
ledger and guest ledger and all other accounts receivable of Seller as of the
Closing Date ("SELLER'S RECEIVABLES") will be collected by Purchaser on behalf
--------------------
of Seller for a period of 180 days after the Closing Date (the "COLLECTION
----------
PERIOD") for a fee of three percent (3%) of the amounts collected. Purchaser
- ------
shall undertake its customary collection efforts to collect Seller's Receivables
during the Collection Period and any monies received by Purchaser and owed to
Seller shall be held in trust by Purchaser for the benefit of Seller and
remitted to Seller promptly after receipt thereof by Purchaser, less a three
----
percent (3%) administrative fee to be paid by Seller to Purchaser's management
company to the extent not required to fully credit Purchaser with all closing
prorations in its favor. Purchaser shall not be obligated to commence any
actions or proceedings to collect any of the Seller's Receivables. If, at the
expiration of the Collection Period any of Seller's Receivables to be collected
by Purchaser have not been collected, Purchaser shall be entitled to retain same
as a further consideration for its collection efforts during the Collection
Period.
(e) Miscellaneous. Fees and expenses for coin machine income and
-------------
washroom and checkroom income.
(f) Deposits. Purchaser shall receive a cash credit in an amount
--------
equal to the sum of all (i) Deposits (which are Purchaser liabilities) not
transferred and delivered to Purchaser, or retained by Seller at the Closing, to
the extent that the same relate to periods from and after the Closing, and (ii)
prepaid rentals and all security deposits, cleaning fees and deposits and other
deposits paid under any Lease and not properly applied as of the Closing to a
monetary obligation of the related Tenant.
(g) Sales Taxes. All sales, use and occupancy taxes, if any, due or
-----------
to become due in connection with revenues received from the Hotel for the period
prior to the time of proration as set forth herein will be paid by Seller to the
end that Purchaser shall be liable to pay all such sales, use and occupancy
taxes due or to become due in connection with revenues for the period after the
time of proration. Seller and Purchaser shall pay their respective share of all
sales, use and occupancy taxes due or to become due in connection with revenues
apportioned between Seller and Purchaser as provided in Subsection (d) of this
Section. Seller shall be entitled to receive any rebates or refunds on such
taxes paid by the Partnership attributable to the tax period prior to the
Closing.
(h) Reservation Deposits.
--------------------
(i) On the Closing Date the aggregate amount of any deposits
("RESERVATION DEPOSITS") received by Seller (whether paid in cash or by
--------------------
credit card) as a downpayment for reservations ("RESERVATIONS") made for
------------
rooms, banquets,
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<PAGE>
meals or other services to be supplied from and/or after the Closing Date
shall be credited against the cash portion of the Purchase Price due at the
Closing.
(ii) Seller hereby indemnifies and holds Purchaser harmless from
and against all claims by and liabilities to any person resulting from
Seller's failure to pay over or credit to Purchaser any Reservation
Deposits allegedly paid to Seller for the period from and after the Closing
Date. Purchaser hereby indemnifies and holds Seller harmless from and
against all claims by and liabilities to any person resulting from
Purchaser's failure to honor or return any Reservation Deposit paid or
credited to Purchaser.
11.5. Closing Costs.
-------------
(a) Seller shall pay (i) the cost of preparing or obtaining documents
or consents to be delivered by Seller to Purchaser pursuant to this Agreement
(specifically excluding, however, any sums paid or to be paid to the franchisor
as a prerequisite to the assignment or cancellation of the Franchise, if
Purchaser requests that the Franchise be assigned to it or cancelled), (ii) all
transfer taxes (other than transfer taxes payable to Arlington Heights ("LOCAL
-----
TRANSFER TAXES"), which shall be paid by Seller only to the extent the local
- --------------
ordinance regulating and authorizing Local Transfer Taxes provides that Seller
is primarily liable for payment of same), conveyance taxes, documentary stamps,
sales taxes and other taxes, fees or charges payable to any governmental
authority as a result of the transfer of the Hotel, (iii) any fees or costs
incurred in order to convey the Hotel free and clear of all liens, encumbrances,
conditions and exceptions other than the Permitted Exceptions, (iv) one-half of
any escrow fee imposed by the Title Company and (v) the fees and disbursements
of ACQ's counsel and any local counsel required by Seller in order to comply
with (x) the provisions of this Agreement (e.g., removing title exceptions) or
----
(y) applicable law. The provisions of this Section 11.5(a) are subject to the
limitations set forth in Section 3.5(b).
(b) Purchaser shall pay (i) the cost of updating and recertifying the
Survey, (ii) recording fees and charges required to record the Seller's Deed,
(iii) any mortgage recording taxes, documentary stamps, intangibles tax and
other taxes, fees or charges payable to any governmental authority as a result
of the Purchase Money Note or the Purchase Money Mortgage, (iv) one-half of any
escrow fee imposed by the Title Company, (v) all search fees, title premiums and
other costs associated with the Title Policy and the cost of the UCC Searches,
(vi) Local Transfer Taxes, but only to the extent the local ordinance regulating
and authorizing Local Transfer Taxes provides that Purchaser is primarily liable
for payment of same and (vii) the fees and disbursements of its counsel.
11.6. Reconciliation and Final Payment. Seller and Purchaser shall
--------------------------------
reasonably cooperate after Closing to make a final determination of the
prorations required hereunder. Upon the final reconciliation of the prorations
and apportionments hereunder, the party which owes the other party any sums
hereunder shall pay such party such sums within ten (10) days
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<PAGE>
after the reconciliation of such sums. Except as expressly provided herein, it
is the intent of the parties that all items herein which are subject to
proration and apportionment shall result in Seller receiving all of the economic
benefits and burdens of the Hotel with respect to the period prior to the
Closing, and Purchaser receiving all of the economic benefits and burdens of the
Hotel with respect to the period from and after the Closing Date. The
obligations to calculate such prorations, make such reconciliations and pay any
such sums shall survive the Closing. The provisions of this Section 11.6 are
subject to the limitations set forth in Section 3.5(b).
11.7. Accounts Payable. Seller shall retain and be responsible for the
----------------
payment of all accounts payable and other debts relating to the Hotel which have
accrued prior to or as of the Closing and payable after the Closing to the
extent the Purchase Price is not adjusted in favor of Purchaser under the
proration provisions of this Agreement for such accounts payable and other
debts. Purchaser shall be responsible for the particular accounts payable
relating to the Hotel arising and accruing after the Closing to the extent the
Purchase Price is adjusted in favor of Purchaser under the same provisions. The
provisions of this Section 11.7 are subject to the limitations set forth in
Section 3.5(b).
ARTICLE 12
CASUALTY AND CONDEMNATION
-------------------------
12.1. Risk of Loss; Notice. Prior to Closing and the delivery of
--------------------
possession of the Hotel to Purchaser in accordance with this Agreement, all risk
of loss to the Hotel (whether by casualty, condemnation or otherwise) shall be
borne by Seller. In the event that (a) any loss or damage to the Hotel shall
occur prior to the Closing Date as a result of fire or other casualty, or (b)
Seller receives notice that a governmental authority has initiated or threatened
to initiate a condemnation proceeding affecting the Hotel, Seller shall give
Purchaser immediate written notice of such loss, damage or condemnation
proceeding.
12.2. Purchaser's Termination Right. If, prior to Closing and the
-----------------------------
delivery of possession of the Hotel to Purchaser in accordance with this
Agreement, (a) any condemnation proceeding shall be pending against a
substantial portion of the Hotel or (b) there is any substantial casualty loss
or damage to the Hotel, Purchaser shall have the option to terminate this
Agreement provided it delivers written notice to Seller of its election so to
terminate this Agreement within thirty (30) days after the date Seller has
delivered Purchaser written notice of any such loss, damage or condemnation
(which notice shall include a certification of (i) the amounts of insurance
coverages in effect with respect to the loss or damage and (ii) if known, the
amount of the award to be received in such condemnation), and in such event all
Earnest Money shall be delivered to Purchaser and thereafter no party shall have
any further obligation or liability to the other under this Agreement. In the
context of condemnation, "substantial" shall mean condemnation of such portion
of the Hotel as would, in Purchaser's sole judgment, render use of the remainder
impractical or unfeasible for the uses herein contemplated, and, in the context
of casualty loss or damage, "substantial" shall mean a loss or damage in excess
of $250,000 in value.
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<PAGE>
12.3. Procedure for Closing. If Purchaser shall not timely elect to
---------------------
terminate this Agreement under Section 12.2 above, or if the loss, damage or
condemnation is not substantial, Seller agrees to pay to Purchaser at the
Closing all insurance proceeds or condemnation awards which Seller has received
as a result of the same plus an amount equal to the insurance deductible, if
any, and assign to Purchaser all insurance proceeds and condemnation awards
payable as a result of the same in which event the Closing shall occur without
Seller replacing or repairing such damage.
ARTICLE 13
DEFAULT AND REMEDIES
--------------------
13.1. Purchaser's Default. If, at or prior to Closing, for any reason
-------------------
other than termination hereof pursuant to a right granted to Purchaser hereunder
to do so or because of an uncured default by Seller (i) Purchaser refuses or
fails to consummate the purchase of the Hotel pursuant to this Agreement, or
(ii) Purchaser shall otherwise fail in any material respect to perform any of
its material obligations or agreements as and when required hereunder, or if, at
or prior to Closing, any representation or warranty made by or on behalf of
Purchaser herein shall have been materially incorrect when made or when ratified
at Closing, then Seller, as its sole and exclusive remedy, shall have the right
to terminate this Agreement by giving Purchaser and the Title Company written
notice thereof, following which ACQ shall be entitled to draw down the Letter of
Credit (unless Purchaser delivers $300,000 within three (3) business days to
ACQ, in which event Seller shall return the Letter of Credit to Purchaser) and
neither party shall have any further rights, duties or obligations hereunder
(except to the extent this Agreement may specifically provide for the survival
of certain obligations) and Purchaser hereby acknowledging that the amount of
damages resulting from breach of this Agreement by Purchaser would be difficult
or impossible accurately to ascertain. If Purchaser terminates this Agreement
pursuant to a right granted to Purchaser hereunder to do so, then, upon return
of the Letter of Credit to Purchaser, neither party shall have any further
rights, duties or obligations hereunder (except to the extent this Agreement may
specifically provide for the survival of certain obligations).
13.2. Seller's Default. If, at or prior to Closing, for any reason other
----------------
than termination hereof pursuant to a right granted to Seller hereunder to do so
or because of a default by Purchaser (i) Seller refuses or fails to consummate
the transaction contemplated by this Agreement, or (ii) otherwise fails in any
material respect to perform any of its material obligations or agreements
hereunder, or if any representation or warranty made by or on behalf of Seller
herein shall have been materially incorrect when made or when ratified at
Closing, then Purchaser, as its sole remedies, shall have the right to do any
one or more of the following:
(a) Terminate this Agreement by written notice given to Seller and the
Title Company, in which event the Title Company shall deliver the Letter of
Credit to Purchaser.
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<PAGE>
(b) Seek damages (but only if Seller's default is due to Seller's
wrongful or willful refusal to close) or specific performance of this Agreement.
Notwithstanding the foregoing, in the event of any default by Seller under this
Agreement due to a breach after Closing or any termination hereof of any
covenant or indemnity which survives the Closing or any termination hereof, or
if Purchaser shall discover after Closing that any warranty or representation
made by Seller herein or in connection with the transaction contemplated herein
was materially incorrect or breached when made, then, in any of such events, but
subject to the express limitations set forth in Section 9.7 hereof, Purchaser
shall have any and all rights and remedies available at law or in equity by
reason of such default.
ARTICLE 14
BROKERS
-------
14.1. Identity of Brokers. The parties hereto represent to each other
-------------------
that they dealt with no finder, broker or consultant in connection with this
Agreement or the transactions contemplated hereby.
14.2. Indemnification by Seller. Seller agrees to, and hereby does,
-------------------------
indemnify and save harmless Purchaser and its affiliates and their respective
successors and assigns against and from any loss, liability or expense,
including reasonable attorneys' fees, arising out of any claim or claims for
commissions or other compensation for bringing about this Agreement or the
transactions contemplated hereby made by any broker, finder, consultant or like
agent if such claim or claims made by any such broker, finder, consultant or
like agent are based in whole or in part on any agreements entered into by
Seller or its representatives for a commission or other compensation. Seller
shall likewise indemnify and save harmless Purchaser and its affiliates and
their respective successors and assigns against and from any loss, liability or
expense, including reasonable attorneys' fees, arising out of any claim or
claims for commissions or other compensation relating to the Leases.
14.3. Indemnification by Purchaser. Purchaser agrees to, and hereby does,
----------------------------
indemnify and save harmless Seller, ACQ and their respective affiliates and
their respective successors and assigns against and from any loss, liability or
expense, including reasonable attorneys' fees, arising out of any claim or
claims for commissions or other compensation for bringing about this Agreement
or the transactions contemplated hereby made by any broker, finder, consultant
or like agent if such claim or claims made by any such broker, finder,
consultant or like agent are based on any agreements entered into by Purchaser
or its representatives for a commission or other compensation.
ARTICLE 15
INTENTIONALLY OMITTED
---------------------
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<PAGE>
ARTICLE 16
MISCELLANEOUS
-------------
16.1. Notices. Any notice provided for by this Agreement and any
-------
other notice, demand or communication which any party may wish to send to
another shall be in writing, addressed to the party for which such notice,
demand or communication is intended at such party's address as set forth in this
Section, and sent either (i) by registered or certified mail, return receipt
requested, in a sealed envelope, postage prepaid, (ii) by any national overnight
receipted courier service, or (iii) by facsimile transmission. Purchaser's
address for all purposes under this Agreement shall be the following:
American General Hospitality
Operating Partnership, L.P.
c/o American General Hospitality Corporation
3860 West Northwest Highway, Suite 300
Dallas, Texas 75220
Attention: Steven D. Jorns, President,
or Kenneth E. Barr, Executive Vice President
Fax No. (214) 351-0568
with a copy to:
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Attention: Douglas A. Raelson, Esq.
Fax No. (212) 856-7806
Seller's address for all purposes under this Agreement shall be the following:
I-90 HOTEL, INC.
c/o American General Hospitality Corporation
3860 West Northwest Highway, Suite 300
Dallas, Texas 75220
Attention: Steven D. Jorns, President,
or Kenneth E. Barr, Executive Vice President
Fax No. (214) 351-0568
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<PAGE>
with a copy to:
Van Kampen American Capital
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Attention: James Fosdick
with a copy to:
Ungaretti & Harris
3500 Three First National Plaza
Chicago, Illinois 60602-4283
Telecopier: 312-977-4405
Attention: Jack Jester, Esq.
ACQ's address for all purposes under this Agreement shall be the following:
Van Kampen American Capital
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Attention: James Fosdick
with a copy to:
Ungaretti & Harris
3500 Three First National Plaza
Chicago, Illinois 60602-4283
Telecopier: 312-977-4405
Attention: Jack Jester, Esq.
Any address or name or facsimile number specified above may be changed by a
notice given by the addressee to the other party. Any notice, demand or other
communication shall be deemed given and effective as of the date of delivery in
person or receipt set forth on the return receipt or the facsimile confirmation.
The inability to deliver because of changed address or facsimile number of which
no notice was given, or rejection or other refusal to accept any notice, demand
or other communication, shall be deemed to be receipt of the notice, demand or
other communication as of the date of such attempt to deliver or rejection or
refusal to accept. Notices, demands and other communications may be given by the
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<PAGE>
parties' counsel which shall have the same force and effect as if given by the
parties themselves.
16.2. Entire Agreement, Modifications and Waivers; Cumulative Remedies.
----------------------------------------------------------------
This Agreement constitutes the entire agreement between the parties hereto and
may not be modified or amended except by an instrument in writing signed by the
parties hereto, and no provisions or conditions may be waived other than by a
writing signed by the party waiving such provisions or conditions. No delay or
omission in the exercise of any right or remedy accruing to Seller or Purchaser
upon any breach under this Agreement shall impair such right or remedy or be
construed as a waiver of any such breach theretofore or thereafter occurring.
The waiver by Seller or Purchaser of any breach of any term, covenant or
condition herein stated shall not be deemed to be a waiver of any other breach,
or of a subsequent breach of the same or any other term, covenant or condition
herein contained. All rights, powers, options or remedies afforded to Seller or
Purchaser either hereunder or by law shall be cumulative and not alternative,
and the exercise of one right, power, option or remedy shall not bar other
rights, powers, options or remedies allowed herein or by law, unless expressly
provided to the contrary herein.
16.3. Exhibits and Schedules. All exhibits and schedules referred to in
----------------------
this Agreement and attached hereto are hereby incorporated into this Agreement
by reference as if fully set forth herein.
16.4. Successors and Assigns. Purchaser may assign its rights under this
----------------------
Agreement to any limited partnership, limited liability company or other entity
controlling, controlled by or under common control with Purchaser for the
purpose of purchasing the Hotel or implementing the REIT so long as Purchaser
provides notice thereof to Seller prior to Closing. This Agreement shall be
binding upon, and inure to the benefit of, Seller and Purchaser and their
respective legal representatives, successors, and assigns. Whenever a reference
is made in this Agreement to Purchaser, it shall include Purchaser's successors
and assigns under this Agreement.
16.5. Article Headings. Article headings and article and section numbers
----------------
are inserted herein only as a matter of convenience and in no way define, limit
or prescribe the scope or intent of this Agreement or any part thereof and shall
not be considered in interpreting or construing this Agreement.
16.6. Governing Law. This Agreement shall be construed and interpreted in
-------------
accordance with the laws of the State where the Hotel is located, without regard
to principals of conflicts of laws.
16.7. Time Periods. If the final day of any time period or limitation set
------------
out in any provision of this Agreement falls on a Saturday, Sunday or legal
holiday under the laws of the State where the Hotel is located or of the federal
government, then and in such event the
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<PAGE>
time of such period shall be extended to the next day which is not a Saturday,
Sunday or legal holiday.
16.8. Counterparts. This Agreement may be executed in any number of
------------
counterparts and by either party hereto on a separate counterpart, each of which
when so executed and delivered shall be deemed an original and all of which
taken together shall constitute but one and the same instrument.
16.9. Survival. All covenants, agreements and indemnities contained in
--------
the Agreement which contemplate performance after the Closing Date shall survive
the Closing. All representations and warranties contained in this Agreement
shall expressly survive the Closing for a period of three (3) years. None of
the foregoing shall be deemed to merge into, or be waived by, Seller's Deed or
any other closing documents.
16.10. Further Acts. In addition to the acts, deeds, instruments and
------------
agreements recited herein and contemplated to be performed, executed and
delivered by Purchaser and Seller, Purchaser and Seller shall perform, execute
and deliver or cause to be performed, executed and delivered at the Closing or
after the Closing, any and all further acts, deeds, instruments and agreements
and provide such further assurances as the other party or the Title Company may
reasonably require to consummate the transaction contemplated hereunder.
However, the foregoing shall not be deemed to (i) require Seller to expend a sum
of money which it could not reasonably have anticipated on the date of execution
of this Agreement, or (ii) require Purchaser to expend a sum of money which it
could not reasonably have anticipated on the expiration of the Review Period.
16.11. Severability. In case any one or more of the provisions contained
------------
in this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
16.12. Attorneys' Fees. Should any party employ an attorney or attorneys
---------------
to enforce any of the provisions hereof, to bring a claim resulting from a
breach of a representation, warranty or covenant by another party hereto or to
protect its interest in any manner arising under this Agreement, the
nonprevailing party in any such action, arbitration or other proceeding pursued
in a court of competent jurisdiction (the finality of which is not legally
contested), or an arbitrator agreed upon by the relevant parties, agrees to pay
to the prevailing party all reasonable costs, damages, and expenses, including
reasonable attorneys' fees, expended or incurred in connection therewith.
16.13. REIT Audits. Seller acknowledges and agrees that the REIT, through
-----------
its independent accountants, may conduct an audit of the REIT's financial
statements for purposes of the REIT complying with its public reporting
obligations under the Securities and Exchange Act of 1934, as amended (the
"SECURITIES ACT"). In connection therewith, Seller
--------------
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<PAGE>
agrees that for a period of twelve (12) months after the Closing Date, Seller
shall cooperate and assist, and to cause each of its Affiliates, its employees
and representatives to cooperate and assist, in such audit in all respects
reasonably requested by the REIT and its independent accountants, including
without limitation making employees of Seller, the Hotel and their respective
Affiliates available to provide any information necessary or appropriate for
such audits and signing standard management representation letters to the REIT's
independent accountants and to the REIT.
16.14. Safes and Baggage.
-----------------
(a) On the Closing Date Seller shall cause the delivery to Purchaser
of all of Seller's keys to all safes and safe deposit boxes (collectively, the
"safes") at the Property. On or prior to the Closing Date, Seller shall give
written notices to those persons who have deposited items in such safes,
advising them of the sale of the Hotel to Purchaser and requesting the removal
or verification of their contents in the safes on the Closing Date. All such
removals or verifications on the Closing Date shall be under the supervision of
Seller's and Purchaser's respective representatives. All contents which are to
remain in the safes shall be recorded. Safes containing items belonging to
guests who have not responded to such written notice by so removing or verifying
their safe contents by the end of the day and which cannot be opened without the
key in the possession of such guest shall be sealed until such time as the guest
appears, at which time the safe shall be opened and the contents recorded in the
presence of the respective representatives. Until that time, Purchaser shall
indemnify, defend and hold Seller harmless from and against any liability for
loss or theft of such contents and Seller shall assign to Purchaser its rights
to any insurance proceeds covering such safes. Any such contents so verified or
recorded and thereafter remaining in the hands of Purchaser shall be the
responsibility of Purchaser and Purchaser hereby agrees to indemnify, defend and
hold Seller harmless from any liability therefor.
(b) On the Closing Date representatives of Purchaser and Seller shall
take an inventory of all baggage, valises and trunks checked or left in the care
of Seller at the Hotel. From and after the Closing Date, Purchaser shall be
responsible for all baggage listed in said inventory and Purchaser hereby
indemnifies and agrees to hold Seller harmless from and against any liability
therefor.
(c) The provisions of this Section 16.14 shall survive the Closing
Date for a period of one (1) year.
16.15. Bulk Transfers Law. Seller has determined that the provisions of
------------------
Article 6 of the Uniform Commercial Code and other applicable laws concerning
bulk transfers, if any, do not apply to this transaction. Seller shall and
hereby agrees to indemnify, hold harmless and defend Purchaser for any loss,
damage, liability, claim or expense (including, without limitation, reasonable
attorneys' fees and expenses) on account of claims of Seller's creditors arising
from Seller's failure to comply with any applicable bulk transfers laws, which
indemnity shall survive the Closing Date.
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<PAGE>
16.16. Tax Reduction Proceedings. The proceeds of any proceeding or
-------------------------
proceedings for the reduction of the assessed valuation of the Property or any
portion thereof for real estate taxes, or of any rate applicable thereto for (x)
Prior Tax Appeals shall belong solely to Seller, (y) the tax period in which the
Closing Date occurs (the "CLOSING TAX PERIOD") shall be apportioned between
------------------
Seller and Purchaser and (z) tax periods subsequent to the Closing Tax Period
shall belong solely to Purchaser. Seller hereby assigns to Purchaser the right
to prosecute, or continue the prosecution of, any and all proceedings with
respect to the Closing Tax Period and any sums hereafter received by Purchaser
or Seller with respect to any proceedings as to which it is not entitled to
receive and retain all of the proceeds thereof shall be held in trust by such
for the account of either (i) the other party or (ii) both parties, as
applicable and shall immediately be either apportioned or delivered in its
entirety, as the case may be, to such other party upon receipt thereof. The
provisions of this Section 16.16 shall survive the Closing Date.
THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK;
THE SIGNATURE PAGE FOLLOWS
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been entered into effective as of the
date first written above.
SELLER:
I-90 HOTEL, INC.
By: ______________________
Name:
Title:
PURCHASER:
AMERICAN GENERAL HOSPITALITY
OPERATING PARTNERSHIP, L.P.,
a Delaware limited partnership.
By: AGH GP, Inc., a Nevada corporation,
its general partner
By: _______________________
Name:
Title:
ACQ:
ACQ, INC.
By: ______________________
Name:
Title:
-42-
<PAGE>
List of Exhibits
- ----------------
Exhibit A - Legal Description of Land
Exhibit B - The Sages Restaurant Escrow Agreement
Exhibit C - Form of Profits Interest Agreement
Exhibit D - Form of Tenant Estoppel Letter
Exhibit E - Form of Audit Representation Letter
The exhibits and/or schedules identified above which comprise a part of this
Exhibit 2.13 have not been included as part of this Exhibit. The Registrant
agrees to furnish supplementally a copy of any such omitted schedule or exhibit
upon request.
-43-
<PAGE>
EXHIBIT 10.22
================================================================================
MASTER ALLIANCE AGREEMENT
Dated as of January 9, 1997
by and among
AMERICAN GENERAL HOSPITALITY CORPORATION,
AMERICAN GENERAL HOSPITALITY OPERATING PARTNERSHIP, L.P.
and
WHC FRANCHISE CORPORATION,
WHC DEVELOPMENT CORPORATION
================================================================================
<PAGE>
MASTER ALLIANCE AGREEMENT
This MASTER ALLIANCE AGREEMENT (this "AGREEMENT") is made and entered into
as of January 9, 1997 by and among American General Hospitality Corporation, a
Maryland corporation, which operates as a real estate investment trust (the
"COMPANY"), American General Hospitality Operating Partnership, L.P., a Delaware
limited partnership (the "OPERATING PARTNERSHIP" and together with the Company,
"AGT"), WHC Franchise Corporation ("WYNDHAM"), a Delaware corporation and a
wholly-owned subsidiary of Wyndham Hotel Corporation ("WYN"), and WHC
Development Corporation, a Delaware corporation ("WHC"). For the limited
purposes set forth herein, WYN shall be a party to this Agreement.
WHEREAS, the Company was formed for the purpose of continuing and expanding
the hotel acquisition, development and repositioning operations of American
General Hospitality, Inc. ("AGHI");
WHEREAS, the Company owns a portfolio of sixteen hotels and intends to
continue to purchase and acquire hotels; and
WHEREAS, the Company and Wyndham desire to pursue a strategic alliance
pursuant to which (i) Wyndham would have the non-exclusive right, but not the
obligation, to franchise hotels acquired by AGT after the date of this Agreement
if the Company shall determine that any such hotel should undergo brand
conversion, (ii) Wyndham shall purchase a certain number of shares of Common
Stock or OP Units (as hereinafter defined) with respect to certain hotels
acquired by AGT that Wyndham shall franchise, and (iii) with respect to hotels
acquired by Wyndham or WHC after the date of this Agreement, AGT would have the
non-exclusive right to be included in any solicitation of real estate investment
trusts ("REITS") to (A) purchase those hotels with respect to which Wyndham or
WHC intends to assign the purchase agreement to a REIT or (B) enter into a sale-
leaseback arrangement with Wyndham or WHC pursuant to those sale-leaseback
arrangements that Wyndham or WHC intend to enter into with a REIT simultaneously
upon the acquisition of such hotel by Wyndham or WHC.
NOW, THEREFORE, the parties hereto, in consideration of the foregoing, the
mutual covenants and agreements hereinafter set forth, and other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby agree as follows:
1. Definitions.
-----------
As used in this Agreement, the following capitalized defined terms shall
have the following meanings:
"ACCEPTED FINANCIAL PROJECTIONS" shall have the meaning set forth in
Section 2(d) hereof.
"ACQUISITION NOTICE" shall have the meaning set forth in Section 2(c)
hereof.
<PAGE>
"AGHI" shall mean American General Hospitality, Inc., a Texas corporation.
"AGREEMENT" shall have the meaning set forth in the Preamble.
"AGT'S REPRESENTATIVES" shall mean any of AGT's affiliates, directors,
officers, employees and representatives (including, without limitation, lenders,
financial advisors, attorneys and accountants).
"BANK FACILITY" shall have the meaning set forth in Section 2(b) hereof.
"CLOSING" shall have the meaning set forth in Section 4(c) hereof.
"COMMON STOCK" shall mean shares of common stock, $0.01 par value per
share, of the Company.
"COMPANY" shall have the meaning set forth in the Preamble and also shall
include the Company's successors.
"CONTROL" shall have the meaning set forth in Section 3 hereof.
"CONTROLLING INTEREST" shall have the meaning set forth in Section 3
hereof.
"CROW INTERESTS" shall have the meaning set forth in Section 13(b) hereof.
"ENTITIES" shall have the meaning set forth in Section 13 hereof.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
"FRANCHISE AGREEMENT" shall have the meaning set forth in Section 2(a)
hereof.
"FRANCHISED HOTEL" shall have the meaning set forth in Section 2(a) hereof.
"FTC RULE" shall have the meaning set forth in Section 3 hereof.
"HSR ACT" shall have the meaning set forth in Section 4(g) hereof.
"LENDERS" shall have the meaning set forth in Section 4(a) hereof.
"LESSEE" shall mean AGH Leasing, L.P., a Delaware limited partnership.
"LESSEE ENTITIES" shall have the meaning set forth in Section 3 hereof.
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<PAGE>
"LINE OF CREDIT" shall mean AGT's $100 million line of credit with Societe
General, Southwest Agency, Bank One, Texas, N.A.
"MANAGEMENT AGREEMENT" shall have the meaning set forth in Section 2(b)
hereof.
"NYSE" shall have the meaning set forth in Section 6(e) hereof.
"OFFER" shall have the meaning set forth in Section 2(d) hereof.
"OP UNITS" shall have the meaning set forth in Section 4(a) hereof.
"OPERATING PARTNERSHIP" shall mean set forth in the Preamble.
"PENDING HOTEL" shall have the meaning set forth in Section 2(a) hereof.
"PERSON" shall mean an individual, partnership, corporation, trust, estate,
or unincorporated organization, or other entity, or a government or agency or
political subdivision thereof.
"REGISTRATION RIGHTS AGREEMENT" shall have the meaning set forth in Section
9.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended from
time to time.
"WHC" shall have the meaning set forth in the Preamble.
"WYNDHAM'S REPRESENTATIVES" shall mean any of Wyndham's affiliates,
directors, officers, employees and representatives (including, without
limitation, lenders, financial advisors, attorneys and accountants).
2. Right to Franchise.
------------------
(a) Non-Exclusive Right. Wyndham shall have a non-exclusive right during
-------------------
the term of this Agreement, but not an obligation, to franchise each hotel
acquired by AGT, or as to which it enters into an acquisition agreement, during
the term hereof and to cause such hotel to be operated under the "Wyndham" name
(a "FRANCHISED HOTEL") pursuant to a franchise agreement substantially in the
form attached hereto as Exhibit A (the "FRANCHISE AGREEMENT"); provided,
--------
however, that Wyndham shall only have such non-exclusive right pursuant to this
- -------
Section 2(a) in the event that (i) AGT shall affirmatively elect, in AGT's sole
and absolute discretion, to change or otherwise replace the existing franchise
under which such hotel shall be operating at the time of such hotel's
acquisition by AGT and (ii) AGT shall acquire the Franchised Hotel and elect to
lease such hotel to the Lessee and the Lessee shall elect to retain AGHI to
manage and operate such hotel.
(b) Pending Hotel. The parties hereby agree that the hotel set forth on
-------------
Exhibit B (the "PENDING HOTEL") hereto will be a Franchised Hotel for purposes
of this Agreement subject to the
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<PAGE>
satisfaction of the conditions to be set forth in the Franchise Agreement to be
entered into with respect to such hotel and all applicable franchise regulatory
requirements, as determined by Wyndham, whether pursuant to Section 3 or
otherwise. The parties further agree that such Franchise Agreement will be
entered into not later than fifteen (15) days following the date of this
Agreement.
(c) Management. Each Franchised Hotel shall initially be (i) leased by
----------
AGT to the Lessee and (ii) managed by AGHI. Wyndham shall have the right to
approve any management agreement between the Lessee and AGHI with respect to any
Franchised Hotel that is other than substantially in the form attached hereto as
Exhibit C (the "MANAGEMENT AGREEMENT"). The Company represents and warrants to
Wyndham that the form of the Management Agreement is substantially the form of
management agreement that is utilized as of the date hereof between the Lessee
and AGHI with respect to the management of hotels owned by AGT.
(d) Notice of Acquisition Agreement. AGT shall notify Wyndham in writing
-------------------------------
no later than fifteen (15) calendar days (or at such earlier time as any other
non-affiliated AGT Person shall be so notified by AGT) following the execution
by AGT of any definitive agreement to purchase a hotel that is eligible to
become a Franchised Hotel (each, an "ACQUISITION NOTICE"). Following delivery
of the Acquisition Notice, AGT shall promptly provide to Wyndham such
information as Wyndham shall reasonably request concerning the hotel or hotels
referred to in such notice, including AGT's bona fide pro forma financial
---- ----
projections for such hotel or hotels following its or their conversion to the
"Wyndham" name and any such other information as Wyndham shall reasonably
request to substantiate its compliance with all federal and state franchise laws
and whether Common Stock or OP Units would be issued to Wyndham pursuant to
Section 4 hereof.
(e) Offer and Election to Franchise. Wyndham shall have fourteen (14)
-------------------------------
calendar days immediately following the receipt by Wyndham of the information
described in Section 2(d) hereof to deliver to AGT in writing Wyndham's
irrevocable, binding offer (the "OFFER") to AGT to make the hotel(s) that are
the subject of the Acquisition Notice a Franchised Hotel. In the event that
Wyndham shall make such Offer, Wyndham shall be deemed to have affirmatively
accepted the pro forma projections (the "ACCEPTED FINANCIAL PROJECTIONS")
provided to Wyndham by AGT pursuant to Section 2(d) hereof; provided, however,
-------- -------
that Wyndham's acceptance of the Accepted Financial Projections shall not be
deemed to constitute, and the Company hereby acknowledges that such acceptance
shall not constitute, a representation by Wyndham that such Accepted Financial
Projections shall be achieved or realized at such hotel or hotels. AGT shall
have fourteen (14) calendar days after the receipt of the Offer (or such longer
period as may be required by applicable law) to deliver to Wyndham a notice (the
"Acceptance Notice") accepting the Offer.
(f) Execution of Franchise Agreement. In the event that AGT shall accept
--------------------------------
the Offer, Wyndham, AGT and the Lessee shall enter into and execute a Franchise
Agreement with respect to such hotel or hotels on or prior to the date on which
the acquisition of such hotel by AGT shall be consummated, or at such other time
as shall be mutually agreed upon by the parties thereto.
(g) Confidentiality. Any and all information provided by AGT or any of
---------------
the AGT's Representatives to Wyndham or any of Wyndham's Representatives
pursuant to Section 2(d) hereof shall be kept confidential and, except as may be
required by law or pursuant to a request by a
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<PAGE>
governmental department or agency, shall not, without AGT's prior written
consent, be disclosed by Wyndham or Wyndham's Representatives, in any manner
whatsoever, in whole or in part, and shall not be used for any other purposes.
3. Fractional Franchise. The transactions contemplated by Section 2(b) of
--------------------
this Agreement (as well as certain other future transactions contemplated by
Section 2(a) hereof) are intended to satisfy the requirements of the fractional
franchise exemption pursuant to the Federal Trade Commission's Trade Regulation
Rule entitled "Disclosure Requirements and Prohibitions Concerning Franchising
and Business Opportunity Ventures" ("FTC RULE") and other exemptions under
applicable state laws. Accordingly, on the date of this Agreement and as a
condition to the execution of a Franchise Agreement, AGT shall be required to
represent and warrant to Wyndham the following: (a) that the Lessee and/or its
current directors or executive officers (or the directors or executive officers
of the Lessee's corporate general partner) have been in the type of business
represented by the franchise relationship for more than the past two (2) years;
(b) that the Lessee does not anticipate that it will execute more than one (1)
Franchise Agreement in any one (1) year, or, if the Lessee anticipates that it
will execute more than one (1) Franchise Agreement in any one (1) year, that the
aggregate sales arising from the relationships by the Franchise Agreements to be
executed pursuant hereto will not represent more than twenty percent (20%) of
the sales in dollar volume of the Lessee or, in Wyndham's discretion and if
applicable, of the Lessee Entities (as hereinafter defined); and (c) that
neither the Lessee nor, as applicable, the Lessee Entities, have any present
plans to sell, prior to one (1) year after the opening of any of the Pending
Hotels any portion of their business, where such sale would result in a decrease
in the aggregate of the Lessee's, or as applicable, the Lessee Entities', gross
sales, such that the gross sales of such Pending Hotels would represent more
than twenty percent (20%) of such aggregate gross sales. "LESSEE ENTITIES"
means the Lessee, together with any subsidiaries in which Lessee owns a
Controlling Interest (as hereinafter defined), and any Person with a Controlling
Interest in the Lessee. "CONTROLLING INTEREST" means, with respect to the
Lessee, any other Person controlling, controlled by or under common control with
the Lessee as determined by Wyndham in its sole discretion. For purposes of
this Section 3, "CONTROL" means the ability to direct the policies and
operations of a Person.
4. Subscription of Common Stock and OP Units.
-----------------------------------------
(a) Subscription. Except with respect to the Pending Hotel and those
------------
other hotels set forth below in this Section 4(a), for each and every Franchised
Hotel with respect to which a Franchise Agreement shall be entered into, Wyndham
will be deemed to have subscribed to and shall purchase shares of Common Stock,
in an amount and at a purchase price as provided in Section 4(b) hereof;
provided, however, that if the issuance of the Common Stock will (i) violate the
- -------- -------
Company's share ownership limitations set forth in its articles of incorporation
that are designed to preserve its status as a REIT, or (ii) violate the
Securities Act or the Exchange Act, or any of the rules promulgated under either
the Securities Act or the Exchange Act, including, without limitation, the
integration of that issuance with any other securities offering by the Company,
as shall be reasonably determined by the Company based upon the advice of
independent legal counsel, then Wyndham (i) shall have no right or obligation
pursuant to this Section 4(a) to purchase shares of Common Stock, and (ii) will
be deemed to have subscribed to and shall purchase units of limited partnership
interest ("OP UNITS") in the Operating Partnership, in an amount and at a
purchase price as provided in Section 4(b) hereof.
-5-
<PAGE>
In the event the Pending Hotel becomes a Franchised Hotel, Wyndham will be
deemed to have subscribed to and shall purchase 112,969 shares of Common Stock
at a price of $22.13 per share, equal to an aggregate purchase price of
$2,500,000; provided, however, that Wyndham shall have no right or
-------- -------
obligation to purchase such shares of Common Stock unless it obtains the prior
written consent of its lenders under its bank credit facility (whether current
or future, the "BANK FACILITY"); provided, further, however that in the event
-------- ------- -------
that Wyndham shall not obtain such prior written consent of its lenders under
the Bank Facility prior to the date of the Closing, Wyndham's franchise fees
with respect to the Pending Hotel shall be reduced by fifty (50) basis points.
For purposes of this Section 4(a), the Four Points by Sheraton located in
Marietta, Georgia, the Fred Harvey Albuquerque Airport Hotel located in
Albuquerque, New Mexico and the Days Inn located in Orlando, Florida shall not,
upon their conversion to a Wyndham brand, be considered a Franchised Hotel. The
obligation to purchase Common Stock or OP Units pursuant to this Agreement is
subject to the satisfaction of the conditions set forth in Section 4(g) and
Section 11 of this Agreement and to Wyndham obtaining the prior written consent
of its lenders under the Bank Facility; provided, however, that in the event
-------- -------
that Wyndham shall not obtain such prior written consent of its lenders under
the Bank Facility prior to the date of a Closing, Wyndham's franchise fees with
respect to the hotel in question shall be reduced by fifty (50) basis points.
(b) Number of Shares of Common Stock and OP Units; Purchase Price. The
-------------------------------------------------------------
number of shares of Common Stock or OP Units to be purchased pursuant to Section
4(a) hereof shall be equal to the nearest whole number determined by dividing
(i) an amount equal to nine (9) times the total estimated franchise fees, based
on the Accepted Financial Projections, to be paid to Wyndham in respect of the
Franchised Hotel during the first twelve (12) months following conversion to the
"Wyndham" name, by (ii) the price per share of Common Stock or per OP Unit to be
paid by Wyndham determined as set forth below. The price per share of Common
Stock or OP Unit to be paid by Wyndham shall be paid in cash and shall be equal
to the average closing sale price of the Common Stock on the New York Stock
Exchange for the thirty (30) trading days immediately preceding the earlier of
(i) the public announcement by AGT of its proposed acquisition of the hotel in
question or (ii) Wyndham's Offer to AGT to make the hotel a Franchised Hotel.
(c) Closing. Each and every closing (a "CLOSING") for the purchase of
-------
the shares of Common Stock or OP Units by Wyndham pursuant to Section 4(a)
hereof shall be held not later than thirty (30) calendar days immediately
following the conversion of a Franchised Hotel by AGT to the "Wyndham" name
pursuant to a Franchise Agreement.
(d) Certificates. At each and every Closing at which Common Stock is
------------
issued pursuant to this Agreement, the Company shall issue to Wyndham one or
more certificates representing the whole number of shares of Common Stock that
shall have been purchased by Wyndham pursuant to Section 4(a) hereof. All
certificates representing shares of Common Stock issued pursuant to this Section
4 shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THE SECURITIES NOR ANY
INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR
OTHERWISE DISPOSED OF EXCEPT
-6-
<PAGE>
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH
LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND
OPINION ARE REASONABLY SATISFACTORY TO THE ISSUER, IS AVAILABLE.
(e) Issuance of OP Units. In the event that the Company shall issue
--------------------
to Wyndham OP Units pursuant to Section 4(a) hereof, (i) the Company shall cause
the books and records of the Operating Partnership to reflect the ownership and
purchase of such OP Units by Wyndham, and if requested by Wyndham, cause the
Operating Partnership to furnish to Wyndham evidence of such ownership, and (ii)
the Company, the Operating Partnership and Wyndham shall enter into and execute
on the date of the Closing of such issuance an Exchange Rights Agreement
substantially in the form attached hereto as Exhibit D.
(f) Payment for Common Stock and Units. Upon receipt by Wyndham of
----------------------------------
certificates representing shares of Common Stock or OP Units, Wyndham shall
promptly pay to the Company or the Operating Partnership, as the case may be, by
wire transfer in immediately available funds or by certified or bank cashier's
check, the purchase price for such shares of Common Stock or OP Units as shall
be calculated pursuant to Section 4(b) hereof.
(g) Certain Filings. If necessary and as required by applicable law
---------------
in order to permit the sale of Common Stock or OP Units to occur pursuant to
this Agreement, the Company and Wyndham shall together, or pursuant to an
allocation of responsibility to be agreed upon between them, coordinate and
cooperate in any action by or in respect of, or filing with, the Federal Trade
Commission or the United States Department of Justice pursuant to the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT") or
any other action by or in respect of, or filing with, or permit, authorization,
consent or approval of, any court, arbitral tribunal, administrative agency or
commission or other governmental or other regulatory authority or agency. If
required by applicable law, the expiration or early termination of the waiting
period under the HSR Act shall be a condition to Closing any sale of Common
Stock or OP Units pursuant to this Agreement.
5. Lock-up. In the event that Wyndham shall purchase or otherwise
-------
acquire shares of Common Stock or OP Units pursuant to Section 4 hereof, Wyndham
hereby irrevocably agrees that, without the prior written consent of the
Company, Wyndham shall not (and shall not announce or disclose any intention
to), and shall cause each of its affiliates not to, sell, offer to sell, solicit
an offer to buy, contract to sell, grant any option to purchase, or otherwise
transfer or dispose of, any shares of Common Stock or OP Units acquired pursuant
to this Agreement, for a period of 180 calendar days immediately following the
date such shares of Common Stock or OP Units shall have been issued to Wyndham
pursuant to Section 4(d) or Section 4(e) hereof; provided, however, that the
-------- -------
foregoing shall not restrict any transfer of Common Stock or OP Units acquired
pursuant to this Agreement to WYN or any direct or indirect wholly-owned
subsidiary of WYN, or any bona fide pledge to secure indebtedness or any
---- ----
transfer upon foreclosure thereof, if the transfer or pledge is subject to the
condition that the transferee is bound by the foregoing restrictions. At each
Closing, Wyndham shall enter into a lock-up letter substantially in the form
attached hereto as Exhibit E.
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<PAGE>
6. Representations and Warranties of the Company and the Operating
---------------------------------------------------------------
Partnership.
- -----------
The Company and the Operating Partnership hereby represent and warrant
to Wyndham as follows:
(a) Organization of the Company and the Operating Partnership. The
---------------------------------------------------------
Company is duly organized, validly existing and in good standing as a
corporation under the laws of the State of Maryland, has full power and
authority to conduct its business as presently being conducted and to own and
lease its properties and assets. The Operating Partnership is duly organized,
validly existing and in good standing as a limited partnership under the laws of
the State of Delaware, has full power and authority to conduct its business as
presently being conducted and to own and lease its properties and assets. Each
of the Company and the Operating Partnership is duly qualified to do business
and is in good standing in each jurisdiction in which such qualification is
necessary under applicable laws as the result of the conduct of its business, or
the ownership of its properties, except where the failure to be so qualified and
in good standing would not have a material adverse effect.
(b) Authorization. Each of the Company and the Operating Partnership
-------------
has all necessary power and authority and has taken all corporate or partnership
action (as the case may be) and has obtained all corporate or partnership
approvals (as the case may be) necessary to execute, deliver and perform its
obligations under this Agreement and to consummate the transactions contemplated
hereby, and no other proceedings on the part of the Company or the Operating
Partnership are necessary to authorize this Agreement or the transactions
contemplated hereby. This Agreement has been duly executed and delivered by the
Company and the Operating Partnership and is a valid, binding and enforceable
obligation of the Company and the Operating Partnership, enforceable against
each of them in accordance with its terms.
(c) No Conflict or Violation. Except for the consents required under
------------------------
the Line of Credit with respect to the issuance of OP Units pursuant to Section
4(a) hereof, neither the execution, delivery and performance of this Agreement
by the Company or the Operating Partnership nor the consummation of the
transactions contemplated hereby will result in (i) a violation of or a conflict
with any provision of the certificate of incorporation or by-laws of the
Company, or the limited partnership agreement of the Operating Partnership, (ii)
a breach of, or a default under any term or provision of any contract,
agreement, indebtedness, lease, commitment, license, franchise, permit,
authorization or concession to which the Company or the Operating Partnership is
a party, which breach or default would have a material adverse effect, or (iii)
a violation by the Company or the Operating Partnership of any law, statute,
rule, regulation, ordinance, standard, code, order, judgment, decision, writ,
injunction, decree, award or other governmental restriction including, without
limitation, any policy or procedure issued or enforced by any governmental
authority, which violation would have a material adverse effect.
(d) Authorized Shares of Common Stock and the Operating Partnership.
---------------------------------------------------------------
Any and all shares of Common Stock and OP Units that may be issued to Wyndham
pursuant to this Agreement shall be duly and validly issued, fully paid and
nonassessable, and shall be delivered free and clear of all liens, charges,
claims, and encumbrances of any kind or nature whatsoever (other than those
created by Wyndham or pursuant to Section 5 hereof), including any preemptive
rights.
-8-
<PAGE>
(e) Consents and Approvals. Except for all filings, consents and
----------------------
approvals as may be required under, and other applicable requirements of, the
HSR Act, the consent and approval of the Lenders in connection with the issuance
of OP Units pursuant to Section 4(a) hereof, and any Company stockholder
approvals required by the rules of the New York Stock Exchange, Inc. (the
"NYSE"), no consent, approval or authorization of, or declaration, filing or
registration with, any governmental authority, or any other person, organization
or entity, is required to be made or obtained by the Company or the Operating
Partnership in connection with the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby.
The foregoing representations and warranties are true and accurate as
of the date hereof, or such other date as of which they are deemed to be made,
and shall be true and accurate as of the date of each Closing as a condition to
the obligation of Wyndham to purchase Common Stock and OP Units on the Closing.
7. Representations and Warranties of Wyndham and WHC.
-------------------------------------------------
Wyndham and WHC hereby represent and warrant to the Company and the
Operating Partnership as follows:
(a) Organization of Wyndham. Each of Wyndham and WHC is duly
-----------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, has full power and authority to conduct its business as presently
being conducted and to own and lease its properties and assets. Each of Wyndham
and WHC is duly qualified to do business and is in good standing in each
jurisdiction in which such qualification is necessary under applicable laws as
the result of the conduct of its business, or the ownership of its properties,
except where the failure to be so qualified and in good standing would not have
a material adverse effect.
(b) Authorization. Each of Wyndham and WHC has all necessary
-------------
corporate power and authority and has taken all corporate action and has
obtained all corporate approvals necessary to execute, deliver and perform its
obligations under this Agreement and to consummate the transactions contemplated
hereby, and no other proceedings on the part of Wyndham or WHC are necessary to
authorize this Agreement or the transactions contemplated hereby. This
Agreement has been duly executed and delivered by Wyndham and WHC and is a
valid, binding and enforceable obligation of Wyndham and WHC, enforceable
against each of them in accordance with its terms.
(c) No Conflict or Violation. Except for the consents required under
------------------------
the Bank Facility, neither the execution, delivery and performance of this
Agreement by Wyndham or WHC nor the consummation of the transactions
contemplated hereby will result in (i) a violation of or a conflict with any
provision of the certificate of incorporation, by-laws of Wyndham or WHC, (ii) a
breach of, or a default under any term or provision of any contract, agreement,
indebtedness, lease, commitment, license, franchise, permit, authorization or
concession to which Wyndham or WHC is a party, which breach or default would
have a material adverse effect, or (iii) a violation by Wyndham or WHC of any
law, statute, rule, regulation, ordinance, standard, code, order, judgment,
decision, writ, injunction, decree, award or other governmental restriction
including, without limitation, any
-9-
<PAGE>
policy or procedure issued or enforced by any governmental authority, which
violation would have a material adverse effect.
(d) Consents and Approvals. Except for all filings, consents and
----------------------
approvals as may be required under, and other applicable requirements of, the
Bank Facility and the HSR Act, no consent, approval or authorization of, or
declaration, filing or registration with, any governmental authority, or any
other person, organization or entity, is required to be made or obtained by
Wyndham or WHC in connection with the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby.
(e) Purchase Not for Distribution. Each of Wyndham and WHC
-----------------------------
understands that neither the shares of Common Stock nor the OP Units to be
issued hereby have been registered under the Securities Act, or any state
securities acts, and are instead being offered and sold in reliance on an
exemption from such registration requirements. The shares of Common Stock and
OP Units for which Wyndham hereby subscribes are being acquired solely for its
own account, for investment, and are not being purchased with a view to, or for
resale in connection with, any distribution, subdivision or fractionalization
thereof, in violation of such laws and Wyndham has no present intention to enter
into any contract, undertaking, agreement or arrangement with respect to any
such resale.
(f) Awareness of Risks. Wyndham is aware of the risks involved in
------------------
making an investment in the shares of Common Stock and in the OP Units. Wyndham
has had an opportunity to ask questions of, and to receive answers from, the
Company and the Operating Partnership, or a person or persons authorized to act
on their behalf, concerning the terms and conditions of this investment.
(g) Accredited Investor. Wyndham is an accredited investor as that
-------------------
term is defined in Rule 501 and Regulation D of the Securities Act.
The foregoing representations and warranties are true and accurate as
of the date hereof, or such other date as of which they are deemed to be made,
and shall be true and accurate as of the date of each Closing as a condition to
the obligation of the Company and the Operating Partnership to issue shares of
Common Stock and OP Units on the Closing.
8. Non-Exclusive Right to Purchase. (a) During the term of this
-------------------------------
Agreement, in the event that (x) WYN or WHC shall enter into a definitive
agreement to purchase a hotel or a group of hotels, and (y) WYN or WHC either
(A) intends to assign such agreement to a REIT or (B) intends to enter into a
sale-leaseback arrangement with a REIT simultaneously with such purchase, WYN or
WHC, as the case may be, shall, prior to assigning such agreement or entering
into such sale-leaseback arrangement, include AGT in any solicitation of REITs
to acquire such hotels by sending AGT a copy of such definitive agreement not
later than the time it is furnished to any other REIT. The confidentiality of
the information provided in this Section 8(a) shall be maintained by AGT on the
same basis as is set forth in Section 2(g) hereof.
(b) WYN covenants and agrees that during the term of this Agreement
if any direct or indirect wholly-owned subsidiary of WYN other than WHC proposes
to enter into a transaction of
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<PAGE>
the type described in Section 8(a) hereof, WYN shall cause such subsidiary to
comply in all respects with the requirements set forth above.
9. Registration Rights Agreement. At the initial Closing, the parties
-----------------------------
hereto shall enter into and execute a registration rights agreement
substantially in the form attached hereto as Exhibit F (the "REGISTRATION RIGHTS
AGREEMENT") with respect to shares of Common Stock issued to Wyndham pursuant to
Section 4(a) hereof or upon exchange of OP Units.
10. NYSE Listing. The Company shall use its best efforts to list prior to
------------
a Closing any and all shares of Common Stock issued to Wyndham pursuant to
Section 4(a) hereof on the NYSE.
11. Stockholder Approval. In the event that any NYSE rule or regulation
--------------------
shall require stockholder approval of any action taken by the Company pursuant
to this Agreement, the Company shall not be required to issue shares of Common
Stock or OP Units to Wyndham pursuant to Section 4(a) hereof without first
obtaining such stockholder approval pursuant to such NYSE rule or regulation,
and the Company shall use its reasonable best efforts to cause such approval to
be effectuated as soon as practicable.
12. Consent of Lenders. Wyndham shall use its reasonable best efforts to
------------------
obtain the written consent of its lenders under its Bank Facility prior to the
consummation of any Closing.
13. Termination. (a) Consent of Lenders. In the event that Wyndham
----------- ------------------
shall not obtain the prior written consent of its lenders under its Bank
Facility in any two Closings during the term hereof, the Company shall have the
right to terminate this Agreement; provided, however, that any transactions
-------- -------
consummated prior to such termination shall not be terminated and shall remain
valid and in full force and effect, and such termination shall have no effect on
any Franchise Agreement, Registration Rights Agreement, Exchange Rights
Agreement or lock-up letter executed pursuant to this Agreement.
(b) Change of Control. Upon the occurrence of a "change in control"
-----------------
(as hereinafter defined) in any of the Lessee, WYN, AGHI or AGT (collectively,
the "ENTITIES"), each of Wyndham and AGT shall have the right at any time
following such occurrence to terminate this Agreement; provided, however, that
-------- -------
any transactions consummated prior to such termination shall not be terminated
and shall remain valid and in full force and effect, and such termination shall
have no effect on any Franchise Agreement, Registration Rights Agreement,
Exchange Rights Agreement or lock-up letter executed pursuant to this Agreement.
For purposes of this Section 13, "change of control" shall mean:
(x) any merger or consolidation of any of the Entities with or into
any Person, or any sale, transfer or other conveyance, whether direct
or indirect, of all or substantially all of the assets of any of the
Entities, in one transaction or a series of related transactions, if,
immediately after giving effect to such transaction any "person" or
"group" (as such terms are used for purposes of Section 13(d) and
14(d) of the Exchange Act, whether or not applicable), is or becomes
the beneficial owner, directly or indirectly, of more than fifty
percent (50%) of the shares of the total voting power of such Entity;
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<PAGE>
provided, however, that the foregoing shall not apply to the
-------- -------
acquisition of such shares by any "person" or "group" comprised solely
of Trammell or Margaret Crow, or any lineal descendant of Trammell and
Margaret Crow, or any trust of which not less than 75% of the
beneficial interests are held by Trammell or Margaret Crow or such
lineal descendants, or any partnership, corporation or other entity of
which not less than 75% of the outstanding equity interests are owned
directly or indirectly by Trammell or Margaret Crow or such
descendants (the "CROW INTERESTS");
(y) any "person" or "group" (as such terms are used for purposes of
Section 13(d) and 14(d) of the Exchange Act, whether or not
applicable) is or becomes the beneficial owner, directly or
indirectly, of more than fifty percent (50%) of the total voting power
of such Entity provided, however, that the foregoing shall not apply
-------- -------
to the acquisition of such voting power by any "person" or "group"
comprised solely of the Crow Interests; or
(z) during any period of twelve (12) consecutive months, individuals
who at the beginning of such twelve-month period constituted the Board
of Directors of any of the Entities cease for any reason to constitute
a majority of the Board of Directors of such Entity then in office.
14. Miscellaneous.
-------------
(a) Term. Except as otherwise provided in Section 13 hereof, the terms and
----
provisions of this Agreement shall commence on the date hereof and shall
terminate on December 31, 1999.
(b) Public Announcements. So long as this Agreement is in effect, neither
--------------------
the Company nor Wyndham nor any of the affiliates which either of them control
shall issue or cause the publication of any press release or other public
statement or announcement with respect to this Agreement or the transactions
contemplated hereby (including those under the Registration Rights Agreement)
without the prior consultation of the other party, except as may be required by
law or by obligations pursuant to any listing agreement with a national
securities exchange, provided that each party shall use its best efforts to
consult with the other party prior to any such issuance.
(c) Expenses. Except as otherwise provided in the Registration Rights
--------
Agreement and the Franchise Agreement, all costs and expenses incurred in
connection with this Agreement, the Registration Rights Agreement and the
Franchise Agreement, and the consummation of the transactions contemplated
hereby and thereby shall be paid by the party incurring such expenses.
(d) Amendments and Waivers. The provisions of this Agreement, including
----------------------
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given without the written consent of the Company and Wyndham.
(e) Notices. All notices, requests, demands and other communications which
-------
are required or may be given under this Agreement shall be in writing and shall
be deemed to have been duly given:
-12-
<PAGE>
(i) upon receipt if personally delivered; (ii) when transmitted with
confirmation of transmission if transmitted by telecopy or facsimile; (iii) the
day after it is sent, if sent for next day delivery to a domestic address by
recognized overnight courier service (e.g., Federal Express); and (iv) upon
----
receipt, if sent by certified or registered mail, return receipt requested. In
each case notice shall be sent:
If to the Company, to:
American General Hospitality Corporation
3860 West Northwest Highway
Suite 300
Dallas, Texas 75220
Facsimile: (214) 351-0568
Attention: Steven D. Jorns
with a copy to:
Battle Fowler LLP
Park Avenue Tower
75 East 55th Street
New York, New York 10022
Facsimile: (212) 856-7823
Attention: Steven L. Lichtenfeld, Esq.
If to Wyndham, to:
Wyndham Hotel & Resorts
2001 Bryan Street
Suite 2300
Dallas, Texas 75201-3075
Facsimile: (214) 863-1262
Attention: Michael R. Silverman
with a copy to:
Locke Purnell Rain Harrell
2200 Ross Avenue
Suite 2200
Dallas, Texas 75201-6776
Facsimile: (214) 740-8800
Attention: M. Charles Jennings, Esq.
(f) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
-13-
<PAGE>
(g) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO THE
CONFLICTS OF LAW PROVISIONS THEREOF.
(i) Specific Performance. The parties hereto acknowledge that there would
--------------------
be no adequate remedy at law if any party fails to perform any of its
obligations hereunder, and accordingly agree that each party, in addition to any
other remedy to which it may be entitled at law or in equity, shall be entitled
to compel specific performance of the obligations of any other party under this
Agreement in accordance with the terms and conditions of this Agreement in any
court of the United States or any State thereof having jurisdiction.
(j) Entire Agreement. This Agreement is intended by the parties as a final
----------------
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
(k) Assignability. The parties to this Agreement may not assign their
-------------
rights or obligations under this Agreement without the prior written consent of
the other party to this Agreement.
-14-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement,
or caused this Agreement to be duly executed on its behalf, as of the date first
written above.
AMERICAN GENERAL HOSPITALITY
CORPORATION
By:____________________________________
Name:
Title:
AMERICAN GENERAL HOSPITALITY OPERATING
PARTNERSHIP, L.P.
By:____________________________________
Name:
Title:
WHC FRANCHISE CORPORATION
By:____________________________________
Name:
Title:
WHC DEVELOPMENT CORPORATION
By:____________________________________
Name:
Title:
Accepted and agreed with
respect to Section 8(b) hereof:
WYNDHAM HOTEL CORPORATION
By:____________________________________________
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF FRANCHISE AGREEMENT]
<PAGE>
================================================================================
WYNDHAM HOTEL
FRANCHISE AGREEMENT
BETWEEN
WHC FRANCHISE CORPORATION
(Franchisor)
and
AGH LEASING, L.P.
(Franchisee)
dated
______________, 199__
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE NO.
--------
I. GRANT OF FRANCHISE AND CONVERSION OF HOTEL........................ 2
II. TERM.............................................................. 4
III. FEES.............................................................. 4
IV. THE WYNDHAM ASSOCIATION........................................... 6
V. MANAGEMENT, STAFFING AND TRAINING................................. 7
VI. HOTEL OPERATIONS.................................................. 9
VII. FURNISHING AND MAINTAINING THE HOTEL.............................. 11
VIII. RESERVATION AND PROPERTY MANAGEMENT SYSTEMS....................... 13
IX. ADVERTISING AND MARKETING......................................... 14
X. PROPRIETARY MARKS................................................. 16
XI. MANUAL............................................................ 18
XII. CONFIDENTIAL INFORMATION.......................................... 19
XIII. ACCOUNTING AND RECORDS............................................ 20
XIV. INSURANCE......................................................... 21
XV. TRANSFERABILITY OF INTEREST....................................... 23
XVI. SECURITIES OFFERINGS.............................................. 26
XVII. DEFAULT AND TERMINATION........................................... 27
XVIII. OBLIGATIONS UPON TERMINATION...................................... 29
XIX. CONDEMNATION AND CASUALTY......................................... 31
<PAGE>
PAGE NO.
--------
XX. TAXES, PERMITS AND INDEBTEDNESS...................................... 32
XXI. INDEPENDENT CONTRACTOR AND INDEMNIFICATION........................... 33
XXII. APPROVALS AND WAIVERS................................................ 34
XXIII. REPRESENTATION OF FRANCHISEE......................................... 35
XXIV. NOTICES.............................................................. 35
XXV. ENTIRE AGREEMENT..................................................... 36
XXVI. CONSTRUCTION AND SEVERABILITY........................................ 36
XXVII. DISPUTE RESOLUTION................................................... 37
XXVIII. APPLICABLE LAW AND CURRENCY REQUIREMENT.............................. 38
XXIX. WAIVER OF JURY TRIAL................................................. 38
XXX. FRANCHISEE ACKNOWLEDGEMENTS.......................................... 39
ATTACHMENTS
Attachment A- Selected Terms
Attachment B- Guaranty
Attachment C- Management Company Rider
Attachment D- Renovation Plan
[ADDENDA
Fractional Franchise Addendum]
<PAGE>
[NOTE: IN THE EVENT THIS AGREEMENT IS TO BE USED FOR A WYNDHAM GARDEN HOTEL,
MAKE APPROPRIATE CONFORMING CHANGES, INCLUDING THE FOLLOWING CHANGE TO SECTION
III.B.
" ROYALTY. IN FURTHER CONSIDERATION OF THE FRANCHISE GRANTED HEREIN,
-------
FRANCHISEE SHALL PAY TO FRANCHISOR A CONTINUING MONTHLY ROYALTY FEE DURING
THE TERM OF THIS AGREEMENT IN AN AMOUNT EQUAL TO FOUR AND ONE-HALF PERCENT
(4.5%) OF FRANCHISEE'S GROSS ROOM REVENUES (DEFINED BELOW). SUCH ROYALTY
FEE SHALL INCREASE TO FIVE PERCENT (5%) FOR THE REMAINING TERM OF THIS
AGREEMENT AT SUCH TIME AS THE REVENUE GENERATED THROUGH THE WYNDHAM
RESERVATIONS SYSTEM EXCEEDS THIRTY PERCENT (30%) OF GROSS ROOM REVENUES FOR
THE HOTEL DURING ANY TWELVE (12) MONTH PERIOD; PROVIDED THAT SUCH INCREASE
SHALL NOT OCCUR PRIOR TO THE THIRD ANNIVERSARY OF THE EFFECTIVE DATE."]
<PAGE>
WYNDHAM HOTEL
FRANCHISE AGREEMENT
THIS AGREEMENT is made and entered into as of the ____ day of ___________,
199__, between WHC Franchise Corporation, a Delaware corporation ("Franchisor"),
and AGH Leasing, L.P., a Delaware limited partnership ("Franchisee").
WITNESSETH:
WHEREAS, Franchisor or its affiliates have developed and Franchisor has the
right to use and license the use of a concept and system ("System") for the
establishment and operation of luxury and resort hotels under the trade name and
mark "Wyndham" and such other trade names, trademarks, service marks, logos,
emblems, symbols and indicia of origin as are now designated and may hereafter
be designated in writing as part of the System, including "Wyndham Hotel" and
"Wyndham Resort" (the "Proprietary Marks"); and
WHEREAS, the distinguishing characteristics of the System include, without
limitation, standards and specifications for the establishment and operation of
a Wyndham Hotel; proprietary reservation and property management systems;
advertising, marketing and promotional programs; a Wyndham Hotel Directory;
management and personnel training; operational standards, procedures and
techniques as prescribed in the Wyndham Hotel Operating Manual (the "Manual");
and a quality assurance program known as the "Wyndham Way," all of which may be
changed, improved or further developed from time to time; and
WHEREAS, pursuant to a Lease Agreement (herein so called)
dated__________________, 199__ with ___________________________________________
("Lessor"), Franchisee, as lessee, holds a leasehold interest in the premises
relating to, and operates, a certain luxury hotel located at _______________,
which hotel is currently operated as a _____________________ hotel (the "Current
Hotel"); and
WHEREAS, Franchisee desires to obtain a license to use the Proprietary
Marks and the System in connection with the operation of the Current Hotel; and
WHEREAS, Franchisee has provided Franchisor with satisfactory evidence of
its right to convert the Current Hotel to a Wyndham Hotel; and
WHEREAS, Franchisee understands and acknowledges the importance of
operating in conformity with Franchisor's standards and specifications in order
to enhance public acceptance of, and demand for, all Wyndham Hotels; and
-1-
<PAGE>
WHEREAS, Franchisor is relying upon the business skill, financial capacity
and character of Franchisee to operate in such manner.
NOW, THEREFORE, the parties, in consideration of the undertakings and
commitments of each party to the other party set forth herein, agree as follows:
I. GRANT OF FRANCHISE AND CONVERSION OF HOTEL
------------------------------------------
A. Grant. Franchisor hereby grants to Franchisee, as of the Effective
-----
Date (defined in Section I.D. below) and upon the terms and conditions herein
contained, the nonexclusive right and franchise, and Franchisee undertakes the
obligation, to operate the Current Hotel as a Wyndham Hotel ("Hotel" or
"Franchised Business") in accordance with Franchisor's standards and
specifications at, and only at, the location specified in Attachment A hereto
("Approved Location") and to use, solely in connection therewith, Franchisor's
System as it may be changed, improved and further developed from time to time.
This franchise and Franchisee's rights hereunder are granted only for the number
of guest rooms specified in Attachment A hereto. Franchisee shall not expand or
change the number of guest rooms or make other structural changes to the Hotel
without the prior written consent of Franchisor. The term "Wyndham Hotel" shall
refer to a full-service luxury or resort hotel operated under the trade name
"Wyndham Hotel" or "Wyndham Resort," but shall not refer to extended stay
facilities, Wyndham Garden hotels or any other lodging concepts or business
operations other than full-service luxury or resort hotels operated under the
trade names "Wyndham Hotel" or "Wyndham Resort."
B. Reserved Rights. Franchisee acknowledges and agrees that Franchisor
---------------
and its affiliates (the "Wyndham Companies") have and retain the right to
develop and operate and to license others to develop and operate hotels and
lodging facilities (including, without limitation, Wyndham Hotels, Wyndham
Resort Hotels, Wyndham Garden Hotels, and extended stay facilities),
restaurants, or other business operations of any type whatsoever, under the
Wyndham name and mark or under other trade names, trademarks and service marks,
at any location, including locations adjacent, adjoining or proximate to the
Approved Location, and that such hotels, lodging facilities, restaurants, and
other business operations may compete directly with the Franchised Business.
The Wyndham Companies may exercise the rights reserved in this Section I.B. from
time to time without notice to Franchisee, and Franchisee covenants that it
shall not take any action, including any action in a court of law or equity,
which may interfere with the exercise of such rights by any of the Wyndham
Companies.
C. Conversion. Franchisor has identified the requirements necessary to
----------
convert the Current Hotel to a Wyndham Hotel. Such requirements, together with
any and all plans developed by Franchisee and approved by Franchisor for
renovation of the Hotel in conformity therewith (collectively, the "Renovation
Plan") are attached hereto as Attachment D and made a part hereof. The grant of
this franchise is subject to Franchisee's completion, to Franchisor's
satisfaction, of the
-2-
<PAGE>
requirements set forth in the Renovation Plan for the Hotel established by
Franchisor and Franchisee.
1. Franchisee shall commence the work necessary to convert the
Current Hotel to a Wyndham Hotel (the "Conversion"), as specified in the
Renovation Plan, on or before the date for commencement of construction set
forth in Attachment A to this Agreement and shall continue the work
uninterrupted (except for interruption by reason of events constituting force
-----
majeure) until it is completed. The Conversion shall be substantially completed
- -------
and the Hotel shall be furnished, equipped, and otherwise made ready to open for
business in accordance with this Agreement not later than the completion date
specified on Attachment A (the "Completion Date"). The Conversion shall be
fully completed in accordance with this Agreement not later than the final
completion date specified on Attachment A (the "Final Completion Date").
Notwithstanding the foregoing, upon the occurrence of a force majeure event that
----- -------
delays completion of the Conversion, the Completion Date, or Final Completion
Date as applicable, shall be extended for a reasonable period of time, not to
exceed ninety (90) days. Upon Franchisee's written request and provided
Franchisee has diligently pursued the Conversion, Franchisor may further extend
the Completion Date or Final Completion Date specified in Attachment A in its
sole discretion and may require, in connection therewith, the payment of an
extension fee in an amount not to exceed Two Thousand Dollars ($2,000) per month
for each month of such further extension period.
2. Before commencing the Conversion, Franchisee shall, at its
expense, (a) obtain all permits, licenses and certifications required for the
lawful construction, renovation and operation of the Hotel including, without
limitation, zoning, access, sign, and fire requirements and shall certify in
writing to Franchisor that all such permits and certifications have been
obtained, (b) employ qualified professionals (including, as required, architect,
engineer, design firm and general contractor) to assist in the Conversion, (c)
obtain adequate financing for completion of the Conversion, and (d) comply with
the insurance requirements set forth in Section XIV. of this Agreement.
3. During the course of the Conversion, Franchisee shall, and shall
cause its architect, engineer, contractors and subcontractors to, cooperate
fully with Franchisor for the purpose of permitting Franchisor to inspect the
Hotel to determine whether the Conversion is proceeding in accordance with this
Agreement and Franchisor's standards. At Franchisor's request, Franchisee shall
submit to Franchisor a report showing progress made toward completing the
Conversion in accordance with the terms of this Agreement. Franchisor's
exercise of its rights to approve and inspect the Conversion shall be solely for
the purpose of assuring compliance with the terms and conditions of this
Agreement, and Franchisor shall have no liability or obligation with respect to
the construction or furnishing of the Hotel, including, without limitation,
liability for architecture or engineering, for code, zoning, or other
requirements or laws, ordinances or regulations of any state, local or federal
governmental body, or for any errors, omissions, or discrepancies of any nature
in any plans, drawings or specifications used for conversion of the Hotel.
-3-
<PAGE>
4. Franchisee shall bear the entire cost of the Conversion.
Franchisee will expend substantial time, effort and expense in order to complete
the Conversion in accordance with the Renovation Plan. Nevertheless, subject to
Section I.C.1 above and the notice and cure provisions of Section XVII.C., if
Franchisee does not satisfy substantially all of the requirements of the
Renovation Plan and obtain Franchisor's final approval of the Conversion on or
before the Completion Date specified on Attachment A, the grant of the franchise
shall not become effective and Franchisor may terminate this Agreement.
Franchisee acknowledges and agrees that Franchisor shall have no liability or
obligation to Franchisee for any losses, obligations, liabilities, or expenses
incurred by Franchisee if the franchise is not declared effective and this
Agreement is terminated because Franchisee fails to substantially satisfy in a
timely manner the requirements of the Renovation Plan.
D. Effective Date. The "Effective Date" shall be the first day the Hotel
--------------
opens for business as a Wyndham Hotel, which day shall be the date on which
Franchisee has substantially completed the Renovation Plan, as determined by
Franchisor in conformity with the requirements set forth on Attachment A to this
Agreement. Franchisor shall notify Franchisee of the Effective Date by written
notice, which shall authorize Franchisee to open and operate the Hotel pursuant
to this Agreement. Franchisor shall enter the Effective Date on Attachment A
hereto. The continuing obligations of the parties (including, but not limited
to, those set forth at Sections III.,V., VI., VII., VIII., IX., X., XI., XII.
and XIII. of this Agreement) derived from the grant of the franchise and the
right to become part of the System shall begin as of the Effective Date.
Franchisee understands and agrees that it shall not open the Hotel for business
as a Wyndham Hotel until the Effective Date, and Franchisee has no rights to the
franchise or to the use of the System until the Effective Date. Franchisee
understands and agrees further that if Franchisee fails to comply with the
construction, furnishing and pre-opening requirements set forth in the
Renovation Plan in compliance with the standards and specifications of
Franchisor, then Franchisor is not obligated to authorize the opening and
operation of the Hotel as a Wyndham Hotel. Upon Franchisee's failure to
substantially, or fully, complete the Conversion in accordance with this
Agreement, this Agreement may be terminated in accordance with Section XVII.C.
and shall thereafter be deemed null and void, except for the obligations of
Franchisee set forth in Section XVIII. hereof.
II. TERM
----
Except as otherwise provided in this Agreement, the term of this franchise
shall begin on the date first set forth above and shall continue until (i) a
date which is twelve (12) years after the Effective Date, or (ii) the earlier
expiration of the Lease Agreement in accordance with its terms. This Agreement
does not confer any rights to renew this Agreement, and Franchisor and
Franchisee agree that Franchisor is not required to grant such rights to
Franchisee.
-4-
<PAGE>
III. FEES
----
A. Initial Franchise Fee. Upon execution of this Agreement, Franchisee
---------------------
shall pay to Franchisor its then-current initial franchise fee in the amount set
forth on Attachment A hereto in consideration for the administrative and other
expenses incurred by Franchisor in approving Franchisee's site for the Hotel and
in entering into this Agreement with Franchisee. Franchisee shall have no right
to expand the number of guest rooms at the Hotel beyond the number initially
approved by Franchisor. If Franchisee proposes to expand the number of guest
rooms, Franchisee must pay to Franchisor, along with its request for approval of
the expansion, a fee equal to the then-current initial franchise fee per guest
room for each proposed additional guest room. The additional fee will be
refundable only if the request for expansion is disapproved by Franchisor. The
amount refunded will be the additional fee less a processing charge. The
additional fee shall be non-refundable upon Franchisor's approval of the
proposed expansion.
B. Royalty. In further consideration of the franchise granted herein,
-------
Franchisee shall pay to Franchisor a continuing monthly royalty fee during the
term of this Agreement in an amount equal to three percent (3%) of Franchisee's
Gross Room Revenues (defined below) during the first year following the
Effective Date and three and one-half percent (3.5%) during the remainder of the
term of this Agreement; provided, however, that such royalty fee shall increase
to four percent (4%) for the remaining term of this Agreement if the revenue
generated through the Wyndham reservations system exceeds thirty percent (30%)
of the Gross Room Revenues for the Hotel during any twelve (12) month period.
C. Marketing Fee. Franchisee shall also remit to Franchisor on a monthly
-------------
basis an amount equal to one and one-half percent (1.5%) of Franchisee's Gross
Room Revenues as a contribution to the marketing fund which shall be maintained
and administered by Franchisor for the System as provided in Paragraph IX.B.
hereof. Each Wyndham Hotel owned or managed by Franchisor or its affiliates
shall make contributions to the marketing fund at generally the same rate
required of franchisees. Franchisor may increase the marketing fund
contribution periodically to an amount consistent with the marketing fund
allocation for all Wyndham Hotels, including hotels owned or managed by
Franchisor or its affiliates.
D. Reservation System Fees. Franchisee shall remit to Franchisor or its
-----------------------
designee reservation system fees in an amount equal to the allocated reservation
center cost per reservation charged to all Wyndham Hotels, including hotels
owned or managed by Franchisor or its affiliates. Reservation center costs shall
be paid or reimbursed on the basis of an initial link-up charge and on the cost
for handling reservations made at the Hotel. Reservation system fees shall be
subject to increase or decrease by Franchisor, provided that any increase or
decrease shall apply equally to all Wyndham Hotels, including hotels owned or
managed by Franchisor or its affiliates. Franchisor reserves the right to
modify or change the reservation system and the basis for computing reservation
system fees, provided the fees are computed on the same basis for all Wyndham
Hotels.
-5-
<PAGE>
E. National Sales Office Commissions. Franchisee shall also remit to
---------------------------------
Franchisor or its designee as a group sales commission an amount which bears the
same relation to the total costs incurred by Wyndham's National Sales Office to
provide national group sales services as the Gross Room Revenues of the Hotel
attributable to national group sales bear to the total Gross Room Revenues of
all Wyndham Hotels attributable to such national group sales. Franchisee shall
further remit to Franchisor or its designee as a transient sales commission an
amount which bears the same relation to the total costs incurred by the National
Sales Office to provide national transient sales services as the number of
available rooms in the Hotel bear to the total number of available rooms in all
Wyndham Hotels for which such national transient sales services are provided;
provided, that if the Hotel historically derives more than seventy-five percent
(75%) of its business from group sales, then only forty percent (40%) of its
available rooms shall be included in the calculation of transient sales
commissions.
F. Due Dates. All payments required in Sections III.B. and III.C. shall
---------
be paid to Franchisor by the fifteenth (15th) day of each month with respect to
the Gross Room Revenues for the preceding month, and shall be submitted to
Franchisor together with any reports required under Section XIII. of this
Agreement. All payments required in Sections III.D. and III.E. shall be paid to
Franchisor as provided in the invoice forwarded to Franchisee, which shall not
be less than thirty (30) days after Franchisee's receipt of the invoice. Any
payment or report not actually received by Franchisor on or before such date
shall be deemed overdue. If any payment is overdue, Franchisee shall pay to
Franchisor, in addition to the overdue amount, a late charge on such amount from
the date it was due until paid, at one and one-half percent (1-1/2%) per month
or the maximum rate permitted by law, whichever is less. Entitlement to such
late charge shall be in addition to any other remedies Franchisor may have. If
Franchisor is ever deemed to have contracted for, charged, or received interest
on an overdue amount in an amount that exceeds the amount permitted under
applicable law, then the excess amount shall be deemed to be, and shall be
treated as, a payment of outstanding fees or other amounts due under this
Agreement and, if no such amounts remain outstanding, any remaining excess shall
be paid to Franchisee, as applicable.
G. Gross Room Revenues. "Gross Room Revenues" shall include all gross
-------------------
revenues attributable to or payable for the rental of guest rooms at the Hotel,
including, without limitation, all credit transactions, whether or not
collected, but excluding any sales or room taxes collected by Franchisee for
transmittal to the appropriate taxing authority. Gross Room Revenues shall also
include the proceeds from any business interruption insurance applicable to loss
of revenues due to the nonavailability of guest rooms and for guaranteed no-show
revenue which is collected. Gross Room Revenues shall be accounted for in
accordance with the Uniform System of Accounts for Hotels, Eighth Revised
-------------------------------------
Edition, 1986, as published by the Hotel Association of New York City, Inc.
IV. THE WYNDHAM ASSOCIATION
-----------------------
A. Establishment of Association. During the term of this Agreement,
----------------------------
Franchisor may, but is not obligated to, establish, or authorize the
establishment of, an association ("Association") sanctioned by Franchisor to
serve as an advisory council to Franchisor with respect to advertising,
-6-
<PAGE>
marketing, reservations and other matters relating to Wyndham Hotels. If an
Association is established, then all franchisees of the System, including
Franchisee, and Franchisor shall be members of the Association.
B. Dues and Assessments; Good Standing. Franchisee shall pay to the
-----------------------------------
Association all dues and assessments authorized by the Association and shall
otherwise maintain its membership in the Association in good standing. "Good
standing" means that Association dues and assessments are current, Franchisor
has authorized Franchisee to open and operate the Hotel as a Wyndham Hotel, and
Franchisee is not in default under this Agreement.
C. Voting. For all matters on which members of the Association in good
------
standing are authorized to vote under the Bylaws of the Association, each
franchisee member shall be entitled to one (1) vote for each Wyndham Hotel it
has in operation, and Franchisor shall be entitled to one (1) vote for each
Wyndham Hotel owned or managed by Franchisor or its affiliates.
D. Committees; Governing Rules. Franchisor will seek the advice and
---------------------------
counsel of the Association, its board of directors and committees. Committees
and their functions and membership will be subject to approval in writing by
Franchisor, which approval will not be unreasonably withheld. Recognizing that
the Association must function in a manner consistent with all franchises of the
System, the parties will cause the governing rules of the Association to be
consistent with this Agreement.
V. MANAGEMENT, STAFFING AND TRAINING
---------------------------------
A. Hotel Management. Any lease, management agreement or other
----------------
arrangement for operating the Hotel or any part thereof (including, without
limitation, food and beverage service facilities) shall be subject to
Franchisor's prior written consent and, absent such consent, Franchisee will at
all times retain and exercise management control over the Hotel and the
Franchised Business.
1. If Franchisee wishes to engage a management company to manage the
Hotel, Franchisee shall apply to Franchisor for its consent. In order to be
approved by Franchisor, a proposed management company must be deemed by
Franchisor, in its reasonable judgment, qualified to manage the Hotel.
Franchisor may refuse to approve any proposed management company which, in
Franchisor's reasonable judgment, is not financially capable or responsible, is
inexperienced or unqualified in managerial skills or operational capacity or
capability, or is otherwise unable to adhere fully to the obligations and
requirements of this Agreement. Franchisor may also withhold its approval if
the proposed management company does not provide Franchisor with all information
that Franchisor may reasonably request in order to reach such decision. It is
understood that confidential information and materials are, in the normal course
of business, imparted to System franchisees and managers, and Franchisor will be
under no obligation to approve any proposed management company that is a
franchisor or owner, or is affiliated with the franchisor or owner, of a hotel
trade name which is competitive with Franchisor or its affiliates, regardless of
the number of hotels operating under such trade name. Franchisor reserves the
right, at its option and upon reasonable
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notice, to revoke its approval of any management company that fails to continue
to meet Franchisor's standards.
2. a. Franchisor has approved American General Hospitality, Inc.
("AGHI") as the Management Company for the Hotel. Upon the execution by AGHI of
the Management Company Rider, in substantially the form of Attachment C to this
Agreement, Franchisor shall be deemed to have approved the Management Agreement
dated______________, 199__, by and between AGHI and Franchisee with respect to
the management of the Hotel. In the event AGHI should cease to serve as the
Management Company for the Hotel, or in the event the Management Agreement
referenced above should be replaced during the term of this Agreement, Sections
V.A.2.b. and V.A.3. below shall apply.
b. When Franchisor has approved in principle the management
company nominated by Franchisee, Franchisee shall have the right to negotiate a
management agreement with such management company for the management and
operation of the Hotel, subject to the terms, conditions, and obligations of
this Agreement. Prior to the execution of such agreement, the management
agreement shall be submitted to Franchisor for Franchisor's written approval,
which shall not be unreasonably withheld. Such management agreement shall
include the following provisions:
(i) The management company shall have the authority and
responsibility for the day-to-day management of the Hotel; and
(ii) The Hotel will be operated during the term of the
management agreement in compliance with this Agreement.
3. At Franchisor's request, (i) Franchisor shall be named as a third
party beneficiary of the management agreement with the independent right to
enforce the provision described in Section 2.b.(ii) above, or (ii) the
management company shall execute a separate rider to this Agreement (in
substantially the form of Attachment C hereto), agreeing to be bound by those
terms hereof that relate to the management and operation of the Hotel and
further agreeing to be bound by the covenants of confidentiality set forth
herein. Further, at Franchisor's request, the management company shall cause
those of its key employees that Franchisor may require to execute similar
covenants of confidentiality, in a form reasonably acceptable to Franchisor.
B. Staffing; Training. Franchisee shall employ qualified personnel
------------------
sufficient to staff all positions at the Hotel, as prescribed in the Manual, or
shall engage an approved management company which shall employ or retain such
qualified personnel.
1. All personnel employed at the Hotel in those positions designated
by Franchisor to receive training shall attend and successfully complete such
initial and other training programs as Franchisor may from time to time require.
Franchisor may also periodically make available other optional training courses
to such personnel, as well as other programs, conferences,
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seminars and materials. All training shall be provided at such times and
locations and for such duration as Franchisor may designate. Prior to attending
any required or optional training program, Franchisee shall pay to Franchisor,
for those employees at the Hotel attending such program, the applicable tuition
fees as specified in the Manual. Franchisee shall also be responsible for such
employees' travel expenses and room, board and wages during any training.
Franchisor reserves the right to require, as a condition of providing training,
that personnel receiving training execute confidentiality agreements prepared by
Franchisor. All persons subsequently employed in positions designated by
Franchisor to receive training also must successfully complete Franchisor's
training programs. Franchisor shall determine, in its reasonable discretion,
whether any person has successfully completed training.
2. Franchisor may provide Franchisee with on-site training at the
Hotel for personnel involved in front desk, restaurant, reservations,
housekeeping, engineering, and other operations, as determined by Franchisor.
The number of Franchisor's personnel and the time period for which such on-site
training may be provided (if any) shall be reasonably determined by Franchisor
based upon its assessment of Franchisee's requirements. Franchisee shall pay or
reimburse Franchisor for the reasonable wages and all direct costs (including
transportation, meals and lodging) of those persons providing such on-site
training.
3. Franchisor may from time to time require certain personnel
employed at the Hotel to attend periodic meetings held to address matters of
general interest to the System (including, without limitation, annual sales,
rooms and human resources meetings). Such meetings shall be held at locations
designated by Franchisor. Franchisee shall be responsible for such persons'
travel expenses and room, board and wages during the meeting.
4. Any person employed as a General Manager for the Hotel shall be
approved by Franchisor and shall devote his full time to the management and
operation of the Hotel.
5. Franchisee shall cause all employees, while working at the Hotel,
to wear uniforms as specified in the Manual, to present a neat and clean
appearance, and to render competent and courteous service to guests of the
Hotel.
C. Nonsolicitation of Employees. Without the prior written consent of
----------------------------
the other party hereto, neither Franchisor nor Franchisee will initiate personal
contact to employ any person who is at that time, or who, to the knowledge of
the party initiating the contact, was within the preceding sixty (60) days,
employed by the other party, its affiliates, another System franchisee, or any
other entity operating under the System.
VI. HOTEL OPERATIONS
----------------
A. Adherence to System Standards. Franchisee understands and
-----------------------------
acknowledges that each and every standard, specification and procedure of the
System is essential in order to maintain the quality and guest service of
Wyndham Hotels and to enhance public acceptance of, and demand for,
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Wyndham Hotels. Franchisee shall conduct the Franchised Business in conformity
with the standards, specifications and procedures set forth in the Manual or
otherwise in writing, which standards, specifications and procedures shall be
applied consistently to all Wyndham Hotels in the same division as the Hotel.
Notwithstanding the foregoing, however, if in the reasonable judgment of
Franchisor local conditions or special circumstances (including the market area
or the physical peculiarities of a hotel) warrant a deviation from such
standards, specifications, or procedures, then Franchisor may allow such
deviation.
B. Restricted Use of Hotel Premises. Franchisee shall use the Hotel
--------------------------------
premises solely for the operation of the Franchised Business and shall refrain
from using, or suffering the use of, the premises for any other purpose or
activity at any time, without obtaining the prior written consent of Franchisor.
Without Franchisor's consent, Franchisee shall not provide, or allow others to
provide, any guest service at the Hotel except as prescribed in the Manual.
Franchisee shall not permit any part of the Hotel premises to be used for gaming
purposes without the prior written consent of Franchisor.
C. Promotion of Other Businesses. Without the prior written consent of
-----------------------------
Franchisor, Franchisee and Franchisee's managers shall ensure that no part of
the Hotel or the System is used, without limitation, to further or promote (i)
a different or competing business, including advertising or promotion for hotels
other than those franchised by Franchisor or its affiliates, or (ii) a different
business on the premises. Franchisee shall use every reasonable means to
encourage the use of Wyndham Hotels everywhere by the traveling public;
provided, however, that nothing herein shall prohibit, and Franchisee agrees to
participate in, any program specified by Franchisor for referring prospective
customers to other hotels when the customers cannot be accommodated by
Franchisee's Hotel or any other Wyndham Hotel. Nothing herein shall prohibit
Franchisee or an affiliate or affiliates of Franchisee from developing,
operating or promoting other hotels or lodging facilities so long as Franchisee
satisfies the provisions of Sections VI.A., B. and C. of this Agreement.
D. Food and Beverage Standards. Franchisee shall provide food and
---------------------------
beverage service in the Hotel in conformity with the standards and
specifications prescribed in the Manual to insure the highest level of quality
and service. Franchisee agrees:
1. To use restaurant premises and lounges solely for the operation
of the business franchised hereunder; to keep any restaurant and lounge open and
in normal operation for such minimum hours and days as Franchisor may from time
to time prescribe; and to refrain from using or suffering the use of the
premises for any other purpose or activity at any time without first obtaining
the written consent of Franchisor;
2. To maintain in sufficient supply, and use at all times, only such
food and beverage products and ingredients, supplies, paper goods, dinnerware
and furnishings as conform to Franchisor's standards and specifications, and to
refrain from deviating therefrom without Franchisor's prior written consent;
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<PAGE>
3. To sell or offer for sale only the menu items and beverages
prescribed in the Manual or otherwise approved in writing by Franchisor,
provided that, so long as such menu items and beverages comply with Franchisor's
quality and other standards, Franchisee may, subject to the further provisions
of this Section VI.D.3., offer a reasonable number of menu items and beverages
which have not previously been approved in writing by Franchisor to accommodate
local tastes and to meet Franchisee's legitimate business interests; to sell or
offer for sale all required menu and beverage items and to prepare them in
accordance with Franchisor's standards and all applicable legal requirements
(including, without limitation, all licensing and other requirements for the
sale of alcoholic beverages); and to discontinue selling and offering for sale
any items which Franchisor may, in its discretion, disapprove in writing at any
time; and
4. To use only menus, signs, promotional displays and other materials
that comply with the style, pattern and design prescribed in the Manual or
otherwise approved in writing by Franchisor. Franchisee shall have sole
discretion as to the prices to be charged with respect to the offer and sale of
all menu items and beverages.
E. Guest Services. Franchisee shall honor at the Hotel all credit cards
--------------
specified in the Manual. Franchisee also agrees to participate in all customer
surveys and guest satisfaction audits and offer all guest services, which may
include complimentary services, as Franchisor may prescribe for Wyndham Hotels
including, without limitation, programs and services for senior citizens,
children and frequent guests. Additionally, Franchisee shall participate in
travel agent programs, any complaint resolution and other programs as Franchisor
may reasonably establish for the System, which programs may include, without
limitation, providing complimentary rooms or refunds to guests.
F. Quality Assurance Program; Inspections. Franchisor shall administer a
--------------------------------------
quality assurance program for the System which may include conducting periodic
inspections of the Hotel and guest satisfaction audits and surveys to ensure
compliance with System standards. Franchisee hereby grants to Franchisor and
its representatives the right to enter upon the premises of the Hotel at all
reasonable times, with or without prior notice, for the purpose of conducting
inspections. Franchisee shall provide lodging, if available, without charge to
Franchisor's representatives during such time as may reasonably be necessary to
complete the inspections; cooperate fully with Franchisor's representatives
during the inspections; and take all steps reasonably necessary to correct any
deficiencies detected within the time specified by Franchisor. Franchisee shall
provide all information requested by Franchisor for the purpose of Franchisor's
conduct of guest satisfaction audits and surveys.
VII. FURNISHING AND MAINTAINING THE HOTEL
------------------------------------
A. Hotel Equipment and Furnishings. Franchisee shall, at Franchisee's
-------------------------------
expense, purchase or lease and install at the Hotel all fixtures, equipment,
furnishings, furniture; all computer terminals, hardware, software, and related
equipment (including, without limitation, that required for the property
management and reservation systems specified by Franchisor); all telephone
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systems, facsimile machines and copiers; all signs and all other items ("FF&E")
specified by Franchisor for the System. Franchisee also shall install and
maintain, or arrange to have installed and maintained, at the Hotel, all coin-
operated vending machines specified by Franchisor for the System. Franchisee
shall refrain from installing or permitting to be installed at the Hotel,
without Franchisor's prior written consent, any FF&E, electronic or video games,
vending machines or any other items not previously approved by Franchisor. The
size, form, color scheme, content (except for prices to be charged) and location
of all signs, advertisements and graphic materials displayed in any public area
or guest rooms at the Hotel shall be as prescribed in the Manual or otherwise
approved in writing by Franchisor. At Franchisor's request, Franchisee shall
install and maintain a telephone modem or such other device as Franchisor may
specify in the Manual or otherwise in writing to permit Franchisor to access
electronically information pertaining to the operation of the Hotel, including,
without limitation, Gross Room Revenues, the source and amounts of all other
revenues generated at the Hotel, room occupancy and rates, and reservations
data. Franchisor shall have electronic access to such information at such times
and in such manner as Franchisor shall from time to time specify.
B. Sourcing. All food products, FF&E (excluding computer terminals,
--------
hardware, software, and related equipment for the property management and
reservation systems), and supplies used at or in the Hotel may be purchased from
any source, provided such products meet the specifications provided for in the
Manual. Notwithstanding the foregoing, Franchisor may specify a particular
model or brand of FF&E or other items for Wyndham Hotels. Computer terminals,
hardware, software and related equipment shall be purchased only from sources
designated or approved by Franchisor. Additionally, Franchisor may, in its
discretion, specify that certain food products, FF&E, communication systems, and
supplies be purchased only from designated or approved sources which have
demonstrated, to the reasonable satisfaction of Franchisor, the ability to meet
Franchisor's standards and specifications for those items. If Franchisee
proposes to purchase or lease any such item from a source which has not been
previously approved by Franchisor, Franchisee shall submit to Franchisor a
written request for such approval, or shall request the source itself to do so.
Franchisor may require, as a condition of its approval, (i) that the source
present satisfactory evidence of insurance protecting Franchisor and its
franchisees against any and all claims arising from the use of such item by
System franchisees, and (ii) that samples of the item be delivered by the
source, at Franchisor's option and at no cost to Franchisor, to Franchisor or
its designee for inspection. A charge not to exceed the cost of such inspection
shall be paid to Franchisor by Franchisee or by the source seeking approval, and
Franchisor shall not be liable for damage to any sample, except as shall be
caused by its grossly negligent or willful acts. Franchisor reserves the right,
at its option, to revoke its approval as to future purchases if the source has
failed to continue to meet Franchisor's standards.
C. Hotel Maintenance. Franchisee shall maintain the Hotel, including,
-----------------
without limitation, all interior and exterior signs, parking areas, entrance
ways, landscaping, and all other facilities and appurtenances in first-class
condition consistent, in the opinion of Franchisor, with the standards necessary
to maintain the reputation and public goodwill of Wyndham. In connection
therewith, Franchisee shall make, at Franchisee's sole cost and expense, all
additions, alterations,
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repairs and replacements of signs and other FF&E as Franchisor may reasonably
direct. Franchisee shall not make any material alterations to the Hotel without
obtaining the prior written consent of Franchisor.
D. Upgrades. Franchisor shall have the right, from time to time, to
--------
require by written notice that Franchisee upgrade the Hotel at Franchisee's sole
cost and expense to conform to the building decor and trade dress and FF&E
required under Franchisor's then-current System standards (which standards shall
be applied consistently throughout the System for hotels of similar age within
the same division as the Hotel), including, without limitation, such FF&E
replacements, remodeling, redecoration and modifications to existing
improvements as may be necessary to do so. Upgrades to the Hotel required by
Franchisor pursuant to this Section VII.D. shall be reasonable, considering the
then-current System standards and requirements and the current structural design
of the Hotel. Franchisee shall complete upgrading and remodeling of the Hotel as
required by Franchisor pursuant to this Section VII.D. within the time
reasonably specified by Franchisor, and Franchisee acknowledges that its failure
to do so shall, except for delays which may be caused by the occurrence of
events constituting force majeure, constitute a material default for which this
-------------
Agreement may be terminated as provided in Section XVII.C. (including the
provisions for notice and cure set forth therein). Notwithstanding the
foregoing, if the requirements contained in this Section VII.D. cause Franchisee
undue hardship, Franchisee may terminate this Agreement upon twelve (12) months
prior written notice to Franchisor and payment of a fee computed in accordance
with Section XVIII.E., provided that the applicable time period for calculating
such fee shall be twelve (12), rather than thirty-six (36), months. Franchisor
and Franchisee expressly acknowledge and agree that Franchisee's initial
installation of Franchisor's proprietary reservation and property management
systems shall not be considered an upgrade, subject to the provisions of this
Section VII.D.
VIII. RESERVATION AND PROPERTY MANAGEMENT SYSTEMS
-------------------------------------------
A. Participation in Reservation System. As long as Franchisee is in
-----------------------------------
compliance with all material terms of this Agreement, Franchisor shall make
available to Franchisee's Hotel the reservation system provided by Franchisor
for all Wyndham Hotels, which system may be modified or changed from time to
time by Franchisor. Franchisee acknowledges that offering the public a single,
efficient reservation service is essential to the goodwill, reputation and
success of the System. During the term of this Agreement, Franchisee shall
participate in the reservation system and shall observe all terms and conditions
of participation as determined from time to time by Franchisor. Franchisee shall
be solely responsible for notifying the reservation center of any changes in
Franchisee's room rates. Franchisee shall not charge any guest a rate higher
than the rate specified to the guest by the reservation center at the time the
guest's reservation was made. Such rate shall be the rate most recently
provided to the reservation center by Franchisee prior to the time the
reservation was made, according to the records of such center.
B. Installation and Maintenance. Franchisee, at its expense, shall
----------------------------
install and maintain at the Hotel all hardware, software and related equipment
necessary for participation in the reservation system provided by Franchisor or
its designee, including any future enhancements,
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additions, substitutions or other modifications specified by Franchisor.
Franchisee shall also be responsible for telephone line charges for connecting
Franchisee's reservation equipment to the reservation system, for the cost of
supplies used in the operation of the equipment and for all other related
expenses.
C. Suspension from Reservation System. In the event Franchisee fails to
----------------------------------
pay royalties, marketing fund contributions, National Sales Office commissions,
or reservation system fees when due, or is otherwise in material default under
this Agreement, Franchisor may, if such default is not cured within the
applicable cure period (if any) pursuant to Section XVII. of this Agreement and
after written notice to Franchisee, suspend Franchisee's Hotel from the
reservation system for so long as Franchisee remains in default. Franchisee
waives all claims against Franchisor arising from Franchisee's suspension from
the reservation system pursuant to this Section VIII.C.
D. Property Management System. Franchisor shall provide specifications
--------------------------
for all hardware and related equipment and Franchisor or its designee shall
license all required applications software for the Wyndham Hotel property
management system ("PMS") to Franchisee. Franchisee shall, at its expense,
install, maintain and use the PMS hardware and install and use all required
software, including any future enhancements, additions, substitutions,
modifications and upgrades at the Hotel as prescribed in the Manual.
E. Software Licenses. Franchisee understands and acknowledges that all
-----------------
software and documentation for the PMS and the reservation system, and all
related documentation provided to Franchisee under this Agreement (the
"Software"), is provided under license from Franchisor or its designee and
Franchisee agrees to enter into all software license agreements required by
Franchisor in connection therewith. The Software shall at all times remain the
sole property of Franchisor or such designee. Franchisee shall at all times
treat the Software and all upgrades, enhancements and modifications thereto as
confidential. Franchisee shall not at any time, without Franchisor's prior
written consent, copy, duplicate, modify, reverse engineer, or otherwise
duplicate the foregoing materials, in whole or in part, or otherwise make the
same available to any unauthorized person.
IX. ADVERTISING AND MARKETING
-------------------------
A. Advertising Approvals. All advertising by Franchisee in any medium
---------------------
shall be conducted in a dignified manner and shall conform to such standards and
requirements as Franchisor may specify. Franchisee shall submit to Franchisor
(by mail, return receipt requested), for its prior approval (except with
respect to prices to be charged), samples of all advertising, promotional plans
and materials and public relations programs that Franchisee wishes to use which
have not been either provided or previously approved by Franchisor. Any
advertising, marketing, or sales concepts programs or materials proposed or
developed by Franchisee for its Hotel and approved by Franchisor may be used by
other Wyndham Hotels without compensation to Franchisee. Franchisor reserves
the right to disapprove upon written notice to Franchisee any advertising
materials previously provided to Franchisee by Franchisor or previously approved
by Franchisor if the materials are determined by Franchisor to have a
substantial adverse effect upon the Proprietary Marks or
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Franchisor's goodwill therein or to infringe upon the proprietary rights of
others. Upon receipt of such written notice, Franchisee shall promptly cease to
use those advertising materials which have been disapproved, and Franchisor and
Franchisee agree to negotiate in good faith an equitable allocation of any costs
incurred by Franchisee in complying with such direction.
B. Marketing Fund. Recognizing the value of marketing and advertising to
--------------
all Wyndham Hotels, Franchisee agrees that Franchisor or its designee shall
administer a marketing fund ("Fund") as follows:
1. To the extent provided generally by the Franchisor for the
benefit of the Hotel and other Wyndham Hotels in the same division as the Hotel,
Franchisor will provide for the Hotel during the term of this Agreement
marketing services consisting of chain-wide and/or division level marketing
programs, marketing collateral, research services, advertising, and public
relations efforts.
2. On or before the fifteenth (15th) day of each calendar month
during the term of this Agreement, Franchisee shall pay or reimburse Franchisor
for the provision of the marketing services by contributing to the Fund an
amount equal to the marketing fee, as defined in Section III.C. The marketing
fee will be collected and applied to pay only the actual costs incurred and
allocated by Franchisor in the provision of the marketing services. The
marketing fee shall not be used to pay, and Franchisee shall pay separately, the
costs of any reservation and national sales office services (as provided in
Sections III.D. and III.E. of this Agreement), as well as the costs of any third
party marketing partner programs (such as frequent flyer and similar programs)
in which the Hotel participates that are direct-billed to participating hotels.
These costs may include, without limitation, mileage or other direct operating
costs to marketing partners.
3. Franchisor will expend the marketing fee at such time and in such
manner as it reasonably deems appropriate for the provision of the marketing
services. Franchisee acknowledges that the Fund is intended to maximize general
public recognition, acceptance and use of the System and that Franchisor and its
designees undertake no obligation in administering the Fund to make expenditures
which are equivalent or proportionate to Franchisee's contribution, or to ensure
that any particular franchisee benefits directly or pro rata from expenditures
--- ----
by the Fund. Prior to the expenditure thereof, the collected marketing fees may
be held or maintained in one or more accounts, any of which also may include
funds other than marketing fees, but Franchisor in any event shall account to
Franchisee for the marketing fee collected. Franchisor will permit Franchisee
access to Franchisor's records concerning the holding and expenditure of such
marketing fee at any reasonable time or times during Franchisor's regular
business hours.
4. Notwithstanding the foregoing provisions of this Section IX.B.,
any service that otherwise would constitute a marketing service covered by the
marketing fee instead may be provided on a cost allocation basis, and any
service provided on a cost allocation basis hereunder instead may be provided
and be paid or reimbursed out of the marketing fee as provided in Sections
IX.B.2. and 3. above, provided that no such reallocation shall increase the
total fees for reservation,
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marketing and National Sales Office services that would otherwise be payable by
Franchisee hereunder.
C. National Sales Office Services. To the extent provided generally by
------------------------------
Franchisor for the benefit of the Hotel and other Wyndham Hotels in the same
division as the Hotel, Franchisor will provide for the Hotel, during the term of
this Agreement, National Sales Office services, such as national and regional
convention, business and sales promotion services, trade show promotional
services, group booking and services. Commissions for such National Sales
Office services shall be paid by Franchisee as provided in Section III.E. of
this Agreement.
D. Initial Opening Campaign. In connection with the initial opening of
------------------------
the Hotel for business as a Wyndham Hotel, Franchisee shall conduct an
advertising and marketing campaign as prescribed by Franchisor in the Manual or
as otherwise agreed upon by Franchisee and Franchisor.
E. Wyndham Hotel Directory. Franchisee agrees to list the Hotel in the
-----------------------
Wyndham Hotel Directory and to furnish to Franchisor such information as
Franchisor may request for that purpose. Franchisee shall have sole discretion
in determining any rates for the Hotel which appear in each Directory. If rates
are required to be included in the Directory listing for the Hotel, seasonal and
other rates changes or differentials shall be specified, upon Franchisee's
request. Franchisee agrees to honor the rates that Franchisee causes to be
published in the Directory and to comply with such other requirements with
respect to the Directory as may be specified from time to time in the Manual.
Franchisee understands and acknowledges that Franchisor assumes no liability
for, nor shall it be deemed liable by reason of, any failure by Franchisee or
Franchisor's other franchisees to honor any Directory rates for the period
during which each Directory is in effect.
F. Additional Marketing Programs. Franchisor may establish and
-----------------------------
coordinate cooperative advertising, marketing and sales programs, customer
satisfaction programs and other activities among System hotels and other lodging
products of Franchisor, its subsidiaries and affiliates on a System-wide or
local or regional basis and provide for participation therein by Franchisee.
Franchisee shall participate in such programs and activities as Franchisor may
prescribe, and such programs and activities will be paid for outside the Fund on
a pro rata or other equitable basis by the participants.
--------
X. PROPRIETARY MARKS
-----------------
A. Right to Use. Franchisor grants Franchisee the right to use the
------------
Proprietary Marks during the term of this Agreement in accordance with the
System and related standards and specifications.
B. Franchisee's Acknowledgments. Franchisee understands and acknowledges
----------------------------
the following:
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1. Due to the substantial and continuous use of the "Wyndham" name
in connection with hotel services in many areas of the United States beginning
in 1982, Franchisor or its affiliates have acquired substantial common law
rights in and to the "Wyndham" service mark for use in connection with hotel
services. In addition, Franchisor or its affiliates own several state
registrations and have filed an application for federal registration of the
"Wyndham" mark. Although Franchisor is aware of prior use of the "Wyndham" name
by third parties, Franchisor is not aware of any third party with superior
rights to the name "Wyndham" for use in connection with hotel services in the
state of in which the Hotel is located.
2. As between Franchisor and Franchisee, Franchisor or its
affiliates are the owners of all right, title and interest in and to the
Proprietary Marks and the goodwill associated with and symbolized by them.
3. Franchisee's use of the Proprietary Marks pursuant to this
Agreement shall not give the Franchisee any right, title, or interest in or to
any of the Proprietary Marks or any of Franchisor's or its affiliates' service
marks, trademarks, trade names, trade dress, logos, patents, copyrights or
proprietary materials, except the non-exclusive license to use the Proprietary
Marks in accordance with the terms and conditions of this Agreement for the
operation of the Franchised Business at the Approved Location. Franchisee shall
not have any right to, and Franchisee shall not, under any circumstances, use or
display the Proprietary Marks except as approved by the Franchisor.
4. Franchisee understands and agrees that any and all goodwill
arising from Franchisee's use of the Proprietary Marks shall inure solely and
exclusively to the benefit of Franchisor or its affiliates and upon expiration
or termination of this Agreement and the license herein granted, no monetary
amount shall be assigned as attributable to any goodwill associated with
Franchisee's use of the Proprietary Marks.
5. Franchisee shall not contest the validity of Franchisor's or its
affiliates' interest in the Proprietary Marks or assist others to contest the
validity of such interest. Franchisee shall take no action that would prejudice
or interfere with the validity of Franchisor's or its affiliates' rights with
respect to the Proprietary Marks.
6. Franchisee acknowledges that any use of the Proprietary Marks by
Franchisee, and any other person or persons under its control, which is not
authorized by this Agreement, shall constitute an infringement of Franchisor's
or its affiliates' rights in the Proprietary Marks and a material event of
default hereunder. Franchisee agrees that it shall provide Franchisor with all
assignments, affidavits, documents, information and assistance Franchisor
reasonably requests to fully vest in Franchisor or its affiliates all right,
title and interest in and to the Proprietary Marks, including all such items as
are reasonably requested by Franchisor to register, maintain and enforce such
rights in the Proprietary Marks.
7. Franchisor reserves the right to substitute different proprietary
marks for use in identifying the System and the Franchised Business if the
current Proprietary Marks no longer can
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be used, or if Franchisor determines that substitution of different Proprietary
Marks will be beneficial to the System. In such event, Franchisor may require
Franchisee to discontinue or modify Franchisee's use of any of the Proprietary
Marks or to use one or more additional or substitute names, marks, logos,
insignia, slogans, emblems, designs or other identifying commercial symbols.
Further, in the event of a sale or any other transfer or assignment of
Franchisor's rights under this Agreement, Franchisor also reserves the right to
require any purchaser, assignee or transferee to cease using the Proprietary
Marks and substitute different names, marks, logos, insignia, slogans, emblems,
designs or other identifying commercial symbols in connection with the continued
operation of the business. Franchisee shall discontinue or modify Franchisee's
use of any of the Proprietary Marks and use such additional or substitute names,
marks, logos, insignia, slogans, emblems, designs or other identifying
commercial symbols as Franchisor or the purchaser, transferee or assignee may
require following Franchisee's receipt of notice of any such requirement.
However, in the event that the proposed schedule for the discontinuation,
substitution or modification of the Proprietary Marks referred to herein creates
undue economic hardship for Franchisee, Franchisor and Franchisee (and, if
applicable, any purchaser, transferee or assignee referred to herein) may by
mutual agreement extend for a reasonable period the time for compliance with the
requirements hereof. Costs and expenses incurred in complying with this Section
X.B.7. shall be borne by Franchisee, except as otherwise provided in Section
X.D. below.
C. Use of Proprietary Marks. With respect to Franchisee's licensed use
------------------------
of the Proprietary Marks pursuant to this Agreement, Franchisee further agrees
that:
1. Unless otherwise authorized or required by Franchisor, Franchisee
shall operate and advertise the Hotel only under the name "WYNDHAM HOTEL"
without prefix or suffix. Franchisee shall not use the Proprietary Marks as
part of its corporate or other legal name or in connection with any other
business activity or venture.
2. During the term of this Agreement, Franchisee shall identify
itself as the owner of the Franchised Business in conjunction with any use of
the Proprietary Marks including, but not limited to, uses on invoices, order
forms, receipts and contracts, as well as the display of a notice in such
content and form and at such conspicuous locations on the premises of the Hotel
or any motor vehicle as Franchisor may designate in the Manual or otherwise in
writing.
3. Franchisee shall not use the Proprietary Marks to incur any
obligation or indebtedness on behalf of Franchisor or its affiliates.
4. Franchisee shall comply with Franchisor's instructions in filing
and maintaining the requisite trade name or fictitious name registrations, and
shall execute any documents deemed necessary by Franchisor or its counsel to
obtain protection of the Proprietary Marks or to maintain their continued
validity and enforceability.
D. Infringement. Franchisee shall notify Franchisor immediately in
------------
writing if litigation involving the Proprietary Marks is instituted or
threatened against Franchisee and of any apparent
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infringement of or challenge to Franchisee's use of any Proprietary Mark and of
any claim by any person of any rights in any Proprietary Mark. Franchisee shall
not communicate with any person other than Franchisor or any designated
affiliate of Franchisor, their counsel and Franchisee's counsel in connection
with any such apparent infringement, challenge or claim. Franchisor shall have
complete and sole discretion to take such action as it deems appropriate in
connection with the foregoing, and the right to control exclusively, or to
delegate control to any of its affiliates, any settlement, litigation, or Patent
and Trademark Office or other proceedings arising out of any such alleged
infringement, challenge or claim or otherwise relating to any Proprietary Mark.
Franchisee agrees to execute any and all instruments and documents, render such
assistance, and do such acts or things as may, in the opinion of Franchisor,
reasonably be necessary or advisable to protect and maintain the interests of
Franchisor or its affiliates in any litigation or other proceeding or to
otherwise protect and maintain the interests of Franchisor or any other
interested party in the Proprietary Marks. Franchisor shall indemnify and hold
Franchisee harmless against any and all claims that Franchisee's use of the
Proprietary Marks, in accordance with the terms of this Agreement, infringes
upon the rights of any other party, as well as the costs, including reasonable
attorneys fees, of defending against such claims and of complying with any
changes in the proprietary marks used in identifying the System if the current
Proprietary Marks no longer can be used as a result of such claims.
E. Retained Rights. The right and license of the Proprietary Marks
---------------
granted hereunder to Franchisee is nonexclusive, and Franchisor may use, and
grant licenses to others to use the Proprietary Marks, and may establish,
develop, and license other systems which use the Proprietary Marks and the
System, without offering or providing Franchisee any rights in, to, or under
such other systems. Franchisor may also engage, directly or indirectly, through
its employees, representatives, licensees, assigns, agents and others in (1) the
production, distribution, license and sale of products and services, and (2) the
use of the Proprietary Marks and any and all trademarks, trade names, service
marks, logos, insignia, slogans, emblems, symbols, designs and other identifying
characteristics as may be developed or used from time to time by Franchisor in
connection therewith.
XI. MANUAL
------
A. The Manual. Franchisor has provided to Franchisee on loan a current
----------
copy of Franchisor's Manual (which may be in multiple volumes). The Manual
contains, among other matters, minimum standards and requirements for
constructing, equipping, furnishing, staffing and supplying the Hotel and
management, training and operational standards, procedures and techniques. The
provisions of the Manual shall be consistently applied by Franchisor to all
Wyndham Hotels in the same division as the Hotel; provided that, if in the
reasonable judgment of Franchisor local conditions or special circumstances
(including the market area or the physical peculiarities of a hotel in the
System) warrant a deviation from such provisions, then in such event Franchisor
may allow such deviation.
B. Compliance with Manual. To protect the reputation and goodwill of
----------------------
Franchisor and to maintain high standards of operation under Franchisor's
Proprietary Marks, Franchisee shall
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conduct its business in accordance with the Manual, other written directives
which Franchisor may issue to Franchisee from time to time (whether or not such
directives are included in the Manual), and any other manuals and materials
created or approved for use in the operation of the Franchised Business. The
Manual, any written directives, any other manuals and materials issued by
Franchisor, and any modifications to such materials shall supplement this
Agreement.
C. Confidentiality of Manual. Franchisee shall at all times treat the
-------------------------
Manual, all revisions thereto, any other manuals, materials and written
directions of Franchisor created for or approved for use in the operation of the
Hotel, and the information contained therein, as confidential, and shall
maintain such information as confidential. Franchisee shall not at any time,
without Franchisor's prior written consent, copy, duplicate, record or otherwise
reproduce the foregoing materials, in whole or in part, or otherwise make the
same available to any unauthorized person.
D. Ownership of Manual. The Manual shall at all times remain the sole
-------------------
property of Franchisor and shall be returned to Franchisor immediately upon the
termination or expiration of this Agreement.
E. Revisions to Manual. Franchisor may from time to time revise the
-------------------
contents of the Manual. Franchisor shall provide to Franchisee a copy of all
revisions and additions to the Manual, and Franchisee expressly agrees to comply
with each new or changed standard.
F. Master Copy of Manual. Franchisee shall at all times ensure that
---------------------
Franchisee's copy of the Manual is kept current and includes all updates
published by Franchisor and provided to Franchisee. In the event of any dispute
as to the contents of the Manual, the terms of the master copy of the Manual
maintained by Franchisor at Franchisor's home office shall be controlling.
G. Manual Replacement Fee. Franchisor will charge a replacement fee of
----------------------
Five Hundred Dollars ($500) for any replacement Manual requested by Franchisee.
XII. CONFIDENTIAL INFORMATION
------------------------
Franchisee shall not, during the term of this Agreement or thereafter,
without Franchisor's prior written consent, copy, duplicate, record, or
otherwise reproduce, in whole or in part, the Manual, any Software and
accompanying documentation developed for the System, or any other confidential
information, knowledge, or know-how concerning the System or the operation of
the Hotel which may be communicated or provided to Franchisee, or of which
Franchisee may be apprised, by virtue of Franchisee's operation under this
Agreement, or otherwise make the same available to any unauthorized person.
Franchisee shall divulge such confidential information only to such of
Franchisee's employees or agents as must have access to it in order to operate
the Hotel. The contents of the Manual, all Software and accompanying
documentation developed for the System, and all other information, knowledge,
know-how or other data which Franchisor designates as confidential shall be
deemed confidential for purposes of this Agreement. The covenants in this
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Section shall survive the expiration, termination or transfer of this Agreement
or any interest herein and shall be perpetually binding upon Franchisee.
XIII. ACCOUNTING AND RECORDS
----------------------
A. Maintenance of Books and Records. Beginning on the Effective Date
--------------------------------
and throughout the term of this Agreement, Franchisee shall maintain and
preserve, for at least five (5) years from the dates of their preparation, full,
complete and accurate books, records and accounts in accordance with generally-
accepted accounting principles, consistently applied, and in the form and manner
prescribed in the Manual. Franchisee's obligation to preserve such books,
records and accounts shall survive the termination hereof.
B. Monthly Reports. Franchisee shall, at Franchisee's expense, submit to
---------------
Franchisor by the fifteenth (15th) day of each month following the Effective
Date (including the first partial month if the Effective Date is on other than
the first day of a month), a statement in the form prescribed by Franchisor,
accurately reflecting for the immediately preceding month all Gross Room
Revenues, the source and amounts of all other revenues generated at the Hotel,
room occupancy and rates, reservations data, and such other data or information
as Franchisor may reasonably require.
C. Financial Statements. Within thirty (30) days following the end of
--------------------
each fiscal quarter during the term of this Agreement, Franchisee shall, at
Franchisee's expense, submit to Franchisor a balance sheet and an unaudited
quarterly profit and loss statement for the Hotel on the form prescribed by
Franchisor. Each statement shall be signed by an authorized officer of
Franchisee attesting that it is true and correct. In addition, Franchisee
shall, at Franchisee's expense, submit to Franchisor, within ninety (90) days
following Franchisee's fiscal year end, a complete annual audited financial
statement, prepared in accordance with generally-accepted accounting principles,
consistently applied, by an independent certified public accountant reasonably
satisfactory to Franchisor, showing the result of the operations of the Hotel
during such fiscal year.
D. Additional Reports. Franchisee shall also submit to Franchisor, for
------------------
review and audit, such other forms, periodic and other reports, records,
information and data as Franchisor may reasonably designate, in the form and at
the times and places reasonably required by Franchisor, upon request and as
specified from time to time in the Manual or otherwise in writing.
E. Audits. Franchisor or its designated agent shall have the right at
------
all reasonable times, and upon reasonable notice to Franchisee, to examine and
copy, at Franchisor's expense, all books, records, accounts and tax returns of
Franchisee related to the operation of the Hotel during the preceding five (5)
years. Franchisor also shall have the right, at any time, and upon reasonable
notice to Franchisee, to have an independent audit made of the books, accounts
and records of Franchisee related to the operation of the Hotel. Franchisee
shall provide lodging, if available, without charge to Franchisor's agents
during the time that may reasonably be necessary to complete such audits and
shall render such other assistance as may reasonably be requested. If an
inspection or audit should reveal that payments have been understated in any
report to Franchisor, Franchisee
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shall immediately pay to Franchisor upon demand, the amount understated plus
interest from the date such amount was due until paid. The rate of interest
shall be one and one-half percent (1-1/2%) per month or the maximum rate
permitted by law, whichever is less. If an inspection or audit discloses an
understatement in any one year of three percent (3%) or more, Franchisee shall,
in addition, reimburse Franchisor for any and all costs and expenses connected
with the inspection or audit (including, without limitation, reasonable
accounting and attorneys' fees). The foregoing remedies shall be in addition to
any other remedies Franchisor may have. If an inspection should reveal that
Franchisee has made overpayments to Franchisor, the amount of any such
overpayment, without interest, shall be credited against future payments due and
payable to Franchisor by Franchisee hereunder.
XIV. INSURANCE
---------
A. Coverage Requirements. Franchisee, at its expense, shall at all times
---------------------
during the term of this Agreement procure and maintain such insurance as may be
required by the terms of any lease or mortgage on the premises where the Hotel
is located, and in any event no less than the following:
1. Property Insurance
a. Property insurance (or builder's risk insurance during any
period of construction) on the Hotel buildings and contents against loss or
damage by fire, lightning and all other risks covered by the usual all risks and
replacement cost policy form, all in an amount not less than ninety percent
(90%) of the replacement cost thereof.
b. Boiler and machinery insurance against loss or damage from
boilers, heating apparatus, pressure vessels and pipes, air conditioning
apparatus and electrical equipment written on a standard, broad form boiler and
machinery policy (on a blanket or comprehensive basis) and including repair and
replacement coverage.
c. Business interruption insurance covering at least twelve
(12) months loss of profits and necessary continuing expenses for interruptions
caused by any occurrence covered by the insurance referred to in 1.a. and b.
immediately above and including specific coverage for the management fee for any
approved management company and Franchisee's royalty and marketing fee
calculated on the basis of the Gross Room Revenues used as the basis for
calculation of the business interruption insurance award. Such business
interruption insurance shall be written on an all risks form, either as an
endorsement to the policies described in 1.a. and b. above or on a separate
policy and shall name Franchisor as an additional insured as its interest may
appear.
2. Workers' compensation insurance in statutory amounts on all
employees of the Hotel and employer's liability insurance in amounts not less
than $500,000 per accident/disease, covering against liability in respect of
employees, agents and servants not covered by workers' compensation insurance
and against occupational disease benefits.
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3. Comprehensive or commercial general liability insurance for any
claims or losses arising or resulting from the Hotel, with combined single
limits of $1,000,000 per each occurrence for bodily injury and property damage.
If the general liability coverages are provided by a commercial general
liability policy form, the general aggregate limit shall be not less than
$2,000,000, and it shall apply in total to this Hotel only by specific
endorsement. Such insurance shall be on an occurrence policy form and shall
include premises and operations liability, independent contractors liability,
blanket contractual liability, liability with respect to all contracts, written
and oral, products and completed operations liability, broad form property
damage liability, personal injury liability, liquor liability, incidental
medical malpractice liability, garage keepers legal liability, water sports
liability (where applicable) and worldwide jurisdiction.
4. Comprehensive automobile liability insurance including owned,
non-owned and hired vehicles for combined single limits of bodily injury and
property damage of not less than $1,000,000 each occurrence.
5. Innkeeper's legal liability insurance covering the property of
guests in an amount not less than $5,000 per guest and $125,000 per occurrence.
6. Safe depository insurance in an amount not less than $50,000 per
guest.
7. Broad form umbrella excess liability which shall cover defense
costs on a "first dollar" basis and shall provide coverage on a following form
in respect of all underlying coverages, in an amount not less than $25,000,000
per location, covering against excess liability over coverage provided by all
primary general liability, automobile liability and employers' liability
insurance policies. Franchisor shall have the right to require Franchisee to
increase the amount of coverage if, in Franchisor's reasonable judgment, such an
increase is appropriate, and any such increase is applied consistently to all
Wyndham hotels in the same division as the Hotel.
8. Fidelity bond coverage on all Hotel employees in an amount not
less than $1,000,000.
B. General Requirements. The following general insurance requirements
--------------------
shall be satisfied by Franchisee.
1. All insurance under Sections XIV.A.3. through 7. shall by
endorsement specifically name Franchisor, Franchisee, their respective
affiliates and their, and their affiliates', respective shareholders, partners,
directors, officers, employees and agents as unrestricted additional insureds.
All workers' compensation and employers' liability insurance under Section
XIV.A.2. shall include a waiver of subrogation in favor of Franchisor.
2. Any deductibles within the insurance policy or policies required
hereunder shall not exceed $25,000, or such higher amount as may be approved in
writing in advance by Franchisor.
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<PAGE>
3. All insurance purchased in compliance herewith shall be placed
with insurance companies reasonably acceptable to Franchisor and licensed or
registered to do business in the state where the Hotel is located. Such
licensing requirement shall not apply to those insurers providing umbrella
excess liability under Section XIV.A.7.
4. All insurance required hereunder shall be specifically endorsed
to provide that the coverages will be primary and that any insurance carried by
any additional insured shall be excess and non-contributory.
5. All insurance required hereunder shall contain an endorsement
whereby the policies shall not be canceled or materially changed without at
least thirty (30) days prior written notice to Franchisee and Franchisor.
6. All insurance required hereunder may be effected under policies
of blanket insurance which cover other properties of Franchisee and its
affiliates so long as such blanket insurance fulfills the requirements herein.
7. Franchisee shall deliver to Franchisor a certificate of insurance
or certified copy of such insurance policy if requested by Franchisor evidencing
the coverages required herein and setting forth deductibles and the amount
thereof, if any. Renewal certificates of insurance or certified copies of such
insurance policy if requested by Franchisor shall be delivered to Franchisor not
less than ten (10) days prior to their respective inception dates.
8. Franchisee's obligation to maintain the insurance hereunder shall
not relieve Franchisee of liability under the indemnity provisions set forth in
Section XXI. of this Agreement, and each of the policies described in Section
XIV.A.3. shall contain a contractual coverage endorsement specifically insuring
the performance by Franchisee of the indemnity obligations set forth in Section
XXI.
9. All insurance shall be satisfactory to Franchisor in accordance
with standards and specifications set forth in the Manual or otherwise in
writing. Should Franchisee for any reason fail to procure or maintain the
insurance required by this Agreement, as revised from time to time for all
franchisees by the Manual or otherwise in writing, Franchisor shall have the
right and authority (without, however, any obligation to do so) to immediately
procure such insurance and to charge same to Franchisee, which charges, together
with a reasonable fee for Franchisor's expenses in so acting, shall be payable
by Franchisee immediately upon demand.
XV. TRANSFERABILITY OF INTEREST
---------------------------
A. Transfer by Franchisor. Franchisor shall have the right to transfer
----------------------
this Agreement to any person or legal entity without prior notice to, or consent
of, Franchisee, provided the transferee assumes Franchisor's obligations to
Franchisee under this Agreement. Specifically, and without
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<PAGE>
limitation of the foregoing, Franchisee agrees that Franchisor may sell its
assets, its interest in the Proprietary Marks or the System to a third party;
may offer its securities privately or publicly; may merge, acquire other
corporations or be acquired by another corporation directly or indirectly; may
undertake a refinancing, recapitalization, leveraged buyout or other economic or
financial restructuring; and with regard to any or all of the above sales,
assignments and dispositions, Franchisee expressly and specifically waives any
claims, demands, or damages against Franchisor arising from or related to the
transfer. Nothing contained in this Agreement shall require Franchisor to
continue any business operating under the System or to offer any services or
products, whether or not bearing the Proprietary Marks, to Franchisee if
Franchisor assigns its rights in this Agreement in accordance with the
provisions of this Section XV.A.
B. Transfer by Franchisee - Franchisor's Consent Required. Franchisee
------------------------------------------------------
understands and acknowledges that the rights and duties set forth in this
Agreement are personal to Franchisee, and that Franchisor has granted this
franchise in reliance on the business skill, financial capacity, and character
of Franchisee, its general partner and such general partner's shareholders.
Accordingly, except as provided in Sections XV.E. and XVI. A. below, neither
Franchisee nor any immediate or remote successor to any part of Franchisee's
interest in this franchise, or any individual, partnership, corporation, or
other legal entity which directly or indirectly owns any interest in this
franchise or in Franchisee or the general partner of Franchisee shall sell,
transfer, convey, pledge, mortgage, or otherwise encumber any direct or indirect
interest in this franchise (including any ownership interest in Franchisee or in
the general partner of Franchisee), this Agreement, the Franchised Business, or
a substantial portion of the assets (including building and real estate) of the
Franchised Business without the prior written consent of Franchisor. Any
purported assignment or transfer, by operation of law or otherwise, contrary to
the terms of Sections XV. or XVI. of this Agreement shall be null and void and
shall constitute a material breach of this Agreement, for which Franchisor may
terminate this Agreement pursuant to Section XVII.B.5. hereof and seek
injunctive relief as well as monetary damages.
C. Conditions to Franchisor's Consent. Franchisor shall not unreasonably
----------------------------------
withhold its consent to a transfer of any interest in this franchise,
Franchisee, this Agreement, the Franchised Business, or in a substantial portion
of the assets (including building and real estate) of the Franchised Business;
provided, however, if a transfer, alone or together with other previous,
simultaneous, or proposed transfers, would result in the transfer of a
controlling interest (as reasonably determined by Franchisor) in this franchise,
Franchisee, this Agreement, the Franchised Business, or substantially all of the
assets (including building and real estate) of the Franchised Business,
Franchisor may require any or all of the following as a condition of its
consent:
1. Transferor shall deliver to Franchisor a complete and accurate
copy of the sale and purchase agreement or similar document covering the
transaction;
2. Transferor shall satisfy all of Franchisee's accrued monetary
obligations to Franchisor and its affiliates, and shall execute a general
release under seal in a form prescribed by
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Franchisor of any and all claims against Franchisor and its affiliates, and
their respective officers, directors, agents and employees;
3. The proposed transferee shall submit to Franchisor an
application, in the form prescribed by Franchisor, for a new franchise agreement
to replace this Agreement for its unexpired term, and shall pay to Franchisor a
transfer fee in an amount equal to fifty percent (50%) of Franchisor's then-
current initial franchise fee. Franchisor reserves the right to reject an
application for a transfer for reasons that may include, without limitation, the
following: (i) if Franchisor deems the transferee's proposed debt service to be
too great to permit the transferee to successfully operate the Hotel under the
System, or (ii) if the proposed transferee or any of its affiliated entities
(other than those holding interests as limited partners only) is the owner of
the trade name of a chain of hotels which competes with the System, irrespective
of the number of hotels comprising the competitive chain;
4. Transferee shall demonstrate to Franchisor's satisfaction that
the transferee and its shareholders, members or partners, as appropriate, meet
Franchisor's then-current managerial and business standards and have the
aptitude and ability to conduct the Franchised Business (as may be evidenced by
prior related business experience or otherwise); possess good moral character,
business reputation and credit rating; and have adequate financial resources and
capital to operate the Franchised Business and any management company to be
engaged by transferee shall meet Franchisor's then-current standards;
5. Franchisor and the transferee will, upon approval of transferee's
application, enter into a new franchise agreement which shall require transferee
to upgrade the Hotel to conform to Franchisor's then-current standards, and
which new franchise agreement shall contain the standard terms (except for
duration) then being issued for new franchised Hotels under the System. The
date of the transferee's new franchise agreement shall be the Effective Date of
this Agreement, and the transferee will be required to certify in writing that:
(i) Franchisor did not endorse, recommend, or otherwise concur with the terms of
the transfer, (ii) Franchisor did not comment upon any financial projections
submitted by Franchisee to transferee, and (iii) Franchisor did not participate
in the decision of the price to be paid, which decision was made without any
intervention, support or participation by Franchisor; and
6. Transferee's General Manager shall, prior to assuming management
of the Hotel, successfully (as defined by Franchisor) complete the management
training program then being offered by Franchisor.
D. Death or Permanent Disability. In the event of the death or permanent
-----------------------------
disability of Franchisee or any controlling shareholder, controlling member, or
general partner of Franchisee, the interest of such person may be transferred in
accordance with and subject to the terms of Section XV.C., provided that (i) any
such transfer shall be made within six (6) months of the date of death or
permanent disability and (ii) the obligations of Franchisee under this Agreement
are satisfied pending the transfer, including adequate provision for management
of the Hotel.
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<PAGE>
E. Permitted Transfers.
-------------------
1. Anything in Section XV.B. to the contrary notwithstanding, any
limited partner owning any interest in Franchisee may transfer such interest
without Franchisor's prior written consent.
2. Upon the occurrence of an event of default by Franchisee for
which Franchisor may terminate this Agreement pursuant to Section XVII. hereof,
Franchisee shall have the right, within ten (10) business days following
delivery of written notice to Franchisor, to transfer this Agreement without the
prior written consent of Franchisor to an affiliate of Franchisee, provided that
(a) adequate provision has been made for the management of the Hotel; (b) the
persons or entities guaranteeing Franchisee's performance under this Agreement
shall continue to guarantee the performance of a Franchisee's affiliate and
there has been or will be no material adverse change in the financial capacity
of the guarantors; (c) the affiliate has at least the financial capacity of
Franchisee as of the date of this Agreement and executes documentation
reasonably satisfactory to Franchisor evidencing the transfer and expressly
assuming Franchisee's obligations hereunder; and (d) such transfer shall not
violate any law, rule or regulation to which Franchisor or Franchisee may be
subject.
3. Franchisee may, without the prior written consent of Franchisor,
pledge, mortgage or otherwise encumber all or any part of the assets of the
Franchised Business (excluding the franchise, this Agreement, and, if Franchisee
is a corporation, partnership or other form of legal entity, all or any part of
the ownership interests in Franchisee or in any general partner of a partnership
Franchisee) to banks or other lending institutions for purposes of any
refinancing or as collateral securing a loan made directly to or for the benefit
of the Franchisee.
XVI. SECURITIES OFFERINGS
--------------------
A. Consent Requirement. Publicly-traded securities in Franchisee, its
-------------------
general partner, or the shareholders of such general partner previously
registered under federal securities law may be transferred without Franchisor's
consent if (i) the transfer is exempt from registration under federal and state
securities law, and (ii) the transfer will not result in a transfer of control
(as reasonably determined by Franchisor) in Franchisee. Any transfer of
securities which will result in a transfer of control in Franchisee (as
reasonably determined by Franchisor) requires Franchisor's prior written
consent, which shall be conditioned upon satisfaction of the requirements of
Section XV.C., and additionally upon satisfaction of the requirements of Section
XVI.B. below.
B. Conditions to Consent. In connection with any federal or state
---------------------
registration or any private offering of Franchisee's securities, or in
connection with any federal or state registration or private offering of the
securities of any of Franchisee's affiliates which refers to the relationship
created by this Agreement, Franchisee shall or shall cause its affiliate to:
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1. Submit to Franchisor at least thirty (30) days before the
effective date of the registration or private offering a copy of the proposed
prospectus and all supporting and related materials and releases and shall
reimburse Franchisor for its expense (including professional fees and costs) in
reviewing the proposed offering. Franchisor's review of such materials shall be
limited as provided in Section XVI.C., below;
2. Fully and unconditionally indemnify and hold harmless Franchisor
and its affiliates in connection with the offering;
3. State clearly in the prospectus and supporting materials and
releases that Franchisor is not, in any way, participating in or endorsing the
offering;
4. Use the Proprietary Marks in the prospectus and in any related or
supporting materials only as directed by Franchisor; and
5. Refrain from filing, publishing, issuing or releasing the
prospectus or any supporting or related materials without having received the
prior written approval of Franchisor. Franchisor shall deliver notice of its
approval (or a statement setting forth the reasons for its failure to give its
approval) to Franchisee within five (5) business days following Franchisor's
receipt of the materials specified in Sections XVI.B.1.-4. above. In the event
Franchisor fails to deliver such written notice within the applicable time
period, Franchisee shall advise Franchisor in writing of its failure to receive
said notice. If Franchisor shall thereafter fail to provide written notice of
its approval (or, alternatively, the statement setting forth its reasons for
disapproval, described above) within three (3) business days following its
receipt of Franchisee's written advisement, then Franchisor shall be deemed to
have given its approval.
C. Scope of Review. Franchisor's review of any securities offering of
---------------
Franchisee shall be limited solely to the subject of the relationship between
Franchisee and Franchisor, and its approval shall not constitute an endorsement
or ratification of the offering, either express or implied.
XVII. DEFAULT AND TERMINATION
-----------------------
A. Termination - No Notice or Cure. Franchisee shall be deemed to be in
-------------------------------
default under this Agreement, and Franchisor may, at its option, terminate this
Agreement and all rights granted hereunder shall automatically terminate without
notice from Franchisor, if Franchisee shall become insolvent or make a general
assignment for the benefit of creditors, or if a petition in bankruptcy is filed
by Franchisee or such a petition is filed against and consented to by
Franchisee, or if Franchisee is adjudicated bankrupt, or if a bill in equity or
other proceeding for the appointment of a receiver of Franchisee or other
custodian for Franchisee's business or assets is filed and consented to by
Franchisee, or if a receiver or other custodian (permanent or temporary) of
Franchisee's assets or property, or any part thereof, is appointed by any court
of competent jurisdiction, or if proceedings for a compromise with creditors
under any state or federal law is instituted by, against or consented to by
Franchisee, or if a final judgment remains unsatisfied or of record for ninety
(90) days or
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longer (unless supersedeas bond is filed), or if execution is levied against
Franchisee's Hotel or other real or personal property at the Hotel, or any lien
or mortgage against the Hotel or other real or personal property appurtenant
thereto is foreclosed against Franchisee or if the real or personal property of
Franchisee's Hotel shall be sold after levied upon by any sheriff, marshal, or
constable; provided, however, Franchisee shall be granted one hundred twenty
(120) days to obtain dismissal of any involuntary proceeding referenced above
before Franchisor will take any action regarding termination so long as
Franchisee remains in possession of the Hotel and no other default by Franchisee
then occurs under this Agreement.
B. Termination - Notice Only. Franchisee shall be deemed to be in
-------------------------
material default and Franchisor may, at its option, terminate this Agreement and
all rights granted hereunder, without affording Franchisee any opportunity to
cure the default, effective immediately upon Franchisee's receipt (or first
refusal of delivery) of notice, upon the occurrence of any of the following:
1. If Franchisee ceases to do business at the Hotel, or ceases to
operate the Hotel under the Proprietary Marks and System or loses ownership or
possession or the right to possession of all or a significant part of the Hotel
or otherwise forfeits the right to conduct the Franchised Business at the
Approved Location, except as otherwise provided in Section XIX.;
2. If a threat or danger to public health or safety results from the
construction, maintenance or operation of the Hotel franchised hereunder, and an
immediate shutdown of the Hotel is reasonably determined by Franchisor to be
essential to avoid substantial liability or loss of goodwill; provided, however,
Franchisor shall reinstate this Agreement if, within six (6) months after
termination under this Section XVII.B.2., the threat or danger to public health
or safety is eliminated and Franchisor reasonably determines that reopening the
Hotel would not cause a substantial loss of goodwill;
3. If Franchisee or any shareholder or partner of Franchisee is
convicted of a felony or any other crime or offense that is reasonably likely,
in the reasonable opinion of Franchisor, to adversely affect the System, the
Proprietary Marks, the goodwill associated therewith, or Franchisor's interest
therein; or
4. If Franchisee intentionally discloses or divulges the contents of
the Manual or other trade secret, Software, including accompanying
documentation, or confidential information provided Franchisee by Franchisor
contrary to Sections VI. and XI. hereof or fails to exercise reasonable care to
prevent such disclosure.
5. If Franchisee or any partner or shareholder in Franchisee
purports to transfer any rights or obligations under this Agreement or any
interest in Franchisee or the Franchised Business to any third party contrary to
the terms of Sections XV. or XVI. of this Agreement.
6. If in an audit conducted pursuant to the provisions of this
Agreement Franchisee is determined to have (i) underreported Gross Room Revenues
by five percent (5%) or
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more for any month during the term hereof, or (ii) underreported Gross Room
Revenues by more than two percent (2%) twice in any thirty-six (36) month
period.
C. Termination - Notice and Cure. Except as provided in Sections XVII.A.
-----------------------------
and XVII.B. of this Agreement and for any monetary default, Franchisee shall
have thirty (30) days or such longer period as specified herein after its
receipt from Franchisor (or first refusal of delivery) of a written notice of
default, within which to remedy any default and provide evidence thereof to
Franchisor. Franchisee shall have ten (10) business days after receipt of a
written notice of default within which to cure any monetary default. If a
default is not cured within the time set forth above, or such longer period as
applicable law may require or as Franchisor may deem necessary to permit
Franchisee to cure any non-monetary default (provided Franchisee immediately
commences, diligently and in good faith pursues, and cures, such default),
Franchisor shall have the right to terminate this Agreement upon notice to
Franchisee. Subject to the foregoing notice and cure provisions, Franchisee
shall be in default under this Agreement for any failure to comply with any of
the requirements imposed by this Agreement, as it may from time to time be
supplemented by the Manual, including, without limitation, if Franchisee fails
to satisfy all of the conversion requirements set forth in the Renovation Plan
on or before the Final Completion Date, or to carry out the terms of this
Agreement in good faith.
D. Termination by Franchisee. Franchisee may terminate this Agreement
-------------------------
effective immediately upon written notice to Franchisor and without the payment
of liquidated damages as provided in Section XVIII.E. below, (i) upon the
transfer or assignment of this Agreement by Franchisor in connection with a
transfer of fewer than all other franchised properties in the System, (ii) in
the event Franchisor merges with, or is acquired by, Hospitality Franchise
Systems ("HFS"), or (iii) in the event Franchisor loses the right to use the
Proprietary Mark "Wyndham" in the operation of its business in the state in
which the Hotel is located and such loss has a direct and materially adverse
impact upon the Hotel.
XVIII. OBLIGATIONS UPON TERMINATION
----------------------------
Upon termination or expiration of this Agreement, all rights granted
hereunder to Franchisee shall forthwith terminate, and Franchisee shall comply
with all of the obligations applicable to the Approved Location as set forth in
this Section XVIII.
A. Cease Operation as Wyndham Hotel. Franchisee shall immediately cease
--------------------------------
operation of the Hotel as a Wyndham Hotel and shall not thereafter, directly or
indirectly, represent to the public or hold itself out as a present or former
franchisee of Franchisor.
B. Discontinue Use of Proprietary Marks. Franchisee shall immediately
------------------------------------
and permanently cease to use, by advertising or in any other manner whatsoever,
the name "Wyndham," all variations thereof and all other Proprietary Marks of
Franchisor, any other identifying characteristics and marks of the System, and
all confidential methods, procedures and techniques associated with the System.
Franchisee shall forthwith remove from its place of business, and
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discontinue using for any purpose, any and all signs, fixtures, furniture,
furnishings, equipment, advertising materials, stationery, supplies, forms or
other articles which display the Proprietary Marks or any distinctive features
or designs associated with the System. Any signs containing the Proprietary
Marks which Franchisee is unable to remove within one day of expiration or
termination of this Agreement shall be completely covered by Franchisee until
the time of their removal.
C. Deidentify. Franchisee shall, at its expense, immediately make such
----------
modifications or alterations as may be necessary to distinguish the appearance
of the Hotel clearly from that of other Wyndham Hotels to prevent any
possibility of confusion therewith by the public (including, without limitation,
removal of all distinctive signs, emblems, amenities and other items bearing the
Proprietary Marks and changing of directory and other listings to remove all
reference to such Proprietary Marks and to any telephone or other number used
generally by other Wyndham Hotels for reservation or other purposes).
Franchisee shall, at Franchisee's expense, make such specific additional changes
as Franchisor may reasonably request for this purpose. Until all modifications
and alterations required by this Section XVIII.C. are completed, Franchisee
shall take all such actions as may reasonably be required by Franchisor to
advise all customers and prospective customers that the Hotel is no longer
associated with the Wyndham System. Franchisee expressly acknowledges that its
failure to make such alterations will cause irreparable injury to Franchisor.
D. Cancel Assumed Name Certificate. Franchisee shall take such action as
-------------------------------
may be necessary to cancel any assumed name or equivalent registration which
contains the name "Wyndham" or any variation thereof and any Proprietary Mark of
Franchisor, and Franchisee shall furnish Franchisor with evidence satisfactory
to Franchisor of compliance with this obligation within thirty (30) days after
termination or expiration of this Agreement.
E. Pay Liquidated Damages. In the event that termination of this
----------------------
Agreement after the Effective Date is the result of Franchisee's default,
Franchisee shall pay to Franchisor, as liquidated damages for the premature
termination of this Agreement and not as a penalty for breaching this Agreement,
a lump sum equal to the total amounts required under Section III.B. during the
thirty-six (36) full calendar months of operation preceding the termination; or
if the Hotel has not been in operation as a Wyndham Hotel for thirty-six (36)
full calendar months, the greater of thirty-six (36) times the monthly average
of such amounts, or thirty-six (36) times such amounts as are due for the one
full calendar month preceding such termination. Notwithstanding the foregoing
sentence, if the number of months remaining between the date of Franchisor's
written notice of default (or, in the event of termination pursuant to Section
XVII.A., the occurrence of the termination event) and the date on which the term
of this Agreement would otherwise have ended pursuant to Section II. hereof is
less than thirty-six (36) months, then the time for calculating the amount of
liquidated damages shall be the number of months remaining in such term. The
parties acknowledge that a precise calculation of the full extent of the damages
which Franchisor will incur in the event of termination of this Agreement as a
result of Franchisee's default is difficult in the extreme, and agree that the
lump sum payment provided under this Section XVIII.E. is reasonable in light of
the damages for premature termination which Franchisor will incur in such event.
Such payment of liquidated damages shall be in lieu of other damages (except
amounts provided immediately below in Section
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<PAGE>
XVIII.F.) but shall not affect Franchisor's rights to obtain appropriate
injunctive or other equitable relief and remedies, such as an injunction to
enforce Section X. hereof and specific performance to enforce Section XVIII.
hereof. In the event this Agreement is terminated prior to the Effective Date,
then this Section XVIII.E. shall not apply, but the initial franchise fee paid
by Franchisee under Section III.A. hereof shall be retained by Franchisor.
F. Pay Outstanding Amounts. Franchisee shall promptly pay all sums owing
-----------------------
to Franchisor and affiliates, and all suppliers. In the event of termination
for any default of Franchisee, such sums shall include any payment to Franchisor
required under Section XVIII.E. and all damages, costs and expenses, including
reasonable attorneys' fees, incurred by Franchisor in obtaining (i) injunctive
or other equitable relief for the enforcement of any provisions of this
Agreement or (ii) contested termination of this Agreement.
G. Return of Manual and Other Materials. Franchisee shall immediately
------------------------------------
deliver to Franchisor the Manual, instructions, Software and accompanying
documentation, and all other materials provided by Franchisor related to the
operation of the Hotel, and all copies thereof (all of which are acknowledged to
be the Franchisor's property), and shall retain no copy or record of any of the
foregoing, excepting only Franchisee's copy of this Agreement and any
correspondence between the parties, and any other documents which Franchisee
reasonably needs for tax and accounting purposes and for compliance with any
provision of law.
H. Purchase of Certain Materials. Franchisor shall have the right, but
-----------------------------
not the duty, to be exercised by notice of intent to do so within thirty (30)
days after termination or expiration, to purchase any and all signs, advertising
materials, supplies and inventory and any other item bearing Franchisor's
Proprietary Marks, at Franchisee's cost. With respect to any purchase by
Franchisor as provided herein, Franchisor shall have the right to set off all
amounts due from Franchisee under this Agreement.
I. Survival. The obligations of Franchisee set forth in Section XVIII.
--------
shall survive the expiration or termination of this Agreement.
XIX. CONDEMNATION AND CASUALTY
-------------------------
A. Condemnation. Franchisee shall, as soon as Franchisee shall become
------------
aware of same, give Franchisor notice of any proposed taking by eminent domain.
If the Hotel is condemned, or such a substantial portion of the Hotel is
condemned as to render impractical the continued operation of the Hotel in
accordance with System standards, this Agreement shall terminate upon notice by
either Franchisor or Franchisee to the other, and Franchisor may apply for and
share in the condemnation award to the extent such award includes a segregated
allocation for its lost royalty income. Franchisee shall pay no liquidated
damages, fee or penalty in connection with the termination of this Agreement
pursuant to this Section XIX.A., except for payment of outstanding amounts (if
any) as provided in Section XVIII.F. hereof. If continued operation of the
Hotel remains
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<PAGE>
practical following any such taking by eminent domain, then the resumption of
normal operation of the Hotel in accordance with Franchisor's standards shall
not be unreasonably delayed.
B. Casualty. If the Hotel is destroyed or substantially destroyed during
--------
the term of this Agreement by fire or other casualty, then Franchisee may elect
to:
1. Expeditiously repair, restore, rebuild or replace the Hotel in
accordance with Franchisor's standards, provided that if the damage or repair
requires closing the Hotel, Franchisee will immediately notify Franchisor.
Franchisee will commence reconstruction within a reasonable time after any
closing of the Hotel and will notify Franchisor of the reopening of, and reopen,
the Hotel for continuous business operations as soon as practicable, but in no
event later than twenty-four (24) months after closing. If the Hotel is not
reopened in accordance with this Section XIX.B.1., this Agreement will terminate
upon notice thereof from Franchisor to Franchisee, with the payment of
liquidated damages, measured as provided in Section XVIII.E. hereof; or
2. Terminate this Agreement upon written notice to Franchisor,
delivered within sixty (60) days after such fire or other casualty, such notice
to be accompanied by the payment of liquidated damages as set forth in Section
XVIII.E. above, provided that the source for such payment shall be limited to
the proceeds of the insurance collectable with respect to such fire or other
casualty (including, for this purpose, the deductible amount under the insurance
policy), less any amount required to be paid pursuant to the provisions of any
deed of trust or mortgage on the Hotel.
3. If Franchisee elects to terminate this Agreement in accordance
with Section XIX.B.2., and subsequent to such termination but prior to the date
on which the term of this Agreement would otherwise have ended pursuant to
Section II hereof if such notice of termination had not been given ("Term
Expiration Date"), Franchisee or any of its affiliates has an interest in or
operates a hotel or lodging facility at the Approved Location which is not
operated pursuant to a license or franchise from Franchisor or its affiliates,
then Franchisee shall be obligated to promptly pay to Franchisor an amount equal
to the liquidated damages set forth in Section XVIII.E. hereof., less any amount
previously paid by Franchisee to Franchisor pursuant to Section XIX.B.2.
C. Nothing in this Section XIX. shall extend the term of this Agreement
but Franchisee shall not be required to make any royalty or marketing fee
payments for periods during which the Hotel is closed by reason of condemnation
or casualty.
XX. TAXES, PERMITS AND INDEBTEDNESS
-------------------------------
A. Payment of Taxes and Indebtedness. Franchisee shall promptly pay when
---------------------------------
due all taxes levied or assessed by any federal, state or local tax authority,
and any and all other indebtedness incurred by Franchisee in the conduct of the
Franchised Business. Franchisee shall pay to Franchisor one-half ( 1/2) of the
amount of any gross receipts tax, and the total amount of any sales tax or
similar tax, imposed on Franchisor with respect to any payments to Franchisor
required under this Agreement, unless the tax is credited against income tax
otherwise payable by Franchisor.
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<PAGE>
Franchisor and Franchisee shall reasonably cooperate in contesting any gross
receipts tax, sales tax or similar tax imposed on Franchisor with respect to any
payments to Franchisor required under this Agreement. Franchisee shall have no
obligation hereunder for any franchise tax payable by Franchisor or for any tax
which is based upon the net income of Franchisor, or for any future tax which
may be imposed in lieu thereof.
B. Contested Amounts. In the event of any bona fide dispute as to
----------------- ---- ----
liability for taxes assessed or other indebtedness, Franchisee may contest the
validity of the amount of the tax or indebtedness in accordance with the
procedures of the taxing authority or applicable law; however, in no event shall
Franchisee permit a tax sale or seizure by levy of execution or similar writ or
warrant, or attachment by creditor, to occur against the premises of the Hotel
or any improvement thereon.
C. Compliance with Laws. Franchisee shall comply with all federal,
--------------------
state, and local laws, rules and regulations, and shall timely obtain any and
all permits, certificates or licenses necessary for the conversion of the Hotel
in accordance with the Renovation Plan and for the full and proper conduct of
the Franchised Business including, without limitation, licenses to do business,
fictitious name registrations, sales tax permits, health and sanitation permits
and ratings and fire clearances. Actions by Franchisee which are required for
compliance with such laws, rules and regulations shall not be deemed a violation
of Franchisor's requirements hereunder.
D. Notice of Judicial and Regulatory Matters. Franchisee shall notify
-----------------------------------------
Franchisor in writing within five (5) days of the time that Franchisee first
becomes aware of the commencement of any action, suit or proceeding, and of the
issuance of any order, writ, injunction, award or decree of any court, agency or
other governmental instrumentality, which may adversely affect the operation or
financial condition of the Franchised Business. Copies of all inspection
reports, warnings, certificates and ratings issued by any governmental entity
during the term of this Agreement in connection with the Hotel which indicate a
failure to meet or maintain governmental standards or less than full compliance
with any applicable law, rule or regulation, shall be forwarded to Franchisor by
Franchisee within five (5) days of Franchisee's receipt thereof.
E. Timely Payments. Franchisee recognizes that Franchisee's failure to
---------------
make or repeated delay in making prompt payment of all amounts owed in
connection with the operation of the Hotel, (including, without limitation, all
taxes levied or assessed and all accounts and other indebtedness) in accordance
with the terms of any agreements, leases, invoices or statements for purchase or
lease of furniture, fixtures, equipment, inventories, supplies, ingredients,
travel agent services, or other goods or services, will be detrimental to the
reputation and credit standing of Franchisee, Franchisor and other System
franchisees. Franchisee shall pay when due all amounts owed by Franchisee in
connection with operating the Hotel. In the event of any bona fide dispute as
---- ----
to Franchisee's liability for taxes or other indebtedness, Franchisee may
contest the validity or the amount of the tax or other indebtedness in
accordance with the procedures of the taxing authority or applicable law.
However, in no event shall Franchisee permit a tax sale or seizure or levy by
execution or similar writ or
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<PAGE>
warrant or attachment by a creditor, to occur against the premises of the Hotel
or any improvements thereon.
XXI. INDEPENDENT CONTRACTOR AND INDEMNIFICATION
------------------------------------------
A. Independent Contractor. This Agreement does not create a fiduciary
----------------------
relationship between the parties hereto. Franchisee is an independent
contractor, and nothing in this Agreement is intended to constitute either party
an agent, legal representative, subsidiary, joint venturer, partner, employee or
servant of the other for any purpose whatsoever.
1. During the term of this Agreement and any extensions hereof,
Franchisee shall hold itself out to the public as an independent contractor
operating the business pursuant to a franchise from Franchisor and as an
authorized user of the Proprietary Marks. Franchisee shall take such
affirmative action as may be necessary to do so, including, without limitation,
exhibiting notices of that fact at the Hotel as required under Section X.
hereof.
2. Nothing in this Agreement authorizes either party to make any
contract, agreement, warranty or representation on the other's behalf, or to
incur any debt or other obligation in the other's name. Neither party shall
assume liability for, or be deemed liable hereunder, as a result of any such
action, or by reason of any act or omission of the other party or any claim or
judgment arising therefrom.
3. Franchisor does not exercise any direction or control over the
employment policies or employment decisions of Franchisee. All employees of
Franchisee are solely employees of Franchisee, not Franchisor. Franchisee is
not Franchisor's agent for any purpose in regard to Franchisee's employees or
otherwise.
B. Indemnity. Except as expressly provided in Section X.D. above,
---------
commencing on the date first set forth above and throughout the term of this
Agreement, Franchisee shall indemnify, defend and save harmless Franchisor, its
affiliates, their officers, directors, agents and employees, and their
respective successors and assigns, from and against all losses, costs,
liabilities, damages, claims and expenses, of every kind and description,
including those attributable to allegations of strict liability or allegations
of or actual negligence by Franchisor, its employees and agents (whether such
negligence be sole, joint or concurrent or active or passive) and including
reasonable attorneys' fees, arising out of or resulting from the construction,
operation or use of the Franchised Business or Franchised Business premises or
of any other business conducted on or in connection with the Franchised Business
by the Franchisee, or because of any act or omission of the Franchisee or anyone
associated with, employed by, or affiliated with Franchisee. Franchisee shall
promptly give written notice to Franchisor of any action, suit, proceeding,
claim, demand, inquiry, or investigation related to the foregoing. Franchisor
shall in any event have the right, through counsel of its choice, to control the
defense or response to any such action if it could affect Franchisor
financially, and such undertaking by Franchisor shall not, in any manner or
form, diminish Franchisee's obligations to Franchisor hereunder. Franchisor's
undertaking, as described in the immediately preceding
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<PAGE>
sentence, shall be conducted at Franchisor's expense, unless, in the good faith
judgment of Franchisor, Franchisee shall have failed to adequately defend
Franchisor as herein required, in which event Franchisor's undertaking shall be
at Franchisee's expense. Under no circumstances shall Franchisor be required or
obligated to seek recovery from third parties or otherwise mitigate its losses
in order to maintain a claim under this indemnification and against Franchisee,
and the failure of Franchisor to pursue such recovery or mitigate loss will in
no way reduce the amounts recoverable by Franchisor from Franchisee.
Notwithstanding the foregoing, Franchisor shall, at Franchisee's cost and
expense, reasonably cooperate with Franchisee, and do such acts or things as may
be reasonably necessary or advisable to assist Franchisee, in any action
Franchisee may take to seek recovery from third parties. This indemnification
shall survive the expiration, termination, or transfer of this Agreement or any
interest herein.
XXII. APPROVALS AND WAIVERS
---------------------
A. Written Consent Required. Approvals and consents by either party
------------------------
will not be effective unless evidenced by a writing signed by such party. Either
party's consent, wherever required, may be withheld if any uncured default by
the other party exists under this Agreement.
B. Standards for Consents. Unless expressly stated otherwise in this
----------------------
Agreement, whenever the consent or approval of Franchisor is required, and
whenever Franchisee is required to operate or act in accordance with standards,
specifications or requirements of Franchisor, such consents and approvals shall
be given or withheld, and such standards, specifications and requirements shall
be promulgated and administered by Franchisor reasonably and in a manner
consistent with the requirements Franchisor imposes on the management of all
Wyndham Hotels in the same division as the Hotel.
C. Effects of Consents. Except as otherwise provided in any written
-------------------
agreement executed by Franchisor and Franchisee, Franchisor makes no warranties
or guarantees upon which Franchisee may rely. Franchisor assumes no liability
or obligation to Franchisee by providing any waiver, approval, consent or
suggestion to Franchisee in connection with this Agreement or by reason of any
delay or denial of any request therefor.
D. No Waiver. No failure of a party to exercise any power reserved to it
---------
by this Agreement, or to insist upon compliance by the other party with any
obligation or condition hereunder, and no custom or practice of the parties at
variance with the terms hereof, shall constitute a waiver of such party's right
thereafter to demand exact compliance with any of the terms herein. Waiver by a
party of any particular default by the other party shall not affect or impair
such party's rights with respect to any subsequent default of the same, similar,
or different nature; nor shall any delay, forbearance, or omission of a party to
exercise any power or right arising out of any breach or default by the other
party of any of the terms, provisions, or covenants hereof, affect or impair
such party's right to exercise the same.
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XXIII. REPRESENTATION OF FRANCHISEE
----------------------------
Franchisor entered into this Agreement in reliance upon the statements
and information submitted to Franchisor by Franchisee in connection with this
Agreement. Franchisee represents and warrants that all such statements and
information submitted by Franchisee in connection with this Agreement are true
correct and complete in all material respects. Franchisee agrees to promptly
advise Franchisor of any material changes in the information or statements
submitted.
XXIV. NOTICES
-------
Any and all notices required or permitted under this Agreement shall be in
writing and shall be delivered personally or by a nationally recognized
overnight commercial delivery service (such as Airborne Express or Federal
Express) or mailed by certified mail, return receipt requested, to the
respective parties at the following addresses unless and until a different
address has been designated by written notice to the other party:
Notices to FRANCHISOR: WHC Franchise Corporation
2001 Bryan Street, Suite 2300
Dallas, Texas 75201
Attention: General Counsel
Facsimile: (214) 863-1100
Telephone: (214) 863-1000
Notices to FRANCHISEE: AGH Leasing, L.P.
3860 W. Northwest Highway, Suite 300
Dallas, Texas 75200
Facsimile: (214) 351-0568
Telephone: (214) 352-3330
Any notice shall be deemed to have been given at the date and time of (i)
receipt or first refusal of delivery if sent via certified mail, or (ii) one (1)
day after posting if sent via overnight commercial delivery service.
XXV. ENTIRE AGREEMENT
----------------
This Agreement and those other agreements referenced herein contain the
entire agreement between the parties hereto as it relates to the franchising of
this Approved Location. There are no representations, inducements, promises,
agreements, arrangements or undertakings, oral or written, between the parties
relating to franchising this Approved Location other than those set forth
herein. No agreement of any kind relating to the matters covered by this
Agreement shall be binding upon either party unless and until the same has been
made in writing and executed by all interested parties.
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<PAGE>
XXVI. CONSTRUCTION AND SEVERABILITY
-----------------------------
A. Definitions. Unless otherwise specified,
-----------
1. The term "Franchisee", as used in this Agreement shall include
the entity identified in the preamble to this Agreement and (i) the individual
owner or owners of the franchise granted hereunder, if Franchisee is a natural
person or persons; or (ii) collectively and individually, the general partners,
if Franchisee is a partnership; or (iii) collectively and individually, the
controlling shareholders or controlling members, as applicable, if Franchisee is
a corporation or limited liability company, provided, however, that no such
person or entity shall have financial responsibility for the performance of this
Agreement, unless such person or entity signs this Agreement or the Guaranty
attached as Attachment B hereto for his or its own account and not in his or its
representative capacity.
2. The term "affiliate" means any person or entity controlling,
controlled by, or under common control with Franchisee or Franchisor, as
applicable.
3. The term "control" means the ability to direct the policies and
operations of a person or entity, as reasonably determined by Franchisor.
B. Severability. Except as expressly provided to the contrary herein,
------------
each section, part, term and provision of this Agreement shall be considered
severable. If, for any reason, any section, part, term or provision herein is
determined to be invalid and contrary to, or in conflict with, any existing or
future law or regulation by a court or agency having valid jurisdiction, such
shall not impair the operation of, or have any other effect upon, such other
sections, parts, terms and provisions of this Agreement as may remain otherwise
intelligible, and the latter shall continue to be given full force and effect
and bind the parties hereto; and said invalid sections, parts, terms or
provisions shall be deemed not to be a part of this Agreement.
C. No Third Party Beneficiary. Nothing in this Agreement is intended,
--------------------------
nor shall be deemed, to confer any rights or remedies under or by reason of this
Agreement upon any person or legal entity other than Franchisee, Franchisor, and
such of Franchisee's and Franchisor's respective successors and assigns as may
be contemplated (and, as to Franchisee, permitted) by this Agreement.
D. Maximum Duty Imposed. Franchisee and Franchisor expressly agree to be
--------------------
bound by any promise or covenant imposing the maximum duty permitted by law
which is subsumed within the terms of any provision hereof, as though it were
separately articulated in and made part of this Agreement, that may result from
striking from any of the provisions hereof and portion or portions which a court
may hold to be unreasonable and unenforceable in a final decision to which
Franchisor or Franchisee, as applicable, is a party, or from reducing the scope
of any promise or covenant to the extent required to comply with such a court
order.
-38-
<PAGE>
E. Captions. All captions in the Agreement are intended solely for the
--------
convenience of the parties, and none shall be deemed to affect the meaning or
construction of any provision hereof.
F. Construction. All references herein to the masculine, neuter or
------------
singular shall be construed to include the masculine, feminine, neuter or
plural, where applicable. All acknowledgments, promises, covenants, agreements
and obligations herein made or undertaken by Franchisee shall be deemed jointly
and severally undertaken by all the parties hereto signing the Guaranty on
behalf of Franchisee.
G. Duplicate Originals. This Agreement may be executed in one or more
-------------------
copies and each copy so executed shall be deemed an original.
XXVII. DISPUTE RESOLUTION
------------------
A. FRANCHISOR AND FRANCHISEE AGREE TO SUBMIT ANY CLAIM, CONTROVERSY OR
DISPUTE ARISING OUT OF OR RELATING TO THIS AGREEMENT (INCLUDING ALL ATTACHMENTS
AND ADDENDA) OR THE RELATIONSHIP CREATED BY THIS AGREEMENT TO NON-BINDING
MEDIATION PRIOR TO BRINGING SUCH CLAIM, CONTROVERSY OR DISPUTE IN A COURT OR
BEFORE ANY OTHER TRIBUNAL. THE MEDIATION SHALL BE CONDUCTED BY EITHER AN
INDIVIDUAL MEDIATOR OR A MEDIATOR APPOINTED BY A MEDIATION SERVICES ORGANIZATION
OR BODY, EXPERIENCED IN THE MEDIATION OF HOTEL INDUSTRY DISPUTES, AGREED UPON BY
THE PARTIES AND, FAILING SUCH AGREEMENT WITHIN A REASONABLE PERIOD OF TIME (NOT
TO EXCEED FIFTEEN (15) DAYS), AFTER EITHER PARTY HAS NOTIFIED THE OTHER OF ITS
DESIRE TO SEEK MEDIATION OF ANY CLAIM, CONTROVERSY OR DISPUTE BY THE AMERICAN
ARBITRATION ASSOCIATION (OR ANY SUCCESSOR ORGANIZATION) IN ACCORDANCE WITH ITS
RULES GOVERNING MEDIATION, AT FRANCHISOR'S PRINCIPAL PLACE OF BUSINESS. THE
COSTS AND EXPENSES OF MEDIATION, INCLUDING COMPENSATION AND EXPENSES OF THE
MEDIATOR (EXCEPT FOR THE ATTORNEY'S FEES INCURRED BY EITHER PARTY), SHALL BE
BORNE BY THE PARTIES EQUALLY. IF THE PARTIES ARE UNABLE TO RESOLVE THE CLAIM,
CONTROVERSY OR DISPUTE WITHIN NINETY (90) DAYS AFTER THE MEDIATOR HAS BEEN
CHOSEN, THEN , UNLESS SUCH TIME PERIOD IS EXTENDED BY WRITTEN AGREEMENT OF THE
PARTIES, EITHER PARTY MAY BRING A LEGAL PROCEEDING UNDER SECTION XXVII.B. BELOW
TO RESOLVE SUCH CLAIM, CONTROVERSY OR DISPUTE. NOTWITHSTANDING THE FOREGOING,
FRANCHISOR OR FRANCHISEE MAY BRING AN ACTION (1) FOR MONIES OWED, OR (2) FOR
INJUNCTIVE OR OTHER EXTRAORDINARY RELIEF, AND FRANCHISOR MAY BRING AN ACTION
INVOLVING THE POSSESSION OF OR TO SECURE OTHER RELIEF RELATING TO THE HOTEL
PREMISES, IN A COURT HAVING JURISDICTION AND IN ACCORDANCE WITH SECTION XVII.B.,
BELOW, WITHOUT FIRST SUBMITTING SUCH ACTION TO MEDIATION.
-39-
<PAGE>
B. WITH RESPECT TO ANY CLAIMS, CONTROVERSIES OR DISPUTES WHICH ARE NOT
FINALLY RESOLVED THROUGH MEDIATION OR AS OTHERWISE PROVIDED ABOVE, EACH OF
FRANCHISOR AND FRANCHISEE HEREBY IRREVOCABLY SUBMITS ITSELF TO THE JURISDICTION
OF THE STATE AND THE FEDERAL DISTRICT COURTS LOCATED IN DALLAS COUNTY, TEXAS OR
THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION AND HEREBY WAIVES ALL QUESTIONS
OF PERSONAL JURISDICTION FOR THE PURPOSE OF CARRYING OUT THIS PROVISION. EACH
OF FRANCHISOR AND FRANCHISEE HEREBY AGREES THAT SERVICE OF PROCESS MAY BE MADE
UPON IT IN ANY PROCEEDING RELATING TO OR ARISING OUT OF THIS AGREEMENT OR THE
RELATIONSHIP CREATED BY THIS AGREEMENT BY ANY MEANS ALLOWED BY TEXAS OR FEDERAL
LAW. EACH OF FRANCHISOR AND FRANCHISEE FURTHER AGREES THAT VENUE FOR ANY
PROCEEDING RELATING TO OR ARISING OUT OF THIS AGREEMENT SHALL BE THE COURTS OF
DALLAS COUNTY, TEXAS OR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION.
XXVIII. APPLICABLE LAW AND CURRENCY REQUIREMENT
---------------------------------------
A. Governing Law. This Agreement takes effect upon its acceptance and
-------------
execution by Franchisor in the State of Texas, and shall be interpreted and
construed under the laws thereof, which laws shall prevail in the event of any
conflict of law.
B. Remedies Cumulative. Except as is expressly set forth in Section
-------------------
XVIII.E herein, no right or remedy conferred upon or reserved to Franchisor or
Franchisee by this Agreement is intended to be, nor shall be deemed, exclusive
of any other right or remedy herein or by law or equity provided or permitted,
but each shall be cumulative of every other right or remedy.
C. Injunctive Relief. Nothing herein contained shall bar either party's
-----------------
right to obtain injunctive relief against threatened conduct that will cause it
loss or damages, under the usual equity rules, including the applicable rules
for obtaining restraining orders and preliminary injunctions.
D. U.S. Currency. All fees and payments required by this Agreement shall
-------------
be paid in U.S. currency.
XXIX. WAIVER OF JURY TRIAL
--------------------
In any litigation between the parties founded upon or arising from this
Agreement, the parties hereby waive their respective rights to a jury trial, and
the parties hereby stipulate that any such trial shall occur without jury.
-40-
<PAGE>
XXX. FRANCHISEE ACKNOWLEDGMENTS
--------------------------
A. FRANCHISEE ACKNOWLEDGES THAT IT DID NOT RELY ON ANY PROMISES,
REPRESENTATIONS OR AGREEMENTS ABOUT THE FRANCHISOR OR THE FRANCHISE NOT
EXPRESSLY CONTAINED OR REFERRED TO IN THIS AGREEMENT IN MAKING ITS DECISION TO
SIGN THIS AGREEMENT. FRANCHISEE FURTHER REPRESENTS AND WARRANTS THAT FRANCHISOR
AND ITS REPRESENTATIVES HAVE NOT MADE ANY PROMISES, REPRESENTATIONS OR
AGREEMENTS, ORAL OR WRITTEN, EXCEPT AS EXPRESSLY CONTAINED OR REFERRED TO IN
THIS AGREEMENT.
B. FRANCHISEE ACKNOWLEDGES THAT FRANCHISEE HAS CONDUCTED AN INDEPENDENT
INVESTIGATION OF THE BUSINESS FRANCHISED HEREUNDER, AND RECOGNIZES THAT THE
BUSINESS VENTURE CONTEMPLATED BY THIS AGREEMENT INVOLVES BUSINESS RISKS AND THAT
ITS SUCCESS WILL BE LARGELY DEPENDENT UPON THE ABILITY OF FRANCHISEE AS AN
INDEPENDENT BUSINESSMAN. FRANCHISOR EXPRESSLY DISCLAIMS THE MAKING OF, AND
FRANCHISEE ACKNOWLEDGES THAT FRANCHISEE HAS NOT RECEIVED, ANY WARRANTY OR
GUARANTEE, EXPRESS OR IMPLIED, AS TO THE POTENTIAL VOLUME, PROFITS OR SUCCESS OF
THE BUSINESS VENTURE CONTEMPLATED BY THIS AGREEMENT.
C. FRANCHISEE ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD THIS
AGREEMENT, THE ATTACHMENTS HERETO, IF ANY, AND THAT FRANCHISEE HAS HAD AMPLE
TIME AND OPPORTUNITY TO CONSULT WITH ADVISORS OF FRANCHISEE'S OWN CHOOSING ABOUT
THE POTENTIAL BENEFITS AND RISKS OF ENTERING INTO THIS AGREEMENT.
D. ALL OF THE OBLIGATIONS OF FRANCHISOR HEREUNDER ARE TO FRANCHISEE ONLY;
NO OTHER PERSON OR ENTITY IS ENTITLED TO RELY ON, ENFORCE, OR OBTAIN RELIEF FOR
BREACH OF SUCH OBLIGATIONS EITHER DIRECTLY OR BY SUBROGATION.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
-41-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed, sealed and
delivered this Agreement in duplicate on the day and year first above written.
FRANCHISOR:
ATTEST: WHC FRANCHISE CORPORATION
By:
- ----------------------------- -----------------------------------
Secretary Name:______________________________
Title:_____________________________
FRANCHISEE:
ATTEST: AGH LEASING, L.P.
By: AGHL GP, INC.,
- ----------------------------- General Partner
Secretary
By:___________________________
Name:______________________
Title:_____________________
For purposes of Section XXVI.A.
of the Franchise Agreement
AGHL GP, INC.,
for its own account
By:_____________________________
Name:________________________
Title:_______________________
-42-
<PAGE>
ATTACHMENT A
1. Location of the Hotel: ________________________________
________________________________
________________________________
2. Number of guest rooms:_______
3. Commencement Date for conversion:_______________________
4. Completion Date for substantial satisfaction of the conversion
requirements set forth in the Renovation Plan:_______________
5. Effective Date:_________________________________________
6. Final Completion Date:__________________________________
7. Initial Franchise Fee:__________________________________
8. Equity Interest(s) in Franchisee (name(s), address(es), and
percentage(s) of ownership):
<TABLE>
<CAPTION>
Name Address Percentage of Ownership
- ----------------------- --------------------------- -----------------------
<S> <C> <C>
AGHL GP, Inc., 3860 West Northwest Highway 1.0000%
General Partner Suite 300
Dallas, Texas 75200
Kenneth E. Barr, 3860 West Northwest Highway 2.4750%
Limited Partner Suite 300
Dallas, Texas 75200
Steven D. Jorns, 3860 West Northwest Highway 15.2757%
Limited Partner Suite 300
Dallas, Texas 75200
Kenneth W. Shaw, 3860 West Northwest Highway 15.2757%
Limited Partner Suite 300
Dallas, Texas 75200
Lewis W. Shaw, 3860 West Northwest Highway 15.2757%
Limited Partner Suite 300
Dallas, Texas 75200
</TABLE>
Attachment A - Page 1
<PAGE>
<TABLE>
<S> <C> <C>
James E. Sowell, 3860 West Northwest Highway 45.8568%
Limited Partner Suite 300
Dallas, Texas 75200
Bruce G. Wiles, 3860 West Northwest Highway 4.8411%
Limited Partner Suite 300
Dallas, Texas 75200
</TABLE>
Attachment A - Page 2
<PAGE>
ATTACHMENT B
GUARANTY
As an inducement to WHC Franchise Corporation ("Franchisor") to
execute the Franchise Agreement dated___________, 199__, applicable to the
Wyndham Hotel located at the location specified in Attachment A to the Franchise
Agreement, the undersigned, jointly and severally, hereby agree to be bound by
all the terms and conditions of the above Franchise Agreement including any
amendments thereto whenever made (hereinafter the "Agreement") and
unconditionally and irrevocably guaranty to Franchisor and its successors and
assigns that all of Franchisee's obligations under the Agreement will be
punctually paid and performed.
Upon default by Franchisee, the undersigned will immediately make each
payment and perform each obligation required of Franchisee under the Agreement.
Without affecting the obligations of the undersigned under this Guaranty,
Franchisor may, without notice to the undersigned, extend, modify, waive, renew
or release any indebtedness or obligation of Franchisee. The undersigned waive
notice of amendment of the Agreement and notice of demand for payment or
performance by Franchisee.
Franchisor may pursue its rights against any of the undersigned
without first exhausting its remedies against Franchisee and without joining any
other guarantor. No delay on the part of the Franchisor in the exercise of any
right or remedy, and no single or partial exercise by Franchisor of any right or
remedy shall preclude the further exercise of such right or remedy. Upon the
death of an individual guarantor, the estate of such guarantor will be bound by
this Guaranty but only for defaults and obligations hereunder existing at the
time of death, and the obligations of the other guarantors will continue in full
force and effect.
In WITNESS WHEREOF, each of the undersigned has signed this Guaranty as
of date of the above Agreement.
GUARANTOR
American General Hospitality Corporation,
for its own account
ATTEST:
By:
- --------------------------- ---------------------------
Witness Kenneth E. Barr,
Executive Vice President
Attachment B - Page 1
<PAGE>
For purposes of Section XXVI.A.
of the Franchise Agreement
AGHL GP, INC.,
for its own account
By:_________________________________
Name:____________________________
Title:___________________________
Attachment B - Page 2
<PAGE>
ATTACHMENT C
MANAGEMENT COMPANY RIDER
TO FRANCHISE AGREEMENT DATED___________, 199__
BETWEEN WHC FRANCHISE CORPORATION AND
AGH LEASING, L.P.
American General Hospitality, Inc. ("Management Company") has entered into
a Management Agreement with AGH Leasing, L.P. ("Franchisee")
dated_________________, 199__, under the terms of which Management Company will
operate the Wyndham Hotel located at the location specified in Attachment A to
the Franchise Agreement (the "Hotel") in accordance with the terms and
conditions of the Franchise Agreement identified above.
In consideration of being permitted to operate the Hotel, Management
Company hereby acknowledges and ratifies the terms and conditions of the
Franchise Agreement and agrees to fully observe and be bound by all terms,
conditions and restrictions regarding the management and operation of the Hotel
set forth in the Franchise Agreement as if and as though Management Company had
executed the Franchise Agreement as "Franchisee" for as long as Management
Company operates the Hotel; provided, however, that the foregoing does not
constitute an agreement of the Management Company to pay or assume any financial
obligation of Franchisee to Franchisor or to any third party. Management
Company further agrees to be bound by the confidentiality covenants set forth in
Section XII. of the Franchise Agreement (including all remedies available to
Franchisor under the Franchise Agreement for breach thereof) during and
subsequent to its tenure as manager and operator of the Hotel.
Management Company agrees that Franchisor may enforce directly against
Management Company those terms and conditions of the Franchise Agreement to
which Management Company has hereby agreed to be bound. The prevailing party in
any cause of action brought hereunder, pursuant hereto or in connection herewith
(including, without limitation, any action for declaratory or equitable relief)
shall be entitled to recover from the non-prevailing party reasonable attorney's
fees, expenses and costs of suit incurred by the prevailing party in such
action.
MANAGEMENT COMPANY:
AMERICAN GENERAL HOSPITALITY, INC.,
a Texas corporation
ATTEST:
By:
- --------------------------- ---------------------------
Witness Name:_____________________________
Title:____________________________
Attachment C - Page 1
<PAGE>
ADDENDUM TO
FRANCHISE AGREEMENT
FOR FRACTIONAL FRANCHISE EXEMPTION
This Addendum to Franchise Agreement for Fractional Franchise Exemption
("Fractional Franchise Addendum") is entered into on ____________, 199__ by and
between WHC Franchise Corporation, a Delaware corporation ("Franchisor") and AGH
Leasing, L.P., a Delaware limited partnership ("Franchisee"), and supplements
the terms of the Franchise Agreement entered into by the Franchisor and
Franchisee on this date (the "Franchise Agreement"), as set forth below.
I. The parties agree that the transaction contemplated by the Franchise
Agreement is intended to satisfy the requirements of the fractional franchise
exemption pursuant to the Federal Trade Commission's Trade Regulation Rule on
Franchising and Business Opportunity Ventures ("FTC Rule") and other exemptions
under applicable state laws.
II. Franchisee represents and warrants that the offer and sale of the Franchise
Agreement is exempt from the FTC Rule and that the Franchise Agreement creates a
fractional franchise relationship, based upon the following:
1. Franchisee and/or its current director(s) or executive officer(s) have
been in the type of business represented by the franchise relationship for more
than the past two years, as described in Attachment A hereto, and
2. Franchisee, together with the subsidiary(ies) of Franchisee (if any)
in which Franchisee owns a Controlling Interest, as defined in I.3. below, and
any individual or entity with a Controlling Interest in Franchisee (such
subsidiary(ies), individuals, entities, and Franchisee referred to collectively
as "Franchisee Entities") anticipate that sales arising from the franchise
relationship will represent no more than twenty percent (20%) of the sales in
dollar volume of Franchisee, or, as determined by Franchisor in its sole
discretion, of the Franchisee Entities, as described in Attachment B hereto.
3. "Controlling Interest" means, with respect to any person or entity
("Person"), any other person or entity controlling, controlled by, or under
common control with such Person. "Control" means the ability to direct the
policies and operations of a person or entity, as determined by Franchisor.
III. Franchisee and the Franchisee Entities further anticipate that the
aggregate sales arising from the relationship created by this Franchise
Agreement, combined with the relationships created by all other existing and
future Franchise Agreements with Franchisor, will not represent more than twenty
percent (20%) of the sales in dollar volume of Franchisee, or, as applicable,
the Franchisee Entities.
IV. Franchisee and the Franchisee Entities do not have any present plans to
sell, prior to one (1) year after the Hotel (as defined in the Franchise
Agreement) opens, any portion of its or their business, where such sale would
result in a decrease in the aggregate of its or their gross sales, such that the
gross sales of the Hotel would represent more than twenty percent (20%) of such
aggregate gross sales.
Addendum - Page 1
<PAGE>
V. Franchisee and its principals have undertaken an independent investigation
to confirm the accuracy of the above, and understand that Franchisor has offered
and executed the Franchise Agreement in reliance upon the above.
VI. If Franchisee has falsely made any of the representations or warranties set
forth herein, including all attachments hereto, such shall constitute a false
statement of the representations and warranties contained in the Franchise
Agreement.
VII. FRANCHISOR AND FRANCHISEE, EACH TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, EXPRESSLY WAIVE THE PROVISIONS OF AND ANY RIGHTS, CLAIMS OR
CAUSES OF ACTION UNDER, SECTIONS 17.41 THROUGH 17.63 (EXCLUDING THE PROVISIONS
OF SECTION 17.555, WHICH ARE NOT WAIVED), INCLUSIVE, OF THE TEXAS BUSINESS AND
COMMERCE CODE (THE "TEXAS DECEPTIVE TRADE PRACTICES ACT", TEX. BUS. & COM. CODE
ANN. (S)17.41, ET SEQ. (VERNON 1987)).
VIII. This Addendum constitutes an integral part of the Franchise Agreement
between the parties hereto, and the terms of this Addendum shall be controlling
with respect to the subject matter hereof. Except as modified or supplemented by
this Addendum, the terms of the Franchise Agreement are hereby ratified and
confirmed.
IN WITNESS WHEREOF, each of the parties hereto has caused this Addendum to
be executed by its authorized representative as of the date first above written.
FRANCHISOR:
WHC FRANCHISE CORPORATION
ATTEST:
By:
- --------------------------- ---------------------------
Witness Name:----------------------
Title:---------------------
FRANCHISEE:
AGH LEASING, L.P.
ATTEST:
By: AGHL GP, INC.,
- --------------------------- General Partner
Witness
By:---------------------------
Name:----------------------
Title:---------------------
Addendum - Page 2
<PAGE>
ATTACHMENT A
1. The Franchisee will be/is of the following business structure: a
Delaware limited partnership.
2. The following individuals will have management responsibility for the
Franchisee (i.e., the executive officers and directors of a corporation or
persons holding equivalent positions if the Franchisee will be/is organized as
another form of legal entity):
Officers of the Corporate General Partner
-----------------------------------------
Steven D. Jorns, Chairman/President/CEO
Bruce G. Wiles, Executive Vice President
Kenneth E. Barr, Executive Vice President/CFO
3. The Franchisee currently owns and/or leases and/or operates _____
Wyndham hotels. The Franchise Agreement relates to one of Franchisee's existing
hotels which it proposes to convert to a Wyndham Hotel.
4. The Franchisee currently owns and/or operates a total of
________________ (__) other hotels. Franchisee's ownership/operation of the
first of such hotels began on July 31, 1996. Each of these hotels are
identified below, including the name and location of each:
5. Describe below the hotel experience of those individuals listed in 2,
above. Please include dates, titles, responsibilities, and a description of the
hotel:
Attachment A - Page 1
<PAGE>
ATTACHMENT B
1. The Franchisee owns and/or leases and/or operates the following
businesses, other than the anticipated ownership of the Hotel:
2. a. The following is a complete list of the Franchisee's subsidiaries
in which Franchisee owns a Controlling Interest, and a description of their
relationship with the Franchisee, including the Franchisee's equity interest
therein:
b. The following is a complete list of those persons or entities
with a Controlling Interest in Franchisee, and a description of their
relationship with the Franchisee, including their equity interest in Franchisee:
Sole General Partner: AGHL GP, Inc. - 1%, whose individual owners are:
<TABLE>
<S> <C> <C> <C>
James Sowell 46.32% Lewis Shaw 15.43%
Steven Jorns 15.43% Kenneth Shaw 15.43%
Bruce Wiles 4.89% Kenneth Barr 2.50%
</TABLE>
3. For the _________ month period beginning ______________, 199__, the
Franchisee recorded gross sales totaling $________________. This figure does
not include the gross sales of any subsidiary or any person or entity with a
Controlling Interest in Franchisee. Franchisee's financial statements for the
most recently concluded fiscal year (audited, if available) and for the period
following such fiscal year-end through _____________________________, 199__
(DATE PRIOR TO DATE OF FRANCHISE AGREEMENT). If Franchisee has not completed
- ------------------------------------------
one full year of operations, please attach financial statements from the
commencement of operations through ____________________, 199__ (DATE PRIOR TO
--------------
DATE OF FRANCHISE AGREEMENT).
- ---------------------------
4. a. For the twelve (12) month period preceding __________, 199__
(DATE OF FRANCHISE AGREEMENT), the subsidiaries described in 2.a. above recorded
- -----------------------------
gross sales as follows (list the entity and the total gross sales for each):
b. For the twelve (12) month period preceding _________, 199__ (date
----
of franchise agreement), the persons or entities described in 2.b. above
- ----------------------
recorded gross sales as follows (list the entity and the total gross sales for
each):
Attachment A - Page 2
<PAGE>
Please attach financial statements for the most recently concluded fiscal year
(these statements should be audited, if available) and for the period following
such fiscal year-end through ________________________, 199__ (DATE PRIOR TO DATE
OF FRANCHISE AGREEMENT). If any person or entity listed has not completed one
full year of operations, please attach financial statements from the
commencement of operations through _________________________________________,
199__ (DATE PRIOR TO DATE OF FRANCHISE AGREEMENT).
5. The anticipated gross sales for each of the subsidiaries and
affiliates described in 2.a. and b. above, not attributable to the operation of
the Hotel, for the one year period after the Hotel opens, will be as follows
(list the entity and the total anticipated gross sales for each):
6. The Franchisee's anticipated gross sales, not attributable to the
operation of the Hotel for the one year period after the Hotel opens, will be
$____________________.
7. The Franchisee's anticipated gross sales, attributable to the
operation of the Hotel, for the one year period after the Hotel opens, will be
$__________________.
Attachment A - Page 3
<PAGE>
ATTACHMENT D
RENOVATION PLAN
Attachment D - Page 1
<PAGE>
Addendum - Page 2
<PAGE>
EXHIBIT B
1. LeBaron Hotel in San Jose, California
<PAGE>
EXHIBIT C
[FORM OF MANAGEMENT AGREEMENT]
<PAGE>
MANAGEMENT AGREEMENT
This Management Agreement (this "Agreement") is made and entered into as of
this _____ day of October, 1996, by and between AGH LEASING, L.P., a Delaware
limited partnership, with offices located at 3860 W. Northwest Highway, Suite
300, Dallas, Texas 75220 ("Lessee") and AMERICAN GENERAL HOSPITALITY, INC., a
Texas corporation, with offices located at 3860 W. Northwest Highway, Suite 300,
Dallas, Texas 75220 ("Manager").
RECITALS:
---------
A. American General Hospitality Operating Partnership, L.P., a Delaware
limited partnership (the "Partnership"), has acquired fee or leasehold title to,
or ownership of the partnership or limited liability company that owns fee or
leasehold estate title to, the Days Inn Lake Buena Vista Resort & Suites (the
"Hotel") located in Orlando, Florida.
B. The Hotel has been leased to Lessee pursuant to that certain Lease
Agreement (the "Participating Lease") dated of even date herewith.
C. Lessee has agreed to engage Manager to manage, or to continue to
manage, as the case may be, the Hotel on the terms and conditions hereinafter
set forth, effective as of the date hereof (the "Effective Date").
ARTICLE I.
TERM
----
SECTION 1.1. TERM. The term shall commence on the Effective Date and,
-----------------
unless earlier terminated in the manner provided herein, shall continue for a
period of 12 years from the Effective Date (the "Term"). In the event that the
term of the Participating Lease (as the same may be modified, amended, extended
or renewed from time to time) expires (whether by its own terms, by agreement of
the parties thereto or by reason of an event of default thereunder) prior to or
after the scheduled expiration of the Term, the Term of this Agreement shall be
correspondingly shortened or lengthened, so that the Term of this Agreement
shall be coterminous with the term of the Participating Lease.
<PAGE>
ARTICLE II.
MANAGER'S DUTIES AND AUTHORIZATIONS
-----------------------------------
SECTION 2.1. MANAGER'S DUTIES AND AUTHORIZATIONS. Manager
-------------------------------------------------
acknowledges that it has received and reviewed a copy of the Participating Lease
and the Franchise License Agreement and agrees to maintain and manage the Hotel
in accordance with the terms thereof. Manager, on behalf of Lessee and at
Lessee's expense as provided for in this Agreement, shall direct and be
responsible for the operation of the Hotel in accordance with the terms of this
Agreement, the Participating Lease and the Franchise License Agreement. Manager
is hereby exclusively authorized, and shall have the responsibility, to direct
the day-to-day activities of the Hotel and establish all policies and procedures
relating to the management and operation of the Hotel, subject to the terms and
conditions of this Agreement, the Participating Lease and the Franchise License
Agreement. Except as herein specifically provided to be "at the expense of
Manager", or similar specific language, all cost(s) and expense(s) incurred by
Manager in connection with the performance of its obligations hereinafter set
forth shall be Operating Costs (as defined in Exhibit "B") and accordingly shall
be paid from the Hotel Account(s) (as hereinafter defined in Section 3.1(d)).
Manager, during the Term, shall have the following duties and obligations:
(a) Allocation of Costs under Participating Lease. Pursuant to the
---------------------------------------------
terms of the Participating Lease, certain costs are to be paid by the
Partnership and certain costs are to be paid by the Lessee. To the extent
this Agreement authorizes or directs Manager to pay any such costs, Manager
shall pay such costs to the extent of funds in the Hotel Account(s) or the
Reserve Fund (as such terms are defined below), and shall maintain records
and accounts of all such payments for periodic review by the Lessee and the
Partnership.
(b) Personnel. Manager is to be the sole judge of the fitness and
---------
qualification of all employees of the Hotel (whether full-time, part-time,
temporary, "casual", salaried or hourly, sometimes herein referred to as
the "personnel") and is vested with absolute discretion in the hiring,
discharging, supervision and direction of such personnel during the course
of their employment at the Hotel. It is expressly understood and agreed
that all such personnel will be the employees of Manager, and not the
Lessee, and, subject to Section 2.1(e), that all costs and expenses related
to the personnel shall be Operating Costs and not an expense of Manager and
these shall include, but not be limited to, wages, salaries, benefits,
bonuses, commissions, vacation, workers compensation insurance programs,
unemployment, severance, life, health, accident insurance premiums,
retirement programs, payroll processing, other usual and customary direct
or indirect compensation items, and employee benefits regularly granted by
Manager in the usual course of its management business, as well as all
other unusual or non-customary direct or indirect compensation items and
other employee benefits not regularly granted in the usual course of
business but which Manager has disclosed to, and which have been approved
by, Lessee ("Extra Benefits")
2
<PAGE>
(all of the foregoing being herein collectively referred to as
"Compensation"). Manager shall be responsible, as the employer of all
personnel, for the proper and timely reporting and payment (as an expense
of the Hotel) of all required governmental charges with respect to the
personnel.
1. Manager will hire, train, supervise, direct the work of, and
discharge all personnel of the Hotel. Manager will not discriminate
against any employee or applicant for employment because of race,
creed, color, sex, age or national origin or any other legally
prohibited criteria. Except as stated below, such personnel shall be
deemed employees of the Manager, and Lessee shall have no right to
supervise or direct employees.
2. The salaries, wages and other compensation, including social
security, taxes and insurance, of any employees not located at the
Hotel shall be paid by Manager without reimbursement by Lessee.
3. In the event that Manager in its reasonable judgment
determines that employees of the Manager not located at the Hotel
should become full-time, on-site personnel of the Hotel on a temporary
basis, subject to Section 2.1(e), the compensation of such employees,
to the extent their time is devoted to such Hotel, shall be deemed to
be Operating Costs reimbursable to Manager out of the Hotel
Account(s).
4. Notwithstanding anything herein to the contrary, and in
addition to any other expenses or compensation payable under any other
provisions of this Agreement, members of Manager's internal audit
staff, Manager's regional operations and marketing managers, all home-
office personnel for Manager's hotel operations, Manager's Accountants
(as hereinafter defined), and Manager's construction personnel shall
receive complimentary room, food, and beverage services and other
amenities at the Hotel during their visits to the Hotel if such
personnel must travel to the Hotel to work on a specific project for
the Hotel's benefit, and Manager shall be entitled to payment or
reimbursement for any reasonable travel related expenses, including
air and ground transportation with respect thereto.
5. Manager may, on occasion, transfer employees from one hotel
to another, or secure the employment of a person that is not a
resident of the same city as the Hotel. In this instance, Manager
shall use the most economical method of relocating the employee and,
with Lessee's prior approval, charge all expenses of relocation to the
Hotel.
6. Any relocated or newly hired personnel (including spouse and
dependent children, if any), may receive complimentary room, food and
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beverage service in the Hotel (not to exceed two residential units)
for a period up to ninety (90) days from the date such personnel
commence work at the Hotel.
7. Manager shall provide all eligible personnel with its
standard benefits package and bonus program, and, if applicable, the
Extra Benefits, in effect from time to time, the cost of which shall
be Operating Costs. It is understood that certain executive employees
of Manager will participate in the Property level bonus plan as an
incentive to maximize revenues and profits, and these shall be
Operating Costs, provided that in no event will the aggregate cost of
any bonuses paid to such executive employees of Manager during any
Term Year with respect to the Hotel exceed $25,000.
8. So long as Manager is not in default hereunder, Lessee shall
not interfere with or give orders or instructions to the personnel
employed at the Hotel.
9. Except as otherwise herein provided, Manager shall be
reimbursed for travel and other reasonable and necessary out-of-pocket
expenses incurred by Manager or the personnel in the performance of
the duties imposed hereunder.
10. Except as otherwise herein provided, the reasonable and
necessary costs, fees, compensation and other out-of-pocket expenses
of any persons engaged by Lessee or Manager to perform duties of a
special nature, directly related to the operation of the Hotel,
including but not limited to, attorneys, auditors, and the like, shall
be Operating Costs.
11. Manager agrees that it will consult with Lessee regarding
the hiring, transferring, or terminating of the General Manager and
Director of Sales for the Hotel. Lessee shall be afforded an
opportunity to review the resumes of, and to interview, the candidates
that Manager deems to be the best candidate(s) for each such position.
Manager and Lessee shall consult with each other concerning such
decisions, and Manager agrees to give serious consideration to the
views of Lessee, but in the event Manager and Lessee are not able to
reach a mutually agreeable decision, the decision of Manager shall
control.
(c) Hotel Policies. Manager shall determine the terms of guest
--------------
admittance to the Hotel, room rates, and use of rooms for commercial
purposes, subject to the right of Lessee to identify from time to time
certain individuals who shall be entitled to receive complimentary rooms as
guests of Lessee.
4
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(d) Bank Accounts. On the Effective Date, Manager shall open the
-------------
following "Hotel Accounts" and establish the following cash management
procedures:
1. Manager shall open two accounts (respectively, the
"Depository Account" and the "General Manager's Account") with a
banking institution acceptable to Lessee which accounts shall be in
the name of the Hotel and shall have as authorized signatories for
check writing and withdrawals any one among Lessee, Lessee's nominee,
Manager's chief executive officer, and such nominees of Manager as
Lessee shall approve in writing. Upon the opening of the General
Manager's Account, Lessee shall immediately deposit therein a sum
estimated by Lessee and Manager to be necessary for certain payments
required or customarily made to vendors through the issuance of a
check from an account maintained with a local banking institution.
Thereafter, Lessee shall from time to time deposit such amounts as
Manager and Lessee agree are necessary to replenish the General
Manager's Account in order to continue to provide for payments to
local vendors as described in the immediately preceding sentence.
Manager shall on a daily basis cause (i) all cash receipts and the
proceeds of credit card receipts, in each case generated from the
management and operation of the Hotel, to be deposited into the
Depository Account, and (ii) all amounts in the Depository Account, in
excess of any minimum required by law or the local banking institution
with which the Depository Account is maintained, to be deposited into
the Operating Account (as defined below). Without the prior written
consent of Lessee, neither Manager nor any of its nominees shall cause
any checks to be issued or otherwise permit amounts to be withdrawn
from the Depository Account, except for the daily deposits into the
Operating Account contemplated hereunder.
2. Manager shall open an account (the "Operating Account") with
a banking institution acceptable to Lessee, which account shall be in
the name of the Hotel and shall have as its authorized signatories for
check writing and withdrawals any one among Lessee, Lessee's nominee,
Manager's chief executive officer, and such nominees of Manager as
Lessee shall approve in writing. Upon the opening of the Operating
Account, Lessee shall immediately deposit into the Operating Account a
sum estimated by Lessee and Manager to be necessary for the initial
operation of the Hotel.
3. Manager shall cause all amounts remaining in the Operating
Account at the end of each month, after the payment and disbursement
of such amounts contemplated under the terms hereof or approved by
Lessee, including any allowances for checks written and not yet
presented for payment against the Operating Account, to be transferred
to Lessee.
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<PAGE>
4. It is expressly agreed that Manager shall in no event have or
suffer any liability or responsibility whatsoever for lost funds or
the unavailability of funds deposited in any of the Hotel Accounts
resulting from the errors or omissions of any bank where such account
is maintained (unless the failure to correct same results from
Manager's negligence or intentional acts) or the failure, closing
and/or restructuring thereof. Manager agrees that each nominee or
designee of Manager who is an authorized signatory of the Hotel
Accounts shall be a bonded employee of Manager and Manager shall
supply to Lessee copies of such bonds or insurance; the expense of
obtaining and maintaining such insurance and bonds shall be borne
exclusively by Manager. Notwithstanding anything to the contrary
contained herein, neither Manager nor any of its nominees or designees
authorized to issue checks or disburse funds under the Hotel Accounts
shall make any payment in respect of, or otherwise settle any claims
arising under, any obligations owed or arising prior to one day
following the Effective Date.
5. As agent for Lessee, Manager shall collect all income arising
from the operation of the Hotel, however arising, and shall deposit
same in the Hotel Accounts.
(e) Operating Budget.
----------------
1. Manager and Lessee have agreed to a budget ("Operating
Budget") for the balance of calendar year 1996, attached hereto as
Schedule A. Hereafter, Manager, not less than sixty (60) days prior
to the commencement of each succeeding calendar year, shall submit to
Lessee, for Lessee's approval, a proposed Operating Budget for the
ensuing full or partial calendar year, as the case may be. Each
Operating Budget shall be accompanied by, and shall include an
estimated profit and loss statement on a monthly basis generally in
accordance with the latest edition of the Uniform System of Accounts
as adopted by the Hotel Association of New York City, Inc. and the
American Hotel & Motel Association (the "Uniform System of Accounts"),
and, a business plan which shall describe business objectives and
strategies for the period covered by the Operating Budget. The
business plan shall include without limitation an analysis of the
market area in which the Hotel competes, a comparison of the Hotel and
its business with competitive hotels, an analysis of categories of
potential guests, and a description of sales and marketing activities
designed to achieve and implement identified objectives and
strategies.
2. Manager shall meet with Lessee to discuss the proposed
Operating Budget within 20 days after submitting the proposed
Operating Budget to Lessee, and Lessee shall provide a written
response to Manager approving or disapproving a proposed Operating
Budget within twenty (20)
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<PAGE>
days after the date Manager and Lessee have met to discuss the
proposed Operating Budget. If Lessee fails to provide an effective
notice disapproving a proposed Operating Budget within such 20-day
period, the proposed Operating Budget shall be deemed to be approved.
If the proposed Operating Budget contains disputed budget item(s),
Lessee and Manager agree to cooperate with each other in good faith to
resolve the disputed or objectionable proposed item(s). In the event
(A) Lessee and Manager are not able to reach mutual agreement
concerning any disputed or objectionable item within a period of
twenty (20) days after the date Lessee provides written notice of its
objections to Manager, then either party shall be entitled to submit
the dispute to arbitration in accordance with the provisions of
Section 9.2 below. If Lessee and Manager are unable to resolve the
disputed or objectionable matter(s) prior to the commencement of the
applicable calendar year, the undisputed portions of the proposed
Operating Budget shall be deemed to be adopted and approved. The
disputed line item(s) shall be adjusted as set forth in the next
sentence and shall be substituted in lieu of the disputed item in the
proposed Operating Budget. Those disputed line items which represent
variable costs from year to year shall be adjusted by increasing the
corresponding line items of the Operating Budget for the preceding
calendar year by an amount determined by Manager which does not exceed
the increase in the Consumer Price Index for All Urban Consumers
published by the Bureau of Labor Statistics of the United States
Department of Labor, U.S. City Average, all items (1982-1984=100) (the
"CPI"), or any successor or replacement index thereto, for the
calendar year prior to the calendar year with respect to which the
adjustment to the line item is being calculated. The resulting
Operating Budget shall be deemed to be the Operating Budget in effect
until such time as Manager and Lessee have resolved the their dispute
over item(s) objected to by Lessee.
3. Manager may revise the Operating Budget from time to time, as
necessary, to reflect any unpredicted significant changes, variables
or events or to include significant, additional, unanticipated items
of revenue and expense. Any such revision shall be submitted to
Lessee for approval, which approval shall not be unreasonably
withheld, delayed or conditioned. Manager may reallocate part or all
of the amount budgeted with respect to any line item to another line
item in the same Department (below defined), but may not reallocate
from one Department to another without Lessee's consent, which shall
not be unreasonably withheld or delayed. The term "Department" shall
mean and refer to those general divisional categories shown in the
Operating Budget (e.g., Room Department or Administration Department),
but shall not mean or refer to subcategories (e.g., linen replacement
or uniforms) appearing in a divisional category. In addition, in the
event actual Adjusted Gross Revenues (as defined on Exhibit "B"
hereto) for any calendar period are greater than those provided for in
the Operating Budget, the amounts approved in the
7
<PAGE>
Operating Budget (for room, food and beverage, telephone, utilities,
marketing, and hotel repair and maintenance) for any calendar month
shall be automatically deemed to be increased to an amount that bears
the same relationship (ratio) to the amounts budgeted for such items
as actual Adjusted Gross Revenue for such month bears to the budgeted
Adjusted Gross Revenue for such month.
4. Lessee acknowledges that the Operating Budget is intended
only to be a reasonable estimate of the Hotel's income and expenses
for the ensuing calendar year. Manager shall not be deemed to have
made any guarantee, warranty or representation whatsoever in
connection with the Operating Budget.
(f) Operating Statements. Manager shall prepare and furnish to Lessee
--------------------
the following statements: (i) within twenty (20) days after the end of each
calendar month a detailed profit and loss statement setting forth the results of
the Hotel's operations for such calendar month and the calendar year to date,
with a comparison to the then current Operating Budget; and a balance sheet
setting forth the results of the Hotel's operations for the calendar year to
date and the previous calendar year; and (ii) within twenty (20) days after the
end of each calendar year, a balance sheet, together with a comparison to the
previous calendar year, a related statement of profit and loss (including all
supporting departmental schedules of revenues and expenses), together with a
comparison to the previous calendar year, and having annexed thereto a
computation in reasonable detail of the Basic Management Fee and the Incentive
Management Fee for such calendar year; and such other additional (operating)
statements, computations and reports as Lessee shall reasonably request.
(g) Capital Budgets.
---------------
1. Manager and Lessee have agreed to a capital budget ("Capital
Budget") for the balance of calendar year 1996, attached hereto as
Schedule B. Thereafter, Manager, not less than sixty (60) days prior
to the commencement of each succeeding calendar year, shall submit to
Lessee for its written approval, a recommended Capital Budget for the
ensuing full or partial calendar year, as the case may be. Each
Capital Budget shall address furnishings, equipment, and Hotel capital
replacement items as shall be required to operate the Hotel in
accordance with the standards referred to in the applicable Franchise
License Agreement. Manager, to the extent it is able to do so without
compromising compliance with the minimum standards required under the
terms of the Franchise License Agreement, shall take into
consideration the amount of funds available to pay for the proposed
capital expenditures. Manager shall also identify for Lessee those
projects that are required to meet the minimum standards of the
Franchise License Agreement and give priority to such items. Lessee
and Manager shall meet within twenty (20) days after submission of
each proposed Capital Budget to discuss the proposed Capital Budget.
If the Lessee does not approve a proposed Capital Budget by the
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<PAGE>
beginning of a calendar year, Manager shall be allowed to spend
annually (until a Capital Budget is approved by Lessee) an amount up
to the amount of the Reserve Fund (as defined below) for such items
which the franchisor has indicated are necessary to maintain the
franchise license under the Franchise License Agreement.
2. Manager, at Lessee's expense, shall be responsible for
supervising the design, installation and construction of alterations
or additions to, or rebuilding or renovation of, the Hotel, including
any additions to Hotel furnishings and equipment (collectively,
"Capital Improvements"). These services shall be entitled "Technical
Services", and Lessee agrees to reimburse the Manager for Manager's
actual reasonable expenses incurred in performing these services in
accordance with a Capital Budget previously approved by Lessee.
3. Lessee shall have the right to approve and inspect Capital
Improvements. Any mortgagee having a lien on either the Partnership's
or the Lessee's estate in the Hotel (the "Mortgagee") shall also have
any right of approval or inspection of the Capital Improvements set
forth in the mortgage, deed of trust or other loan documents
(collectively, the "Financing Documents").
4. After a Capital Budget has been adopted, it shall be subject
to review and modification in the event unpredicted or unanticipated
capital expenditures are required during any calendar year. Manager
and Lessee each agree not to unreasonably withhold or delay its
consent to a proposed modification of a Capital Budget. Any amendment
that is mutually agreed upon shall be set forth in writing and signed
by all parties. The provisions of this Section 2.1 (g) are
supplemental to, and not in limitation on, Section 3.1 (e) below.
(h) General Maintenance and Non-Capital Replacements. Manager shall
------------------------------------------------
supervise the maintenance, repair and replacement of fixtures, furnishings and
equipment, regardless whether such expenditures are expensed or capitalized and
amortized.
(i) Operating Equipment. Manager shall select and purchase all
-------------------
operating equipment for the Hotel such as linens, utensils, uniforms and other
similar items.
(j) Operating Supplies. Manager shall select and purchase all
------------------
operating supplies for the Hotel such as food, beverages, uniforms, cleaning
materials, and other consumable items.
9
<PAGE>
(k) Accounting Standards. Manager shall maintain the books and
--------------------
records reflecting the operations of the Hotel in accordance with the Uniform
System of Accounts in conformity with generally accepted accounting principles
("GAAP") consistently applied and in a manner which permits an audit in
accordance with generally accepted auditing standards. The Hotel level generated
accounting records reflecting detailed day-to-day transactions of the Hotel's
operations shall be kept by Manager at the Hotel or at Manager's corporate
headquarters, or at such other location as Manager shall reasonably determine.
Manager agrees upon request to cooperate in good faith with Lessee and its
designees to facilitate an examination or audit of such books and records.
(l) Marketing and Advertising. Manager shall advertise and promote
-------------------------
the Hotel in coordination with the sales and marketing programs approved in the
Operating Budget. Manager may cause the Hotel to participate in sales and
promotional campaigns and activities involving complimentary rooms which are
intended to benefit the business of the Hotel. Manager, in marketing and
advertising the Hotel, shall have the right to use marketing and advertising
services of Manager's off-site personnel which shall be charged as Operating
Costs.
(m) Permits and Licenses. Manager shall be responsible for obtaining
--------------------
and maintaining all licenses and permits that are necessary to enable Manager to
operate the Hotel in accordance with the terms of this Agreement and the
Franchise License Agreement. In addition, Manager shall upon request cooperate
with and assist Lessee in obtaining the various permits and licenses that are
allowed or required to be held in the name of either or both of Lessee and the
Partnership that are necessary to enable Manager to operate the Hotel. Manager
shall use all reasonable efforts, to the extent within its control, to comply
with the terms and conditions of all licenses and permits issued with respect to
the Hotel and the business conducted at the Hotel, including without limitation
the terms and conditions of the Franchise License Agreement.
(n) Lessee Meetings. A representative of Manager's corporate staff
---------------
and the Hotel's general manager shall meet with Lessee's Representatives
quarterly to review and discuss the previous and future quarter's operating
statement cash flow, budget, capital expenditures, important personnel matters
and the general concerns of Lessee and Manager ("Quarterly Lessee's Meeting").
(o) Insurance. Manager shall procure and maintain throughout the Term
---------
the insurance coverages set forth on Exhibits "C" and "D" and in accordance
with the Participating Lease. To the extent that the insurance requirements in
the Participating Lease are more stringent, onerous or extensive than those set
forth on Exhibits "C" and "D", the provisions in the Participating Lease shall
control. Manager may elect to purchase certain insurance coverages that are
loss sensitive. Such policies are broad in coverage and cost efficient to the
operation of the Hotel but carry with them a degree of risk. Manager may incur
additional costs as a result of poor loss experience during the policy year or
may receive
10
<PAGE>
a return for good experience. Manager is responsible for the additional premium
risks and shall be entitled to all returns associated with such coverages at no
additional cost or liability to the Lessee or any of the other insured parties.
(p) Lease and Concession Agreements. Manager shall consult with
-------------------------------
Lessee to determine the desirability of entering into lease and concession
agreements to provide activities or services such as the food and beverage
facilities for the benefit of the Hotel and its guests. In situations in which
it is mutually determined to be desirable to enter into lease or concession
agreements, Manager shall assist Lessee to the extent requested in identifying
suitable lessees and concessionaires, negotiating mutually agreeable lease and
concession agreements, and monitoring the performance of the lessees and
concessionaires under the agreements. Except for leases and concession
agreements with any person or entity holding the liquor license for the Hotel,
the revenues and income generated by a lessee or concessionaire shall be
excluded from Gross Revenues, but Gross Revenues shall include all rental or
other payments made to Lessee pursuant to the provisions of such agreements.
(q) Taxes and Assessments. Manager shall annually review and submit
---------------------
statements of all real estate and personal property taxes and all assessments
affecting the Hotel, including, to the extent applicable, any common areas or
common elements with respect to multiparty cost sharing obligations applicable
to the Hotel to Lessee, and Manager shall recommend payment thereof or appeal
therefrom. Manager shall file all personal property tax returns for the Hotel.
(r) Compliance with Law. Subject to the availability of funds in
-------------------
accordance with this Agreement, Manager shall use all reasonable efforts to
comply with all laws, ordinances, regulations, and requirements of any federal,
state, or municipal government that are applicable to the use and operation of
the Hotel, as well as with all orders and requirements of the local fire
department; provided, however, that Lessee shall have the right to contest by
proper legal proceedings, the validity of any such law, ordinance, rule,
regulation, order, decision or requirement and may postpone compliance therewith
to the extent and in the manner provided by law until final determination of any
such proceedings. Manager promptly shall notify Lessee in writing of all
notices of legal requirements applicable to the Hotel that are received by
Manager and of any non-compliance matters which to cure would require the
expenditure of funds in excess of the amounts allocated therefor in either the
Operating Budget or the Capital Budget.
(s) Satisfaction of Obligations. From and to the extent that funds
---------------------------
are available in the Hotel Accounts, Manager agrees to pay, when due, the costs
and expenses described on Exhibit "A" hereto, and to comply with all other
covenants and obligations of the Lessee relating to the operation and
maintenance of the Hotel contained in the Participating Lease and in all
equipment leases, utility contracts, concession agreements, leases for retail or
commercial space, service and maintenance contracts, the Franchise License
Agreement and, if requested by Lessee, the Financing Documents, to the extent
that compliance therewith is
11
<PAGE>
within the reasonable control of Manager by reason of its management and
operation of the Hotel pursuant to this Agreement; provided, however, that if
compliance with any of the provisions in the Financing Documents will materially
conflict with Manager's rights and obligations under the Agreement, Lessee shall
use its best efforts to reconcile the conflict to the reasonable satisfaction of
the holder of the Financing Documents and Manager but, in any event, Lessee
shall indemnity and hold Manager harmless from any loss, claim or expense in any
way arising from any irreconcilable conflict. The indemnity set forth in this
Section 2.1(s) shall survive any termination of this Agreement.
(t) Requests for Information. Manager shall respond, with reasonable
------------------------
promptness, to any information requests made in accordance with the Financing
Documents, to the extent such information is required to be furnished by Manager
to Lessee pursuant to this Agreement. Any additional information or reports
shall be provided by Manager only if Lessee so directs Manager in writing and,
to the extent such information or reports are not being prepared for Lessee in
the ordinary course of business pursuant to this Agreement, Lessee agrees to pay
the reasonable expenses of preparing such information and reports.
(u) Tax and Insurance Accruals. If requested by Lessee or required by
--------------------------
the Mortgagee, Manager shall accrue and set aside on a monthly basis a portion
(as Lessee or such Mortgagee shall designate) of Gross Revenues for the payment
of real estate and personal property taxes and insurance premiums, and such
accruals shall be deposited with the Mortgagee, if so required by the Financing
Documents or otherwise approved by Lessee, or in a separate account and not
commingled with other operating accounts for Hotel operations generally.
ARTICLE III.
LESSEE'S OBLIGATIONS
--------------------
SECTION 3.1. LESSEE'S OBLIGATIONS. During the Term, Lessee shall
----------------------------------
have the obligations set forth below:
(a) Hotel Franchise License Agreement. Lessee shall comply with all
---------------------------------
the terms and conditions of the Hotel's franchise license agreement (the
"Franchise License Agreement") to the extent that compliance therewith is within
the control of the Lessee and use its best efforts to keep the Franchise License
Agreement in full force and effect from the Effective Date through the remainder
of the Term. Nothing in this Agreement shall be interpreted in a manner which
would relieve Lessee of any of its obligations under the Franchise License
Agreement.
(b) Licenses and Permits. Lessee shall use its best efforts to obtain
--------------------
and maintain (or shall cause to be obtained and maintained), with Manager's
assistance and cooperation as needed, all governmental permissions, licenses and
permits required or allowed
12
<PAGE>
to be held in either Lessee's or the Partnership's name that are necessary to
enable Manager to operate the Hotel in accordance with the terms of this
Agreement, the Participating Lease and the Franchise License Agreement.
(c) Intentionally Omitted.
---------------------
(d) Operating Funds. Lessee shall provide all funds necessary to
---------------
enable Manager to manage and operate the Hotel in accordance with the terms of
this Agreement, the Franchise License Agreement, the Participating Lease and the
Financing Documents. Lessee agrees to deliver to Manager for deposit into the
General Manager's Account on the Effective Date the amount specified on Exhibit
"A", which amount shall be the "Minimum Balance" to be maintained by Lessee in
the General Manager's Account throughout each calendar year during the Term.
The Minimum Balance shall serve as working capital for the Hotel's operations.
Within five (5) business days of Manager's written request, Lessee agrees to
furnish Manager with sufficient funds to make up any deficiency in Minimum
Balance in the General Manager's Account. From time to time, Manager may
request additional funds for Operating Costs (an "Operating Deficit Advance")
which shall be based on anticipated cash shortfalls shown on the cash flow
projection delivered to Lessee or incurred cash shortfalls. If Manager
determines, in its good faith business judgment, that the amount of the Minimum
Balance and the Operating Deficit Advance are insufficient adequately to meet
the working capital needs for the Hotel's operations, Manager shall notify
Lessee and attempt to reach agreement on an adjustment to the amount of the
Minimum Balance and/or Operating Deficit Advance. In the event Lessee and
Manager are unable to agree after a period of 30 days, Manager may submit such
matter to arbitration pursuant to Section 9.2 below. Lessee shall be
responsible for providing funds to cover any shortfall in working capital for
the Hotel.
(e) Capital Funds. Subject to the terms of the Capital Budget
-------------
approved by the Lessee, Manager is directed by Lessee to utilize the Capital
Expenditure Reserve (as defined in the Participating Lease) for renovation
programs, furnishings, equipment and ordinary Hotel capital replacement items as
are required from time to time (i) to maintain the Hotel in good order and
repair; (ii) to comply with the standards referred to in the Franchise License
Agreement; (iii) to comply with applicable governmental regulations and orders;
and (iv) to comply with the Capital Budget, subject to the restrictions
contained in the Participating Lease. Any expenditures for capital replacements
during any calendar year which have been included in an approved Capital Budget
may be made without Lessee's additional approval and shall be made by Manager
from the Capital Expenditure Reserve. To the extent the Capital Expenditure
Reserve is insufficient at a particular time or to the extent the Capital
Expenditure Reserve plus anticipated contributions for the ensuing calendar year
is less than budgeted expenditures in an approved Capital Budget for the ensuing
calendar year, then in either such event, Manager shall give Lessee written
notice thereof at least 45 days before the anticipated date such funds will be
needed. Manager shall not dispose of any capital item or group of capital items
having a value in excess of $10,000 without Lessee's prior written consent
unless the disposal and replacement of such capital item or group of capital
items has been
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contemplated in the applicable Capital Budget. To the extent that any
expenditure under this Section 3.1 (e) shall exceed $20,000, Manager shall first
solicit bids from at least three different reputable and qualified third parties
and the lowest of the bidders shall be selected unless waiver of the bid process
or acceptance of a higher bid has been approved by Lessee in writing. Manager
shall maintain complete records of all capital expenditures with respect to the
Hotel and shall provide the Lessee and its designees access to all such records
at any time.
(f) Payments to Manager. Lessee shall promptly pay to Manager all
-------------------
amounts due Manager under this Agreement, subject to the provisions of
Paragraphs 9 and 10 of Exhibit "B".
(g) Lessee's Representative. Lessee shall appoint two or more
-----------------------
representatives to represent Lessee in all matters relating to this Agreement
and/or the Hotel ("Lessee's Representatives"). Lessee's initial Lessee's
Representatives shall be the individuals named on Exhibit "A". Manager shall
have the right to deal solely with the Lessee's Representatives on all such
matters. Manager may rely upon statements and representations of any one of
Lessee's Representatives (without the joinder of the others) as being from and
binding upon Lessee. Lessee may change one or more of its Lessee's
Representatives from time to time by providing written notice to Manager in the
manner provided for herein. Lessee shall cause one or more of the Lessee's
Representatives or designated substitutes to attend all Quarterly Lessee's
Meetings.
(h) Lessee's Right of Inspection and Review. Lessee and its designees
---------------------------------------
and their respective accountants, attorneys, agents and other representatives
and invitees, shall have the right to enter upon any part of the Hotel at all
reasonable times during normal business hours and during the term of this
Agreement for the purpose of examining, repairing or inspecting the same,
preventing damage to the Hotel, showing the Hotel to prospective purchasers or
mortgagees or other parties, auditing, examining or making extracts of books and
records of the Hotel, or for any other purpose which Lessee, shall deem
necessary or advisable, but the same shall be done with as little disruption to
the business of the Hotel as under the circumstances is practicable. Books and
records of the Hotel shall be kept at Manager's office in Dallas, Texas, or such
other place as the Lessee may hereafter in writing agree. Lessee's rights of
examination and audit of the books and records of the Hotel are subject to the
provisions of Section 2.1 above.
(i) Quiet and Peaceable Operation. Lessee agrees that Manager shall
-----------------------------
be entitled to peaceably and quietly possess and operate the Hotel in accordance
with the terms of this Agreement, free from molestation, eviction and
disturbance by Lessee or by any other person or persons claiming by, through or
under Lessee.
14
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ARTICLE IV.
MANAGEMENT FEE
--------------
SECTION 4.1. MANAGEMENT FEE. Lessee authorizes Manager to pay itself
----------------------------
from the Hotel Account(s) the Basic Management Fees and Incentive Management
Fees (hereinafter collectively referred to as the "Management Fees") as defined,
calculated and payable in accordance with Exhibit "B".
ARTICLE V.
CLAIMS AND LIABILITY
--------------------
SECTION 5.1. CLAIMS AND LIABILITY. Lessee and Manager mutually agree
----------------------------------
for the benefit of each other to look only to the appropriate insurance
coverages in effect pursuant to this Agreement in the event any demand, claim,
action, damage, loss, liability or expense occurs as a result of injury to
person, damage to property, or any act or omission regardless whether any such
demand, claim, action, damage, loss, liability or expense is caused or
contributed to by or results from the negligence of Lessee or Manager or their
respective subsidiaries, affiliates, employees, partners, directors, officers,
agents or independent contractors and regardless whether the injury to person,
damage to property or act or omission occurs in and about the Hotel or elsewhere
as a result of the performance of this Agreement. Nevertheless, to the extent
that insurance proceeds are insufficient or there is no insurance coverage to
satisfy the demand, claim, action, loss, liability or expense or that the
injuries, damages, acts or omissions are not insured or are not insurable and
the same did not arise out of a material breach of this Agreement by Manager or
the gross negligence or willful misconduct of Manager, Lessee agrees, at its
expense, to indemnify and hold Manager and its subsidiaries, affiliates,
partners, officers, directors, employees, agents or independent contractors
harmless therefrom and all costs and expenses of defense. For purposes of this
Section, any deductible amount under any policy of insurance shall not be deemed
to be included as part of collectible insurance proceeds, and Manager shall be
indemnified therefor to the extent provided in the foregoing sentence. Manager
shall indemnify and hold harmless Lessee, and its respective subsidiaries,
affiliates, partners, officers, directors, employees, agents or independent
contractors, from all demands, claims, actions, loss, liability and expense
which are not covered by insurance and which are determined to have resulted
from the gross negligence, willful misconduct or material breach of this
Agreement by Manager and its agents or employees in connection with the
operation of the Hotel.
SECTION 5.2. SURVIVAL. The provisions of this Article V shall
----------------------
survive any cancellation, termination or expiration of this Agreement and shall
remain in full force and effect until such time as the applicable statute of
limitation shall extinguish all rights to any demands, claims, actions, damages,
losses, liabilities or expenses which are the subject of the provisions of this
Article V.
15
<PAGE>
ARTICLE VI.
CLOSURE, EMERGENCIES AND DELAYS
-------------------------------
SECTION 6.1. EVENTS OF FORCE MAJEURE. If at any time during the Term
-------------------------------------
of this Agreement it becomes necessary, in Manager's opinion, to cease operation
of the Hotel in order to protect the Hotel and/or the health, safety and welfare
of the guests and/or employees of the Hotel for reasons known to, but beyond the
reasonable control of, Manager, such as, but not limited to, acts of war,
insurrection, civil strife and commotion, labor unrest, governmental regulations
and orders, shortage or lack of adequate supplies or lack of skilled or
unskilled employees, contagious illness, catastrophic events or acts of God
("Force Majeure"), then in any such event or similar events Manager may close
and cease operation of all or any part of the Hotel, reopening and commencing
operation when Manager reasonably determines that such may be done without
jeopardy to the Hotel, its guests and employees. Further, Manager and Lessee
agree, except as otherwise provided herein, that the time within which a party
is required to perform an obligation hereunder shall be extended for a period of
time equivalent to the period of delay caused by an event of Force Majeure, but
only to the extent that delay is caused or contributed to by a specific event of
Force Majeure.
SECTION 6.2. EMERGENCIES. If an emergency condition should exist
-------------------------
which requires that immediate repairs or replacements be made for the
preservation or protection of the Hotel or persons in the Hotel, or to assure
the continued operation of the Hotel (for purposes of this Section, an emergency
condition shall include any situation or circumstance that is reasonably
estimated to require corrective action within a period of seventy-two (72) hours
or less), Manager is authorized to take all actions and to make all expenditures
necessary to repair and correct such condition, regardless whether provisions
have been made in the applicable budget for such emergency expenditures.
Expenditures made by Manager in connection with an emergency shall be paid, in
Manager's sole discretion, out of the Hotel Account(s) to the extent funds are
available and, if not, from the Reserve Fund. Lessee shall to the extent
required to meet current obligations immediately replenish such funds. Manager
shall endeavor to communicate with Lessee prior to making any expenditures to
correct an emergency condition, but in any event shall promptly notify Lessee
after the emergency expenditures have been made.
ARTICLE VII.
CONDEMNATION AND CASUALTY
-------------------------
SECTION 7.1. CONDEMNATION. If the Hotel is taken in any eminent
--------------------------
domain, expropriation, condemnation, compulsory acquisition or similar
proceeding by any competent authority, this Agreement shall automatically
terminate as of the date of taking or condemnation. Manager shall have the
right to file a claim with the appropriate authorities for the loss of
Management Fee income for the remainder of the Term and any extension thereof
because of the condemnation or taking; provided, however, that the filing of any
such claim or
16
<PAGE>
the payment of any award to Manager as a result thereof shall in no way diminish
or affect the amount or payment of any award which may be claimed by the
Partnership or the Lessee. Subject to contrary provisions in any Financing
Documents and the Participating Lease, if only a portion of the Hotel is so
taken and the taking does not make it unreasonable or imprudent, in the
reasonable opinion of Lessee and Manager, to operate the remainder as a hotel of
the type and class immediately preceding such taking, this Agreement shall not
terminate provided that any compensation shall be used to render the Hotel a
complete and satisfactory architectural unit as a hotel of the same type and
class as it was immediately preceding such taking or condemnation.
SECTION 7.2. CASUALTY. In the event of a fire or other casualty,
----------------------
Lessee shall comply with the terms of the Franchise License Agreement, the
Participating Lease and the Financing Documents, and if, as a result thereof,
the Franchise License Agreement and the Participating Lease remain in full force
and effect and, within ninety (90) days after the occurrence of such event,
Lessee notifies Manager that a decision has been made to restore the Hotel, this
Agreement shall not terminate provided that the Hotel is thus restored within a
reasonably appropriate period of time.
ARTICLE VIII.
DEFAULT: TERMINATION RIGHTS
---------------------------
SECTION 8.1. LESSEE'S DEFAULT. (a) Definition. The following shall,
------------------------------ ----------
at the election of Manager, constitute events of default by Lessee under this
Agreement (each such event being referred to herein as a "Lessee Default"):
(i) The failure of Lessee to pay any amount to Manager provided
for herein or to maintain, restore, or supplement the Hotel Accounts, the
Minimum Balance, the Operating Deficit Advance or the Reserve Fund as herein
provided for a period of ten (10) days after written notice by Manager of such
failure.
(ii) Material failure of Lessee to keep or perform any duty,
obligation, covenant or agreement of Lessee under this Agreement (other than the
obligations that are the subject of Section 8.1(a)(i) above) and such failure
continues for a period of 30 days after receipt of written notice thereof from
Manager; provided, however, if such failure cannot reasonably be remedied or
corrected within such 30-day period, then such 30-day period shall be extended
for such additional period as may be reasonably required to cure such default
but only if the Lessee promptly commences to cure such default and continues
thereafter with all due diligence to complete such a cure to the reasonable
satisfaction of Manager.
(iii) Lessee or the Partnership is voluntarily or involuntarily
dissolved or declared bankrupt or is insolvent, or commits an act of bankruptcy
or enters into liquidation
17
<PAGE>
whether compulsory or voluntary other than for the purpose of amalgamation or
reconstruction or compounds with its creditors, or has a receiver appointed over
all or any part of its assets, or conveys title in lieu of foreclosure.
(b) Remedies. On the occurrence of any Lessee Default, Manager shall
--------
have the right to terminate this Agreement by written notice to Lessee, in
addition to its other rights hereunder and its rights to seek damages or other
remedies available to it at law or in equity.
SECTION 8.2. MANAGER DEFAULT. (a) Definition. The following shall,
----------------------------- ----------
at the election of Lessee, constitute events of default by Manager under this
Agreement (each such event being referred to herein as a "Manager Default"):
(i) Material failure of Manager to keep or perform any duty,
obligation, covenant or agreement of Manager under this Agreement and such
failure shall continue for a period of 30 days after receipt of written notice
thereof from Lessee; provided, however, if such failure cannot reasonably be
remedied or corrected within such 30-day period, then such 30-day period shall
be extended for such additional period as may be reasonably required to cure
such default provided that Manager promptly commences to cure such default and
continues thereafter with all due diligence to complete such cure to the
satisfaction of Lessee.
(ii) Manager is voluntarily or involuntarily dissolved or
declared bankrupt or is insolvent, or commits an act of bankruptcy, or enters
into liquidation whether compulsory or voluntary other than for the purpose of
amalgamation or reconstruction or compounds with its creditors, or has a
receiver appointed over all or any part of its assets.
(iii) Manager shall fail to deliver to Lessee within one hundred
twenty (120) days after the end of each calendar year an audited financial
statement of Manager showing a net worth (computed in accordance with GAAP) in
excess of a negative three hundred thousand dollars (-$300,000).
(iv) Manager shall fail to comply with any covenant or condition
in any of the Financing Documents which results in the occurrence of an event of
default thereunder.
(b) Remedies. Upon the occurrence of a Manager Default, Lessee shall
--------
have the right to terminate this Agreement by written notice to Manager, in
addition to its other rights hereunder and its rights to seek damages or other
remedies available to it at law or in equity.
SECTION 8.3. DELAYS. Notwithstanding any other provision of this
--------------------
Agreement, if any event of the type described in Article VI or VII occurs and
Manager is unable to operate
18
<PAGE>
a substantial portion of the Hotel for a period of ninety (90) days, Manager
shall have the right to terminate this Agreement upon thirty (30) days' prior
written notice to Lessee, without liability on the part of Manager or its
subsidiaries or affiliates.
SECTION 8.4. TRANSITION UPON TERMINATION. Upon any termination of
-----------------------------------------
this Agreement other than as a result of a material uncured Manager Default, the
remainder of all fees and payments that would be due to Manager under this
Agreement as of the effective date of termination, including all accrued and
unpaid fees and reimbursable charges and expenses, shall be paid to Manager
within ten (10) days after delivery to Lessee of an itemized statement of such
fees and payments and Manager shall be entitled to exercise the right of set-off
provided in Section 10.16 below with respect to such fees, charges and expenses.
Manager shall deliver to Lessee, or such other person or persons as Lessee may
designate, copies of all books and records of the Hotel and all funds in the
possession of Manager belonging to Lessee and received by Manager pursuant to
the terms of this Agreement, and shall assign, transfer or convey to such person
or persons all service contracts and personal property relating to or used in
the operation and maintenance of the Hotel, except any personal property which
is owned by Manager. Manager, at its cost and expense, shall remove all signs
that it may have placed at the Hotel indicating that it is the manager of same
and replace and restore any damage resulting therefrom. Manager shall also, for
a period of thirty (30) days after such expiration or termination, make itself
available to consult with and advise Lessee or such other person or persons
regarding the operation and maintenance of the Hotel at a consultation fee, and
with an accounting fee, to be agreed upon between Manager and Lessee.
SECTION 8.5. TERMINATION UPON TERMINATION OF PARTICIPATING LEASE.
-----------------------------------------------------------------
This Agreement shall terminate upon termination of the Participating Lease.
ARTICLE IX.
APPLICABLE LAW AND ARBITRATION
------------------------------
SECTION 9.1. APPLICABLE LAW. The interpretation, validity and
----------------------------
performance of this Agreement shall be governed by the procedural and
substantive laws of the State of Texas. If any judicial authority holds or
declares that the law of another jurisdiction is applicable, this Agreement
shall remain enforceable under the laws of that jurisdiction.
SECTION 9.2. ARBITRATION OF FINANCIAL MATTERS.
----------------------------------------------
(a) Matters to be Submitted to Arbitration. In the case of a dispute
--------------------------------------
with respect to any of the following matters, either party may submit such
matter to arbitration which shall be conducted by the Accountants (as defined in
Section 9.2(b) below):
(i) Computation of the Management Fees;
19
<PAGE>
(ii) Reimbursements due to Manager under the provisions of
Section 10.14;
(iii) Any adjustment in the Minimum Balance under the
provisions of Section 3.1 (d);
(iv) Any adjustment in dollar amounts of insurance coverages
required to be maintained hereunder; and
(v) Any dispute concerning the approval of an Operating Budget.
All disputes concerning the above matters shall be submitted to the Accountants.
The decision of the Accountants with respect to any matters submitted to them
under this Section 9.2(a) shall be binding on both parties hereto.
(b) The Accountants. The "Accountants" shall be one of the so-called
---------------
"Big Six" firms of certified public accountants, represented by a partner or
manager level employee who has personal experience with the hotel industry and
hotel operations. Lessee and Manager may select any one of such public
accounting firms, notwithstanding any existing relationships which may exist
between Lessee or Manager and such accounting firm. The party desiring to
submit any matter to arbitration under Section 9.2(a) shall do so by written
notice to the other party, which notice shall set forth the items to be
arbitrated and such party's choice of an accounting firm. The party receiving
such notice shall within 15 days after receipt of such notice either approve
such notice, or designate one of the remaining firms by written notice back to
the first party, and the first party shall within 15 days after receipt of such
notice either approve such choice or disapprove the same. If both parties shall
have approved one of the firms under the preceding sentence, then such firm
shall be the "Accountants" for the purposes of arbitrating the dispute. If the
parties are unable to agree on an accounting firm, then the accounting firm
selected by each party shall represent the respective parties and the two firms
so selected shall select a third firm, and the three firms so selected shall be
the "Accountants" for such purpose. The Accountants shall be required to render
a decision in accordance with the procedures described in Section 9.2(c) within
15 days after being notified of their selection. The fees and expenses of the
Accountants with respect of each disputed item will be paid by the non-
prevailing party. In the event that either Lessee or Manager cannot locate an
"Accountant" satisfying all of the above criteria who is willing to act as an
arbitrator hereunder, the matter shall be submitted to the American Arbitration
Association for arbitration in accordance with the procedures set forth herein.
(c) Procedures. In all arbitration proceedings submitted to the
-----------
Accountants, the Accountants (either the mutually agreed upon firm acting alone
or two of the three firms selected to constitute a panel) shall be required to
agree upon and approve in writing the substantive position advocated by Lessee
or Manager with respect to each disputed item. Any decision rendered by the
Accountants that does not reflect the position advocated by Lessee or
20
<PAGE>
Manager shall be beyond the scope of authority granted to the Accountants and,
consequently, may be overturned by either party. All proceedings by the
Accountants shall be conducted in accordance with the Uniform Arbitration Act,
except to the extent the provisions of such act are modified by this Agreement
or by the mutual agreement of the parties. Unless Lessee and Manager agree
otherwise, all arbitration proceedings shall be conducted at the Hotel.
(d) Performance During Disputes. It is mutually agreed that during
----------------------------
any kind of bona fide, good faith controversy, claim, disagreement or dispute,
including a dispute as to the validity of this Agreement, Manager shall remain
in possession of the Hotel as Manager, and Lessee and Manager shall continue
their performance of the provisions of this Agreement and its exhibits until
termination of Manager's services pursuant to the terms of this Agreement.
ARTICLE X.
GENERAL PROVISIONS
------------------
SECTION 10.1. AUTHORIZATION. Lessee and Manager represent and
----------------------------
warrant to each other that their respective companies have full power and
authority to execute this Agreement and to be bound by and perform the terms
hereof. On request, each party shall furnish to the other evidence of such
authority.
SECTION 10.2. RELATIONS. Manager and Lessee shall not be construed
------------------------
as joint venturers or partners of each other by reason of this Agreement and
neither shall have the power to bind or obligate the other except as set forth
in this Agreement.
SECTION 10.3. MANAGER'S CONTRACTUAL AUTHORITY IN THE PERFORMANCE OF
--------------------------------------------------------------------
THIS AGREEMENT. Manager is authorized to make, enter into and perform in the
- --------------
name of and for the account of Lessee any contracts deemed necessary by Manager
to perform its obligations under this Agreement. In exercising its authority
hereunder, Manager shall be entitled to execute and enter into contracts without
the specific approval of Lessee so long as each such contract (i) requires
expenditures or otherwise establishes liability of twenty-five thousand dollars
($25,000) or less and (ii) has a term (including options in favor of Manager or
Lessee to renew) of one (1) year or less or can be canceled without penalty upon
sixty (60) days' notice or less. Any contract that does not satisfy the
conditions set forth in the preceding sentence shall require the prior approval
in each instance of Lessee, regardless whether such expenditure is authorized in
an applicable budget, unless the form of the contract proposed to be entered
into has been approved in advance by Lessee. Lessee agrees promptly to respond
to any request for approval and further agrees that its consent shall not be
unreasonably withheld or delayed. Manager shall be authorized to enter into
contracts with affiliates of Manager, but only so long as Lessee shall have
approved in advance by approved budget or otherwise the cost of the service or
product to be provided by such affiliate and only if in
21
<PAGE>
accordance with the terms of this Agreement. Manager shall have no authority to
enter into any contract in the name of or for the account of the Partnership.
SECTION 10.4. FURTHER ACTIONS. Lessee and Manager agree to execute
------------------------------
all contracts, agreements and documents and to take all actions reasonably
necessary to comply with the provisions of this Agreement and the intent hereof.
SECTION 10.5. SUCCESSORS AND ASSIGNS. This Agreement is not
-------------------------------------
assignable by Manager without the prior written consent of Lessee. Lessee shall
have the right to assign this Agreement to any party acquiring or leasing
Lessee's interest in the Hotel, if such assignee or lessee shall expressly
assume, or be deemed to assume, the obligations of Lessee arising hereunder.
Otherwise, Lessee shall not have the right to assign this Agreement without the
prior written consent of Manager, which consent shall not be unreasonably
withheld or delayed.
SECTION 10.6. NOTICES. All notices or other communications provided
----------------------
for in this Agreement shall be in writing and shall be either hand delivered,
delivered by certified mail, postage prepaid, return receipt requested,
delivered by an overnight delivery service, or delivered by facsimile machine
(with an executed original sent the same day by an overnight delivery service),
addressed as set forth on Exhibit "A". Notices shall be deemed delivered on the
date that is four (4) calendar days after the notice is deposited in the U.S.
mail (not counting the mailing date) if sent by certified mail, or, if hand
delivered, on the date the hand delivery is made, or if delivered by facsimile
machine, on the date the transmission is made if receipt is confirmed. If given
by an overnight delivery service, the notice shall be deemed delivered on the
next business day following the date that the notice is deposited with the
overnight delivery service. The addresses provided on Exhibit "A" may be
changed by any party by notice given in the manner provided herein.
SECTION 10.7. DOCUMENTS. Lessee shall furnish Manager copies of all
------------------------
leases, title documents, property tax receipts and bills, insurance statements,
all financing documents relating to the Hotel and such other documents
pertaining to the Hotel as Manager shall request.
SECTION 10.8. DEFENSE. Manager shall defend and/or settle any claim
----------------------
or legal action brought against Manager or Lessee, individually, jointly or
severally, in connection with the operation of the Hotel. Manager or the
applicable insurance carrier shall retain legal counsel and Manager shall
supervise legal counsel, accountants and such other professionals, consultants
and specialists as Manager deems appropriate to defend and/or settle any such
claim or cause of action. Lessee shall have the right to actively participate
in the defense of any such claim or cause of action in which Lessee is a named
defendant. Manager shall confer with Lessee concerning any settlement proposal
that Manager is considering accepting, regardless whether Lessee is a named
party, but Lessee's approval shall not be required if Lessee is not a named
party and the settlement is covered by insurance. Lessee's approval
22
<PAGE>
shall be required with respect to any proposed settlement of any claim or cause
of action in which Lessee is a named party or that is not covered by insurance
(excluding any deductible amount specified in the applicable policy of
insurance). All liabilities, costs, and expenses, including attorneys' fees and
disbursements, incurred in defending and/or settling any such claim or legal
action which are not covered by insurance shall be an expense of Lessee or
Manager as applicable under the provisions of Section 5.
SECTION 10.9. WAIVERS. No failure or delay by Manager or Lessee to
----------------------
insist upon the strict performance of any covenant, agreement, term or condition
of this Agreement, or to exercise any right or remedy consequent upon the breach
thereof, shall constitute a waiver of any such breach or any subsequent breach
of such covenant, agreement, term or condition. No covenant, agreement, term,
or condition of this Agreement and no breach thereof shall be waived, altered or
modified except by written instrument. No waiver of any breach shall affect or
alter this Agreement, but each and every covenant, agreement, term and condition
of this Agreement shall continue in full force and effect with respect to any
other then existing or subsequent breach thereof.
SECTION 10.10. CHANGES. Any change to or modification of this
-----------------------
Agreement, including, without limitation, any change in the application of this
Agreement to the Hotel, must be evidenced by a written document signed by both
the Manager and the Lessee.
SECTION 10.11. CAPTIONS. The captions for each Article and Section
------------------------
are intended for convenience only.
SECTION 10.12. SEVERABILITY. If any of the terms and provisions
----------------------------
hereof shall be held invalid or unenforceable, such invalidity or
unenforceability shall not affect any of the other terms or provisions hereof.
If, however, any material part of a party's rights under this Agreement shall be
declared invalid or unenforceable (specifically including Manager's right to
receive its Management Fees) the party whose rights have been declared invalid
or unenforceable shall have the option to terminate this Agreement upon thirty
(30) days' written notice to the other party, without liability on the part of
the terminating party.
SECTION 10.13. INTEREST. Any amount payable to Manager or Lessee by
------------------------
the other which has not been paid when due shall accrue interest at the lesser
of: (i) the highest legal limit in the state in which the Hotel is located, or
(ii) two percentage points (2%) over the published base rate of interest charged
by Citibank, N.A., New York, New York, to borrowers on ninety (90) day unsecured
commercial loans, as the same may be changed from time to time.
SECTION 10.14. REIMBURSEMENT. The performance by Manager of its
-----------------------------
responsibilities under this Agreement is conditioned upon Lessee providing
sufficient funds to Manager on a timely basis to enable Manager to perform its
obligations hereunder. Nevertheless, Manager shall be entitled, at its option
and without any obligation to do so, after
23
<PAGE>
first providing not less than ten (10) days' prior written notice to Lessee
specifying the obligations to be satisfied and the amount of money to be
advanced, to advance funds or contribute property on behalf of the Lessee to
satisfy obligations of Lessee in connection with the Hotel and this Agreement;
provided, however, that Manager shall not be required to give prior written
notice to advance funds for the purpose of paying compensation for Hotel
personnel within the Operating Budget or to remedy an emergency or with respect
to any other advance of funds for which provision is otherwise made herein.
Manager shall keep appropriate records to document all reimbursable expenses
paid by Manager, which records shall be made available for inspection by Lessee
or its agents upon request. Lessee agrees to reimburse Manager with interest
upon demand for money paid or property contributed by Manager to satisfy
obligations of Lessee in connection with the Hotel and this Agreement. Interest
shall be calculated at the rate set forth in Section 10.13 from the date Manager
remits the funds or contributes the property for the satisfaction of such
obligation to the date reimbursement is made.
SECTION 10.15. AGREEMENT. This Agreement is not, and shall not be
-------------------------
deemed at any time to be or to create, an interest in real estate or a lien or
other encumbrance of any kind whatsoever against the Hotel or the land on which
it is erected.
SECTION 10.16. SETOFF. Other than as provided in Sections 9, 10 and
----------------------
11 of Exhibit B hereto, Manager shall have the right to set off against the
Hotel Accounts and all other amounts payable to the Lessee hereunder any amount
due and payable to Manager under this Agreement.
SECTION 10.17. THIRD PARTY BENEFICIARY. This Agreement is
---------------------------------------
exclusively for the benefit of Manager and Lessee and it may not be enforced by
any party other than such parties and shall not give rise to liability to any
third party other than the authorized successors and permitted assigns of such
parties.
SECTION 10.18. BROKERAGE. Manager and Lessee represent and warrant
-------------------------
to each other that neither has sought the services of a broker, finder or agent
in this transaction, and neither has employed, nor authorized, any other person
to act in such capacity. Manager and Lessee each hereby agrees to indemnify and
hold the other harmless from and against any and all claims, loss, liability,
damage or expenses (including reasonable attorneys' fees) suffered or incurred
by the other party as a result of a claim brought by a person or entity engaged
or claiming to be engaged as a finder, broker or agent by the indemnifying
party.
SECTION 10.19. SURVIVAL OF COVENANTS. Any covenant, term or
-------------------------------------
provision of this Agreement which, in order to be effective, must survive the
termination of this Agreement, shall survive any such termination.
SECTION 10.20. ESTOPPEL CERTIFICATE. Manager and Lessee each agrees
------------------------------------
to furnish to the other party, from time to time upon request, an estoppel
certificate in such
24
<PAGE>
reasonable form as the requesting party may request stating whether there have
been any defaults under this Agreement known to the party furnishing the
estoppel certificate and such other information relating to the Hotel as may be
reasonably requested.
SECTION 10.21. OTHER AGREEMENTS. Except to the extent as may now or
--------------------------------
hereafter be specifically provided, nothing contained in this Agreement shall be
deemed to modify any other agreement between Lessee and Manager with respect to
the Hotel or any other property or with respect to the Franchise License
Agreement or the Participating Lease.
SECTION 10.22. PERIODS OF TIME. Whenever any determination is to be
-------------------------------
made or action is to be taken on a date specified in this Agreement, if such
date shall fall on a Saturday, Sunday or legal holiday under the laws of the
state of Texas and/or the state in which the Hotel is located, then in such
event said date shall be extended to the next day which is not a Saturday,
Sunday or legal holiday.
SECTION 10.23. PREPARATION OF AGREEMENT. This Agreement shall not be
----------------------------------------
construed more strongly against either party regardless of who is responsible
for its preparation.
SECTION 10.24. EXHIBITS. All exhibits attached hereto are
------------------------
incorporated herein by reference and made a part hereof as if fully rewritten or
reproduced herein.
SECTION 10.25. COUNTERPARTS. This Agreement may be executed in two
----------------------------
(2) or more counterparts, each of which shall be deemed an original.
SECTION 10.26. ATTORNEY'S FEES AND OTHER COST. The parties to this
----------------------------------------------
Agreement shall bear their own attorney's fees in relation to negotiating and
drafting this Agreement. Should Lessee or Manager engage in litigation to
enforce their respective rights pursuant to this Agreement, the prevailing party
shall have the right to indemnity by the non-prevailing party for an amount
equal to the prevailing party's reasonable attorneys' fees, court costs and
expenses arising therefrom.
SECTION 10.27. MANAGER'S SUPERVISOR. Lessee acknowledges the special
------------------------------------
relationship of Manager's general manager/supervisor at the Hotel ("Supervisor")
to Manager and Supervisor's knowledge of Manager and that Manager would suffer
great loss and damage if this Agreement were terminated and Supervisor, or any
constituent of Supervisor, were engaged directly or indirectly for the
performance of Manager's duties hereunder or with respect to other similar
properties. Further, it would be difficult to ascertain the damages that might
result to Manager in such instance. Therefore, Lessee agrees that no
constituent of Supervisor shall be engaged or employed by Lessee or any related
person or entity in a management or management-related capacity, including
without limitation consultant services, with respect to the Hotel or with
respect to any hotel, motel or other overnight guest lodging related business
located within a one hundred (100) mile radius of the Hotel for a period of
25
<PAGE>
twelve (12) months following termination of this Agreement by Lessee. Breach of
this covenant by Lessee shall be enforceable by Manager by injunctive relief or,
if unavailable or unsuccessful, then by suit for damages, if provable. This
Section shall survive any expiration or termination of this Agreement and shall
continue to bind the parties hereto in accordance with the terms hereof. The
covenant contained in this Section shall be construed as a covenant and
agreement independent of any other provision of this Agreement, and the
allegation or existence of any claim or cause of action of Lessee against
Manager, whether predicated on this Agreement or otherwise shall not constitute
a defense to the enforcement by Manager of the covenant contained herein.
SECTION 10.28. ENTIRE AGREEMENT. This Agreement contains the entire
--------------------------------
agreement between Lessee and Manager regarding the management of the Hotel and
supersedes all prior agreements relating thereto.
26
<PAGE>
The parties have respectively caused this Agreement to be executed as
of the date set forth in the introductory paragraph above.
LESSEE:
AGH LEASING, L.P.
By: AGHL GP, Inc., its general partner
By:_________________________________________
Kenneth E. Barr
Executive Vice President
MANAGER:
AMERICAN GENERAL HOSPITALITY, INC.
By:____________________________________________
Kenneth E. Barr
Executive Vice President
27
<PAGE>
SCHEDULE A
----------
OPERATING BUDGET
----------------
28
<PAGE>
SCHEDULE B
----------
CAPITAL BUDGET
--------------
29
<PAGE>
EXHIBIT "A"
-----------
DEAL SPECIFIC TERMS
-------------------
Term: Twelve (12) years from the Effective Date.
- -----
Initial Minimum Balance for the Hotel Accounts: Twenty-Five Thousand Dollars
- -----------------------------------------------
($25,000.00).
Initial Lessee's Representatives: Steven D. Jorns and Kenneth E. Barr
- ---------------------------------
Disbursement Schedule:
- ----------------------
Each calendar month Manager shall disburse funds from the Hotel Accounts to
the extent available to pay the following costs and expenses, to the extent due
and payable or earned:
(a) monthly Base Rent and quarterly Participating Rent under the
Participating Lease;
(b) all fees, assessments and charges due and payable under the Franchise
License Agreement;
(c) the Basic Management Fee and the Incentive Management Fee (subject,
however, to the provisions of Paragraphs 9, 10 and 11 of Exhibit "B");
(d) all reimbursements or reimbursable expenses due Manager including,
without limitation, those reimbursements required under Sections
2.1(g) and 10.14 hereof;
(e) all other Operating Costs;
(f) all other Ownership Costs;
`
(g) additional costs and expenses to the extent requested by Lessee;
(h) repayment of any Operating Deficit Advances; and
(i) deposits into the Reserve Fund.
A-1
<PAGE>
After the disbursements set forth above, any excess funds remaining in the
Hotel Accounts over the Minimum Balance shall be distributed to Lessee. If
after making the
A-2
<PAGE>
disbursements set forth above, there shall be a deficiency in the Minimum
Balance, Lessee shall within five (5) business days of Manager's written
request, provide such funds as may be required to maintain the Minimum Balance
in the Hotel Accounts.
Notices:
- --------
<TABLE>
<CAPTION>
Lessee: Manager:
<S> <C>
AGH Leasing, L.P. American General Hospitality, Inc.
3860 W. Northwest Hwy., Suite 300 3860 W. Northwest Hwy, Suite 300
Dallas, Texas 75220 Dallas, Texas 75220
Fax: (214) 351-0568 Fax: (214) 351-0568
Attn: Steven D. Jorns and/or Attn: Robert J. Karch and/or
Kenneth E. Barr Elizabeth Williams
with a copy for Lessee to: with a copy for Manager to:
Steven L. Lichtenfeld, Esq. Parker Nelson, Esq.
Battle Fowler LLP Calhoun & Stacy, PLLC
Park Avenue Tower 901 Main St., Suite 5700
75 East 55th Street Dallas, Texas 75202-3747
New York, NY 10022 Fax No. (214) 748-1421
Fax No. (212) 856-7812
</TABLE>
A-3
<PAGE>
EXHIBIT "B"
-----------
MANAGEMENT FEES
---------------
1. Defined Terms. Certain capitalized terms in this Exhibit "B",
--------------
are defined in Paragraph 8 below; other capitalized terms have the meaning given
such terms herein or in the Agreement.
2. Basic Management Fee. Subject to paragraphs 9, 10 and 11 below,
---------------------
commencing with the Effective Date and continuing during the Term of this
Agreement, Lessee shall pay to Manager a basic management fee (the "Basic
Management Fee"), payable monthly in an amount equal to one and one-half percent
(1.5%) (such percentage is referred to herein as the "Applicable Percentage") of
Adjusted Gross Revenues for the preceding calendar month, payable as soon as
Manager has closed the books for the applicable calendar month. Any overpayment
of the Basic Management Fee shall be refunded by Manager within sixty (60) days
after the end of each Term Year.
3. Incentive Management Fee. (a) Subject to paragraphs 9, 10 and 11
-------------------------
below, commencing with the first full Fiscal Quarter (as defined below)
following the Effective Date and continuing until the year ending December 31,
2000, Lessee shall pay to Manager an incentive management fee (the "Incentive
Management Fee") equal to .025% of Adjusted Gross Revenues during the applicable
Term Year for every 0.1% increase in the Adjusted Gross Revenues for such Term
Year over the Adjusted Gross Revenues for the preceding Term Year up to a
maximum Incentive Management Fee of 2.0% of Adjusted Gross Revenues for such
Term Year. The Incentive Management Fee shall be computed and paid within ten
(10) days after the end of each Fiscal Quarter during the Term Year (based on
the percentage increase in the Adjusted Gross Revenues for the applicable Term
Year through the end of such Fiscal Quarter over the Adjusted Gross Revenues for
the comparable period of time during the prior Term Year) and adjusted and
reconciled to reflect the actual results at the completion of each such Term
Year; if there has been any overpayment or underpayment of the Incentive
Management Fee to Manager for such Term Year as a result of the prior quarterly
payments, the amount thereof shall be either refunded or paid at such time, as
the case may be. In any event, any overpayment of the Incentive Management Fee
as of the end of any Term Year shall be refunded by Manager within sixty (60)
days after the end of such Term Year. In the event that any Term Year shall be
less than 365 days, the Incentive Management Fee for such Term Year shall be
computed by comparing the Adjusted Gross Revenues for such Term Year to the
Adjusted Gross Revenues for the comparable period of time during the prior Term
Year. As used herein, the term "Fiscal Quarter" shall mean any three month
period ending on March 31, June 30, September 30 or December 31.
(b) During the 60 day period prior to January 1, 2001 and every
fourth (4th) anniversary thereafter during the term of this Agreement (the
"Renegotiation Period"), the
A-1
<PAGE>
Lessee and Manager shall in good faith renegotiate the terms of the Incentive
Management Fee to reflect current market conditions, the performance of the
Hotel and comparable management and operating agreements that take into account
the size and location of the Hotel; provided, however, without the consent of
the Lessee, the Incentive Management Fee shall be limited to an aggregate
maximum of 2.0% of Adjusted Gross Revenues. Such renegotiated fee shall be
reflected in an amendment to this Agreement and shall be effective during the
period commencing with the expiration of the applicable Renegotiation Period and
continuing for a period of 4 years thereafter.
4. Accounting Reimbursement. Commencing with the Effective Date, and
-------------------------
continuing during the term of this Agreement, Lessee shall pay to Manager a
reimbursement of $1,500 per month, if the Hotel is a "full service" hotel
(containing a restaurant and meeting rooms), or $1,000 per month, if the Hotel
is a "limited service" hotel (the "Accounting Reimbursement"), for accounting
and financial management services rendered. At the beginning of the first
Fiscal Year following the first anniversary of this Agreement, and thereafter at
the beginning of each Fiscal Year for the balance of the term of this Agreement,
the Accounting Reimbursement will be adjusted annually by the CPI. The
Accounting Reimbursement shall be considered an Operating Expense.
5. Reimbursable Expenses. Subject to the provisions of Section 2.1,
----------------------
Lessee shall reimburse Manager for all reasonable out of pocket expenses
incurred by Manager for the account of and in connection with the operation of
the Hotel, such as reasonable travel expenses of Manager's executive personnel
incurred traveling to and from or on behalf of the Hotel, payroll processing,
and computer terminals placed at the Hotel for the transmission of data between
Manager and the Hotel. The intent being that the Manager shall not incur
operating expenses of the Hotel.
6. Books and Records. Manager shall maintain in the books and
------------------
records of the Hotel all Management Fees that have been paid and shall set forth
therein the accrual of all Management Fees that have been earned but are not yet
due and payable.
7. Proration. With respect to any calculation in this Exhibit "B"
----------
that is based on a Term Year that is not a full calendar year, such calculation
shall be prorated for any partial Term Year based on the actual number of days
elapsed in such partial Term Year that is applicable to the calculation.
8. Definitions. Unless otherwise expressly provided, each
------------
definition applies to each Term Year:
The term "Adjusted Gross Revenues" shall mean Gross Revenues less (a)
-------------------------
the following revenues actually received by the Hotel and booked as part of
Gross Revenues: (i) any gratuities or service charges added to a customer's
bill; (ii) any sales taxes, excise taxes, gross receipt taxes, admission taxes,
entertainment taxes, and tourist taxes or charges; (iii) any proceeds from the
sale or other disposition of the Hotel or its furnishings, equipment or other
A-2
<PAGE>
capital assets, (iv) any fire, extended coverage or liability insurance
proceeds; (v) any condemnation awards; (vi) any proceeds of financing or
refinancing of the Hotel; and (b) the following that are actually paid or
credited after having been booked as part of Gross Revenues; (i) any credits or
refunds made to customers, guests or patrons; (ii) any sums and credits received
by Lessee for lost or damaged merchandise:
The term "Gross Revenues" shall be defined as all revenues and income
----------------
of any nature derived directly or indirectly from the Hotel or from the use or
operation thereof, whether on or off the site, including total room sales, food
and beverage sales, if any, laundry, telephone, and facsimile revenues, other
income, rental or other payments from lessees, sublessees, licensees and
concessionaires (but not the gross receipts of such lessees, sublessees,
licensees or concessionaires, except for the gross receipts of any
lessee/concessionaire holding the liquor license(s) for the Hotel which shall be
included in Gross Revenues) and the proceeds of business interruption, use,
occupancy or similar insurance.
The term "Operating Costs" shall mean the entire cost and expense of
-----------------
maintaining, operating and supervising the operation of the Hotel and are
sometimes referred to as "Hotel Expenses" or "Expenses of the Hotel." Operating
Costs shall be the sum of such costs and expenses which are normally charged as
a cost of operation under standard accounting practices, including but not
limited to: (i) the Management Fees; (ii) all amounts payable under the
Franchise License Agreement; (iii) all reimbursable expenses due Manager; (iv)
the cost of operating equipment and operating supplies, wages, salaries and
employee fringe benefits, advertising and promotional expenses, the cost of
personnel training programs, utility and energy costs, operating licenses and
permits, grounds and landscaping maintenance costs and equipment rentals; (v)
all expenditures made for maintenance and repairs to keep the Hotel in good
condition and repair, specifically excluding capitalized expenditures for
capital replacements; (vi) premiums and charges on the insurance coverages
specified in Exhibit "C" and in the Participating Lease (to the extent not
covered in either Exhibits "C" or "D"); and (vii) audit, legal and other
professional or special fees pertaining to the Hotel or the operation thereof.
Operating Costs do not include Ownership Costs.
The term "Ownership Costs" shall mean (i) depreciation of the Hotel,
-----------------
furnishings, fixtures and equipment; (ii) rental pursuant to a ground lease, if
any, or any other lease payments; (iii) debt service (interest and principal) on
any mortgage(s) encumbering the Hotel, including the Financing Documents; (iv)
property taxes and assessments; (v) amortization of preopening expenses; (vi)
expenditures for capital replacements (to the extent actually capitalized rather
than expensed); (vii) premiums for the insurance coverages specified in Exhibit
"D"; (viii) equipment rentals for capitalized leases; (ix) administrative and
general expenses and disbursements of Lessee, including compensation of
employees of Lessee; (x) Federal, State and local Franchise and Income Taxes;
(xi) amortization of bond discounts and mortgage expenses; (xii) such other
costs or expenses which are normally treated as "Ownership Costs" under the
standard GAAP accounting practices (which are in accordance with generally
accepted accounting principles and are substantially similar to the Hotel and
A-3
<PAGE>
Motel Standard System of Accounts); (xiii) repayment of any Operating Deficit
Advances; (xiv) deposits into the Reserve Fund; and (xv) payments of rent (base
rent and percentage rent) due under the Participating Lease.
The term "Term Year" shall mean (i) with respect to the calendar year
-----------
during which the Effective Date occurs, the period ending on the last day of
such calendar year; (ii) with respect to each subsequent calendar year during
the Term other than the last, a twelve month period ending on the anniversary
date of the end of the first Term Year, and (iii) with respect to the calendar
year during which the end of the Term occurs, the period commencing at the end
of the previous Term Year and ending on the date the Term ends.
9. Subordination of Management Fees. Payment of the Basic
---------------------------------
Management Fee and the Incentive Management Fee shall be subordinated to the
payment of rent (base rent and participating rent) due under the Participating
Lease. In the event that there are insufficient funds in the Hotel Accounts to
pay all of the base rent and participating rent under the Participating Lease,
the Operating Costs and the Ownership Costs, the payment of any Basic and
Incentive Management Fees owed to Manager shall be deferred (without interest)
to such time as there are sufficient funds in the Hotel Accounts to make such
payments.
10. Suspension of Payments During Events of Default Under the
---------------------------------------------------------
Participating Lease. Upon written notice from the Partnership of the occurrence
- --------------------
of any monetary Event of Default by the Lessee under the Participating Lease or
any default under that certain promissory note given by Lessee to Lessor in
connection with the transfer of certain personal property at the Hotel (the
"FF&E Note"), no further payments of any Basic and Incentive Management Fees
shall be made to the Manager during the continuation of such Event of Default or
default. If any sum is paid to Manager on account of any Basic or Incentive
Management Fee after the occurrence and during the continuation of a monetary
Event of Default under the Participating Lease or a default under the FF&E Note,
such sum shall be promptly redeposited by Manager in the appropriate Hotel
Accounts. If the Event of Default or default is subsequently cured, any Basic
and Incentive Management Fees owed to Manager for the period during which such
Event or Default or default continued shall be, subject to the terms of this
Agreement, be thereafter paid (when otherwise due) to the extent of available
funds in the Hotel Accounts.
11. Limitation on Certain Management Fees.
--------------------------------------
(a) During the Term Years ending December 31, 1996, and December 31,
1997, the Basic and Incentive Management Fees will only be earned and paid to
the extent of any Available Lessee Income (as defined below) that is
attributable to Lessee operations during each of such years.
For this purpose: "Available Lessee Income" shall mean the product of
(i) the Applicable Percentage (as defined below) and (ii) Lessee Income (as
defined below).
A-4
<PAGE>
"Applicable Percentage" shall mean, as of the end of any Term Year,
---------------------
Lessee income from the operations of the Hotel, divided by Lessee income from
the operations of all hotels (including the Hotel) leased to the Lessee by the
Partnership, in each case determined in accordance with GAAP and expressed as a
decimal fraction.
"Lessee Income" shall mean, as of the end of any Term Year, (A) Lessee
-------------
income from the operation of all hotels (including the Hotel) leased to the
lessee by the Partnership (determined in accordance with GAAP) minus (B) to the
extent not previously deducted from Lessee income as set forth in clause (A),
the sum of (i) all rent payable to the Partnership under all leases between the
lessee and the Partnership, (ii) an allocable share of the Lessee's overhead
expenses that relate to hotels leased to the Lessee by the Partnership or its
affiliates and (iii) $50,000.
A-5
<PAGE>
EXHIBIT "C"
-----------
INSURANCE
---------
In accordance with and subject to the provisions of Section 2.1 (o),
Manager shall procure the insurance coverages (or operate the insurance
programs) hereinafter set forth and ensure that they are in full force and
effect on the Effective Date and that they remain in full force and effect
throughout the Term of this Agreement. All cost(s) and expense(s) incurred by
Manager in procuring the following insurance coverages (or operating the
insurance programs) shall be Operating Costs and shall be paid from the Hotel
Accounts:
<TABLE>
<CAPTION>
Coverages: Amounts of Insurance:
<S> <C>
At Lessee's Option: Workers Compensation
- -----------------------------------------
Insurance or Qualified Non-Subscriber Statutory or
- ------------------------------------- $1,000,000
Employee Injury Benefit Program ($200,000 deductible)
- -------------------------------
Employer's Liability $1,000,000
- --------------------
(Policy limits may be obtained by
purchasing an Umbrella Policy)
Fidelity (Employee Dishonesty) $1,000,000
- --------
Money and Securities Minimum of $50,000 Loss Inside/
- -------------------- $50,000 Loss Outside
Hotel Operations Errors & Omissions $1,000,000
- -----------------------------------
Guest Property on Premises $5,000 per Claim
- --------------------------
Guest Property in Safes $100,000
- -----------------------
</TABLE>
All insurance coverages provided for under this Exhibit "C" shall be
effected by policies issued by insurance companies (i) that are authorized to do
business in the state in which the Hotel is located; and (ii) that are of good
reputation and of sound and adequate financial responsibility, having a Best
Rating of A-IX, or better, or a comparable rating if Best ceases to publish its
ratings or materially changes its rating standards or procedures.
Manager shall deliver to Lessee and the Partnership duly executed
certificates of insurance with respect to all of the policies of insurance
procured, including existing, additional and renewal policies.
Each policy of insurance maintained in accordance with this Exhibit "C", to
the extent obtainable, shall specify that such policies shall not be canceled or
materially changed without
C-1
<PAGE>
at least thirty (30) days' prior written notice to Lessee, Manager and the
Partnership, except for cancellation due to non-payment of premium which shall
require ten (10) days' prior written notice to Lessee, Manager and the
Partnership.
Except as otherwise provided in the Agreement, Manager and Lessee each
waives, releases and discharges the other, but only to the extent of collectible
insurance proceeds, from all claims or demands which each may have or acquire
against the other or the other's subsidiaries, affiliates, directors, officers,
agents, employees, independent contractors or partners, with respect to any
claims for any losses, damages, liabilities or expenses (including attorneys'
fees) incurred or sustained by either of them on account of injury to persons or
damage to property or business arising out of the ownership, management,
operation and maintenance of the Hotel, regardless whether any such claim or
demand may arise because of the fault or negligence of the other party or its
subsidiaries, affiliates, officers, employees, directors, agents, partners or
independent contractors. Each policy of insurance maintained in accordance with
this Exhibit "C" shall contain a specific waiver of subrogation reflecting the
above.
All policies of insurance provided for under this Exhibit "C" shall be
carried in the name of the Manager. The Partnership shall be named as an
additional insured. Lessee's interest and that of any other applicable party to
the extent obtainable will be included in the coverage by an additional insured
endorsement.
Coverage afforded on behalf of the Lessee will be primary and will name the
Lessee and such other parties as Lessee shall specify as additional insureds.
Manager will also waive rights of subrogation against Lessee with respect to
Workers Compensation coverage.
All such policies of insurance shall be written on an "occurrence" basis,
with no per location aggregate limitation.
Either Manager, the Partnership or Lessee, by notice to the other, shall
have the right to require that the minimum amount of insurance to be maintained
with respect to the Hotel under this Exhibit "C" be increased to make such
insurance comparable with prudent industry standards and to reflect increases in
liability exposures, taking into account the size and location of the Hotel.
C-2
<PAGE>
EXHIBIT "D"
-----------
INSURANCE
---------
In accordance with and subject to the provisions of Section 2.1(o),
Manager shall procure the insurance coverages (or operate the insurance
programs) hereinafter set forth and ensure that they are in full force and
effect on the Effective Date and that they remain in full force and effect
throughout the Term of this Agreement. All cost(s) and expense(s) incurred by
Manager in procuring the following insurance coverages (or operating the
insurance programs) shall be Ownership Costs and shall be paid from the Hotel
Accounts:
<TABLE>
<CAPTION>
Coverages: Amounts of Insurance:
<S> <C>
Builders Risk Completed value of the Hotel
- -------------
All risk for term of the initial and any Waiver of Co-Insurance
subsequent Hotel construction and Subject to Policy Exclusions
renovation.
Real and Personal Property 100% replacement value of
- -------------------------- building and contents
Blanket Coverage
Replacement Cost - all risk Waiver of Co-Insurance
Boiler Machinery - written on a Subject to Policy Exclusions
comprehensive form
Business Interruption Calculated yearly based on
- --------------------- estimated Hotel revenues.
Blanket Coverage for the perils
insured against under Real and
Personal Property in this Exhibit
"D". This coverage shall
specifically cover Manager's loss of
applicable management fees. The
business interruption insurance shall
be for a twelve (12) month
indemnity period.
Lessee's Protective Liability $1,000,000
- -----------------------------
All risks from construction and renovation
occurring prior to the Effective Date and all
risks from Hotel construction and
renovation projects costing more than
$250,000 occurring after the Effective Date
D-1
<PAGE>
Comprehensive General Liability* $10,000,000
- -------------------------------- per location
Including -
Premises - Operations
Products/Completed Operations
Contractual
Personal Injury
Liquor Liability/Dram Shop (if
applicable)
Elevators and Escalators
Valet Parking Away from Premises
Automobile Liability* $5,000,000
- ---------------------
Owned Vehicles
Non-Owned Vehicles
Uninsured Motorist where required
by statute
Garagekeepers
Automobile Physical Damage (Optional)
- -------------------------------------
Comprehensive (To value if insured)
Collision
(*General Liability and Auto Liability limits may be obtained
by purchasing an Umbrella Policy.)
</TABLE>
All insurance coverages provided for under this Exhibit "D" shall be
effected by policies issued by insurance companies (i) that are authorized to do
business in the state in which the Hotel is located; and (ii) that are of good
reputation and of sound and adequate financial responsibility, having a Best
Rating of A-IX, or better, or a comparable rating if Best ceases to publish its
ratings or materially changes its rating standards or procedures.
Manager shall deliver to Lessee and the Partnership duplicate copies of
either insurance policies or certificates of insurance (at Lessee's option) with
respect to all of the policies of insurance procured, including existing,
additional and renewal policies, and in the case of insurance nearing
expiration, shall deliver duplicate copies of the insurance policies or
certificates of insurance with respect to the renewal policies to Lessee and the
Partnership not less than thirty (30) days prior to the respective dates of
expiration.
Each policy of insurance maintained in accordance with this Exhibit "D", to
the extent obtainable, shall specify that such policies shall not be canceled or
materially changed without at least thirty (30) days' prior written notice to
Lessee, the Partnership and Manager.
D-2
<PAGE>
Except as otherwise provided in the Agreement, Manager and Lessee each
waives, releases and discharges the other, but only to the extent of collectible
insurance proceeds, from all claims or demands which each may have or acquire
against the other, or against the other's subsidiaries, affiliates, directors,
officers, agents, employees, independent contractors or partners, with respect
to any claims for any losses, damages, liabilities or expenses (including
attorneys' fees) incurred or sustained by either of them on account of injury to
persons or damage to property or business arising out of the ownership,
management, operation and maintenance of the Hotel, regardless whether any such
claim or demand may arise because of the fault or negligence of the other party
or its subsidiaries, affiliates, officers, employees, directors, agents or
independent contractors. Each policy of insurance maintained in accordance with
this Exhibit "D" shall contain a specific waiver of subrogation reflecting the
above.
All policies of insurance provided for under this Exhibit "D" shall be
carried in the name of the Partnership and Manager, and losses thereunder shall
be payable to the parties as their respective interests may appear. All
liability policies shall name the Lessee and any of its affiliated or subsidiary
companies which it may specify, and their respective directors, officers,
agents, employees and partners as additional named insureds. Manager will also
waive rights of subrogation against Lessee with respect to Workers Compensation
coverage.
All such policies of insurance shall be written on an "occurrence" basis.
Either Manager, the Partnership or Lessee, by notice to the other, shall
have the right to require the minimum amount of insurance to be maintained with
respect to the Hotel under this Exhibit "D" be increased to make such insurance
comparable with prudent industry standards and to reflect increases in liability
exposures, taking into account the size and location of the Hotel.
D-3
<PAGE>
EXHIBIT D
[FORM OF EXCHANGE RIGHTS AGREEMENT]
<PAGE>
EXCHANGE RIGHTS AGREEMENT
THIS EXCHANGE RIGHTS AGREEMENT (this "AGREEMENT"), dated as of July 31,
1996, is entered into by and among American General Hospitality Corporation, a
Maryland corporation (the "COMPANY"), American General Hospitality Operating
Partnership, L.P., a Delaware limited partnership (the "OPERATING PARTNERSHIP"),
and the Persons whose names are set forth on Exhibit A attached hereto (as it
---------
may be amended from time to time).
R E C I T A L S:
---------------
A. The Company, through AGH GP, Inc., a Nevada corporation ("AGH GP") and
AGH LP, Inc., a Nevada corporation ("AGH LP"), each a wholly-owned subsidiary of
the Company, have formed the Operating Partnership pursuant to the Amended and
Restated Agreement of Limited Partnership of the Operating Partnership dated the
date hereof (the "PARTNERSHIP AGREEMENT").
B. Pursuant to the Partnership Agreement, the Limited Partners (as defined
below) hold units of limited partnership interest ("OP UNITS") in the Operating
Partnership.
C. The Operating Partnership has agreed to provide the Limited Partners
with certain rights to exchange their OP Units for cash or, at the election of
the Company, for shares of the Company's common stock, $0.01 par value per share
(the "REIT STOCK").
Accordingly, the parties hereto do hereby agree as follows:
ARTICLE 1
DEFINED TERMS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"ASSIGNEE" means a Person to whom one or more OP Units have been
transferred in a manner permitted under the Partnership Agreement, but who has
not become a substituted Limited Partner in accordance therewith.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in New York, New York are authorized or required by law
to close.
"CASH AMOUNT" means an amount of cash per OP Unit equal to the Value on the
Valuation Date of the REIT Stock Amount.
<PAGE>
"EXCHANGE FACTOR" means 1.0, provided, that in the event that the Company
(i) declares or pays a dividend on its outstanding REIT Stock in REIT Stock or
makes a distribution to all holders of its outstanding REIT Stock in REIT Stock;
(ii) subdivides its outstanding REIT Stock; or (iii) combines its outstanding
REIT Stock into a smaller number of shares of REIT Stock, the Exchange Factor
shall be adjusted by multiplying the Exchange Factor by a fraction, the
numerator of which shall be the number of shares of REIT Stock issued and
outstanding on the record date for such dividend, contribution, subdivision or
combination assuming for such purpose that such dividend, distribution,
subdivision or combination has occurred as of such time, and the denominator of
which shall be the actual number of shares of REIT Stock (determined without the
above assumption) issued and outstanding on the record date for such dividend,
distribution, subdivision or combination. Any adjustment to the Exchange Factor
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
"EXCHANGING PARTNER" has the meaning set forth in Section 2.1 hereof.
"EXCHANGE RIGHT" has the meaning set forth in Section 2.1 hereof.
"IPO" means an initial public offering by the Company of the REIT Stock
pursuant to a Registration Statement on Form S-11, filed with and declared
effective by the SEC.
"LIEN" means any lien, security interest, mortgage, deed of trust, charge,
claim, encumbrance, pledge, option, right of first offer or first refusal and
any other right or interest of others of any kind or nature, actual or
contingent, or other similar encumbrance of any nature whatsoever.
"LIMITED PARTNER" means any Person, other than AGH LP, named as a Limited
Partner on Exhibit A, as such Exhibit may be amended from time to time.
"LOCK-UP AGREEMENT" means the Lock-up Agreement among the Company and the
Limited Partners, dated the date hereof.
"NOTICE OF EXCHANGE" means the Notice of Exchange substantially in the form
of Exhibit B to this Agreement.
"REIT STOCK AMOUNT" means that number of shares of REIT Stock equal to the
product of the number of OP Units offered for exchange by an Exchanging Partner,
multiplied by the Exchange Factor as of the Valuation Date, provided, that in
the event the Company or the Operating Partnership issues to all holders of REIT
Stock rights, options, warrants or convertible or exchangeable securities
entitling the stockholders to subscribe for or purchase REIT Stock, or any other
securities or property (collectively, the "rights"), then the REIT Stock Amount
shall also include such rights that a holder of that number of shares of REIT
Stock would be entitled to receive.
"SEC" means the Securities and Exchange Commission.
-2-
<PAGE>
"SPECIFIED EXCHANGE DATE" means the tenth (10th) Business Day after receipt
by the Operating Partnership and the Company of a Notice of Exchange.
"VALUATION DATE" means the date of receipt by the Operating Partnership and
the Company of a Notice of Exchange or, if such date is not a Business Day, the
first Business Day thereafter.
"VALUE" means, with respect to shares of REIT Stock, the average of the
daily market price for the five (5) consecutive trading days immediately
preceding the Valuation Date. The market price for each such trading day shall
be: (i) if the REIT Stock are listed or admitted to trading on the New York
Stock Exchange (the "NYSE"), any national securities exchange or the Nasdaq
Stock Market ("Nasdaq"), the closing price on such day, or if no such sale takes
place on such day, the average of the closing bid and asked prices on such day;
(ii) if the REIT Stock is not listed or admitted to trading on the NYSE, any
national securities exchange or the Nasdaq, the last reported sale price on such
day or, if no sale takes place on such day, the average of the closing bid and
asked prices on such day, as reported by a reliable quotation source designated
by the Company; or (iii) if the REIT Stock is not listed or admitted to trading
on the NYSE, any national securities exchange or the Nasdaq and no such last
reported sale price or closing bid and asked prices are available, the average
of the reported high bid and low asked prices on such day, as reported by a
reliable quotation source designated by the Company, or if there shall be no bid
and asked prices on such day, the average of the high bid and low asked prices,
as so reported, on the most recent day (not more than five (5) days prior to the
date in question) for which prices have been so reported; provided, that if
there are no bid and asked prices reported during the five (5) days prior to the
date in question, the Value of the REIT Stock shall be determined by the
independent directors of the Company acting in good faith on the basis of such
quotations and other information as they consider, in their reasonable judgment,
appropriate. In the event the REIT Stock Amount includes rights that a holder
of REIT Stock would be entitled to receive, then the Value of such rights shall
be determined by the independent directors of the Company acting in good faith
on the basis of such quotations and other information as they consider, in their
reasonable judgment, appropriate.
ARTICLE 2
EXCHANGE RIGHT
Section 2.1. Exchange Right.
--------------
A. Subject to Sections 2.1.B, 2.1.C, 2.1.D and 2.1.E hereof, and subject
to any limitations under applicable law, the Operating Partnership hereby grants
to each Limited Partner and each Limited Partner hereby accepts the right (the
"EXCHANGE RIGHT"), exercisable on or after the date that is one (1) year after
the closing of the IPO, to exchange on a Specified Exchange Date all or a
portion of the OP Units held by such Limited Partner at an exchange price equal
to the Cash Amount. The Exchange Right shall be exercised pursuant to a Notice
of Exchange delivered to the Operating Partnership, with a copy delivered to the
Company, by the Limited Partner who is exercising the Exchange Right (the
"EXCHANGING PARTNER"); provided, however, that the
-3-
<PAGE>
Company, on behalf of the Operating Partnership, may elect, after a Notice of
Exchange is delivered, to satisfy the Exchange Right which is the subject of
such notice in accordance with Section 2.1.B. A Limited Partner may not exercise
the Exchange Right for less than one thousand (1,000) OP Units or, if such
Limited Partner holds less than one thousand (1,000) OP Units, all of the OP
Units held by such Limited Partner. Any Assignee of a Limited Partner may
exercise the rights of such Limited Partner pursuant to this Section 2.1, and
such Limited Partner shall be deemed to have assigned such rights to such
Assignee and shall be bound by the exercise of such rights by such Assignee. In
connection with any exercise of such rights by an Assignee on behalf of a
Limited Partner, the Cash Amount or the REIT Stock Amount, as the case may be,
shall be satisfied by the Operating Partnership or the Company, as the case may
be, directly to such Assignee and not to such Limited Partner.
B. Notwithstanding the provisions of Section 2.1.A, the Company may, on
behalf of the Operating Partnership, in its sole and absolute discretion, elect
to satisfy an Exchanging Partner's Exchange Right by exchanging REIT Stock and
rights equal to the REIT Stock Amount on the Specified Exchange Date for the OP
Units offered for exchange by the Exchanging Partner. In the event the Company
shall elect to satisfy, on behalf of the Operating Partnership, an Exchanging
Partner's Exchange Right by exchanging REIT Stock for the OP Units offered for
exchange, (i) the Company hereby agrees to notify the Exchanging Partner within
five (5) Business Days after the receipt by the Company of such Notice of
Exchange, (ii) each Exchanging Partner hereby agrees to execute such documents
and instruments as the Company may reasonably require in connection with the
issuance of REIT Stock upon exercise of the Exchange Right and (iii) the Company
hereby agrees to deliver stock certificates representing fully paid and
nonassessable shares of REIT Stock.
C. Notwithstanding anything herein to the contrary, the Company shall not
be entitled to satisfy an Exchanging Partner's Exchange Right pursuant to
Section 2.1.B if the delivery of REIT Stock to such Limited Partner by the
Company pursuant to Section 2.1.B (regardless of the Operating Partnership's
obligations to the Limited Partner under Section 2.1.A) (i) would be prohibited
under the Articles of Incorporation of the Company, (ii) would otherwise
jeopardize the REIT status of the Company, or (iii) would cause the acquisition
of the REIT Stock by the Limited Partner to be "integrated" with any other
distribution of REIT Stock by the Company for purposes of complying with the
registration provisions of the Securities Act of 1933, as amended.
D. Any Cash Amount to be paid to an Exchanging Partner shall be paid on
the Specified Exchange Date; provided, however, that the Operating Partnership
-------- -------
may elect to cause the Specified Exchange Date to be delayed for up to an
additional 60 days to the extent required for the Company to cause additional
REIT Shares to be issued to provide financing to be used to make such payment of
the Cash Amount by the Operating Partnership.
E. Notwithstanding the provisions of Section 2.1., any person to whom OP
Units have been pledged, in compliance with the terms of the Lock-up Agreement,
may exercise its Exchange Right prior to the date that is one (1) year after the
closing of the IPO, provided however, such OP Units shall only be exchangeable
for the Cash Amount.
-4-
<PAGE>
F. The Exchange Right shall expire with respect to any OP Units for which
an Exchange Notice has not been delivered to the Operating Partnership and the
Company on or before December 31, 2046.
G. Any exchange of OP Units pursuant to this Article 2 shall be deemed to
have occurred as of the Specified Exchange Date for all purposes, including
without limitation the payment of distributions or dividends in respect of OP
Units or REIT Stock, as applicable. Any OP Units acquired by the Company
pursuant to an exercise by any Limited Partner of an Exchange Right shall be
deemed to be acquired by and reallocated or reissued to the Company. AGH GP, as
general partner of the Operating Partnership, shall amend the Partnership
Agreement to reflect each such exchange and reallocation or reissuance of OP
Units and each corresponding recalculation of the OP Units of the Limited
Partners. The number of OP Units to be reallocated or reissued to the Company
shall equal the number of shares of REIT Stock issued to a Limited Partner upon
exercise of an Exchange Right in accordance with the terms of this Agreement.
ARTICLE 3
OTHER PROVISIONS
Section 3.1. Covenants of the Company.
------------------------
A. At all times during the pendency of the Exchange Right, the Company
shall reserve for issuance such number of shares of REIT Stock as may be
necessary to enable the Company to issue such shares in full payment of the REIT
Stock Amount in regard to all OP Units held by Limited Partners which are from
time to time outstanding.
B. During the pendency of the Exchange Right, the Company shall deliver to
Limited Partners in a timely manner all reports filed by the Company with the
SEC to the extent the Company also transmits such reports to its stockholders
and all other communications transmitted from time to time by the Company to its
stockholders generally.
C. The Company shall notify each Limited Partner, upon request, of the
then current Exchange Factor and such notice will include a reasonable
explanation of the Exchange Factor calculation to be applied at such time.
Section 3.2. Fractional Shares.
-----------------
No fractional shares of REIT Stock shall be issued upon exchange of OP
Units. The number of full shares of REIT Stock which shall be issuable upon
exchange of OP Units (or the cash equivalent amount thereof if the Cash Amount
is paid) shall be computed on the basis of the aggregate amount of OP Units so
surrendered. Instead of any fractional shares of REIT Stock which would
otherwise be issuable upon exchange of any OP Units, the Operating Partnership
shall pay a cash adjustment in respect of such fraction in an amount equal to
the Cash Amount of an OP Unit multiplied by such fraction.
-5-
<PAGE>
ARTICLE 4
GENERAL PROVISIONS
Section 4.1. Addresses and Notice.
--------------------
Any notice, demand, request or report required or permitted to be given or
made to the Operating Partnership, the Company, a Limited Partner or Assignee,
as the case may be, under this Agreement shall be in writing and shall be deemed
given or made when delivered in person or when sent by first class United States
mail or by other similarly reliable means of written communication to the
Operating Partnership, the Company, a Limited Partner or Assignee, as the case
may be, (i) at the address listed on the records of the Operating Partnership,
with respect to a Limited partner or Assignee, and (ii) at 3860 West Northwest
Highway, Suite 300, Dallas, Texas 75220, Attn: President, with respect to the
Operating Partnership or the Company.
Section 4.2. Titles and Captions.
-------------------
All article or section titles or captions in this Agreement are for
convenience only. They shall not be deemed part of this Agreement and in no way
define, limit, extend or describe the scope or intent of any provisions hereof.
Except as specifically provided otherwise, references to "Articles" and
"Sections" are to Articles and Sections of this Agreement.
Section 4.3. Pronouns and Plurals.
--------------------
Whenever the context may require, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns, pronouns and verbs shall include the plural and vice versa.
Section 4.4. Further Action and Additional Restrictions.
------------------------------------------
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
Section 4.5. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 4.6. Waiver.
------
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach or any other covenant, duty, agreement or condition.
-6-
<PAGE>
Section 4.7. Counterparts.
------------
This Agreement may be executed in counterparts, all of which together shall
constitute one agreement binding on all of the parties hereto, notwithstanding
that all such parties are not signatories to the original or the same
counterpart. Each party shall become bound by this Agreement immediately upon
affixing its signature hereto.
Section 4.8. Applicable Law.
--------------
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Maryland, without regard to the principles
of conflicts of law thereof.
Section 4.9. Invalidity of Provisions.
------------------------
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
Section 4.10. Entire Agreement.
----------------
This Agreement contains the entire understanding and agreement among the
Limited Partners, the Operating Partnership and the Company with respect to the
subject matter hereof and supersedes any other prior written or oral
understandings or agreements among them with respect thereto.
Section 4.11. Amendment.
---------
This Agreement may be amended from time to time in the same manner as the
Partnership Agreement (in accordance with Section 14.1A thereof) may be amended
as provided therein but excluding the interests of AGHLP.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
THE COMPANY:
AMERICAN GENERAL HOSPITALITY CORPORATION
By:__________________________________________
Name: Steven D. Jorns
Title: Chairman, Chief Executive Officer
and President
AMERICAN GENERAL HOSPITALITY OPERATING
PARTNERSHIP, L.P.
BY: AGH GP, INC., its general partner
By:_________________________________________
Name: Steven D. Jorns
Title: Chairman, Chief Executive Officer
and President
<PAGE>
Signature page to the Exchange Rights Agreement entered into by and among
American General Hospitality Corporation, American General Hospitality Operating
Partnership, L.P. the undersigned and the other parties thereto.
VIRTUAL HOSPITALITY, INC.
By: *
-----------------------------------------------------
JACKSON-SHAW PARTNERS NO. 51, LTD.
By: *
----------------------------------------------------
3005 HOTEL ASSOCIATES, LTD.
By: *
----------------------------------------------------
3100 HOTEL ASSOCIATES, LTD.
By: *
----------------------------------------------------
3860 INVESTORS JOINT VENTURE
By: *
----------------------------------------------------
*
---------------------------------------------------
Steven D. Jorns
JIM SOWELL CONSTRUCTION CO., INC.
By: *
----------------------------------------------------
<PAGE>
*
-------------------------------------------------------
James E. Sowell
*
--------------------------------------------------------
Kenneth W. Shaw
*
--------------------------------------------------------
Lewis W. Shaw II
*
--------------------------------------------------------
Monica Jorns
282 ALMADEN HOTEL ASSOCIATES, L.P.
By: *
--------------------------------------------------
Date July ___, 1996 *By:
____________________________________________________
Bruce G. Wiles
Pro Se and Attorney-in-Fact
<PAGE>
Signature page to the Exchange Rights Agreement entered into by and among
American General Hospitality Corporation, American General Hospitality Operating
Partnership, L.P., the undersigned and the other parties thereto.
*
--------------------------------------------------
Louis E. Capt
*
--------------------------------------------------
Richard O. Jacobson
*
--------------------------------------------------
Hervey A. Feldman
*
--------------------------------------------------
Pin N. Hwang
*
--------------------------------------------------
Thomas L. Wiese
*
--------------------------------------------------
Steven L. Cobb
*
--------------------------------------------------
Richard A. & Barbara A. Hess
*
--------------------------------------------------
Jerry Jacob
Dated: July __, 1996 *By: ____________________________________________
Thomas J. Corcoran, Jr.
Pro Se and Attorney-in-Fact
<PAGE>
Signature page to the Exchange Rights Agreement entered into by and among
American General Hospitality Corporation, American General Hospitality Operating
Partnership, L.P., the undersigned and the other parties thereto.
DEVLO, INC.
Dated: July __, 1996 By:
______________________________
Bruce G. Wiles
Attorney-in-Fact
<PAGE>
Signature page to the Exchange Rights Agreement entered into by and among
American General Hospitality Corporation, American General Hospitality Operating
Partnership, L.P., the undersigned and the other parties thereto.
*
___________________________________
John D. Gourley
Dated: July __, 1996 *By:
_______________________________
Bruce G. Wiles
Attorney-in-Fact
<PAGE>
Signature page to the Exchange Rights Agreement entered into by and among
American General Hospitality Corporation, American General Hospitality Operating
Partnership, L.P., the undersigned and the other parties thereto.
Dated: July __, 1996 DFW SOUTH ACQUISITION CORPORATION,
a Texas corporation
By:
_________________________________
Name:
Title:
<PAGE>
Signature Page to Amended and Restated Agreement of Limited Partnership of
American General Hospitality Operating Partnership, L.P., by and among the
undersigned and the other parties thereto.
Dated: July __, 1996 CORPORATE PROPERTY ASSOCIATES 4,
a California limited partnership
By: CAREY CORPORATE PROPERTY, INC.,
General Partner
By:_______________________________
Name:
Title:
CORPORATE PROPERTY ASSOCIATES 8, L.P.,
a Delaware limited partnership
By: EIGHTH CAREY CORPORATE
PROPERTY, INC., as Managing General
Partner
By:______________________________
Name:
Title:
<PAGE>
Signature Page to Exchange Rights Agreement by and among American General
Hospitality Corporation, American General Hospitality Operating Partnership,
L.P., the undersigned and the other parties thereto.
HOLDERS:
Holiday Inn Select CRAIG STARK, INC.
4402 East Washington Ave.
Madison, Wisconsin 53704
By:____________________________
Name:
Title:
<PAGE>
Signature page to the Exchange Rights Agreement entered into by and among
American General Hospitality Corporation, American General Hospitality Operating
Partnership, L.P., the undersigned and the other parties thereto.
Dated: July __, 1996
----------------------------
Kenneth E. Barr
<PAGE>
Exhibit A
---------
Limited Partners and Their Addresses
Virtual Hospitality, Inc. 3860 Investors Joint Venture
3860 W. Northwest Highway 3860 W. Northwest Highway
Suite 300 Suite 300
Dallas, Texas 75220 Dallas, Texas 75220
Jackson-Shaw Partners No. 51, Ltd. Steven D. Jorns
3131 McKinney Suite 200 4700 Bluffview
Dallas, Texas 75204-2471 Dallas, Texas 75220
3005 Hotel Associates, Ltd. Jim Sowell Construction Co., Inc.
3860 W. Northwest Highway 7000 Vassar
Suite 300 Dallas, Texas 75205
Dallas, Texas 75220
3100 Hotel Associates, Ltd. James E. Sowell
3860 W. Northwest Highway 7000 Vassar
Suite 300 Dallas, Texas 75205
Dallas, Texas 75220
Lewis W. Shaw, II Kenneth W. Shaw
9915 Meadowbrook 1313 Plantation Drive
Dallas, Texas 75220 Calleyville, Texas 76034
Monica D. Jorns Bruce G. Wiles
4700 Bluffview 5204 Lincolnshire Ct.
Dallas, Texas 75209 Dallas, Texas 75287
Louis E. Capt Kenneth E. Barr
L.E.C. Investments 3206 Brook Glen Drive
333 E. Main (Box 189) Garland, Texas 75044
Uvalde, TX 78801
Thomas L. Wiese
3351 Inbleside Drive
Dallas, TX 75229
Richard O. Jacobson Steven L. Cobb
c/o Jacobson Warehouses 140 Mockingbird Lane
3811 Dixon Avenue Coppell, TX 75019
Des Moines, IA 50313
<PAGE>
Thomas J. Corcoran, Jr. Richard A. & Barbara A. Hess
4100 Oxford Court 12920 NW 17th Street
Colleyville, TX 76034 Topeka, KS 66615-9818
Hervey A. Feldman Jerry Jacob
8181 Douglas, #310 c/o S&B Technical Products, Inc.
Dallas, TX 75225 One Holly Hill Lane
Greenwich, CT 06830
Pin N. Hwang
360 E. Randolph St., #3006
Chicago, IL 60601
Devlo, Inc.
c/o James Pruett
4381 Green Oaks Blvd. West, #100
Arlington, Texas 76016-4465
John D. Gourley
Madison Realty Investors
3300 Oak Lawn, #606
Dallas, Texas 75219
DFW South Acquisition Corporation
545 East John Carpenter Freeway
Irving, Texas 75062
Craig Stark, Inc.
4402 E. Washington Ave.
Madison, WI 53704
Corporate Property Associates 4,
a California limited partnership
c/o W.P. Carey & Company, Inc.
Attn: Anthony Mohl
50 Rockefeller Plaza, 2nd Floor
New York, NY 10020
<PAGE>
Corporate Property Associates 8, L.P.
c/o W.P. Carey & Company, Inc.
Attn: Anthony Mohl
50 Rockefeller Plaza, 2nd Floor
New York, NY 10020
<PAGE>
Exhibit B
---------
Notice of Exchange
The undersigned Limited Partner hereby irrevocably (i) exchanges
___________ OP Units in American General Hospitality Operating Partnership,
L.P., in accordance with the terms of the Exchange Rights Agreement, dated as of
______________, 1996, and the Exchange Right referred to therein; (ii)
surrenders such OP Units and all right, title and interest therein; and (iii)
directs that the Cash Amount or REIT Stock Amount (as determined by the Company)
deliverable upon exercise of the Exchange Right be delivered to the address
specified below, and if REIT Stock is to be delivered, such REIT Stock will be
registered or placed in the name(s) and at the address(es) specified below. The
undersigned hereby represents, warrants, and certifies that the undersigned (a)
has marketable and unencumbered title to such OP Units, free and clear, other
than any encumbrance arising pursuant to the Partnership Agreement, of the
rights or interests of any other person or entity; (b) has the full right,
power, and authority to exchange and surrender such OP Units as provided herein;
and (c) has obtained the consent or approval of all persons or entities, if any,
(other than consent or approval that may be required of the Company or the
Operating Partnership) having the right to consent or approve such exchange and
surrender on the part of the undersigned.
Dated: __________________________
Name of Limited Partner: -----------------------------------------
Please Print
-----------------------------------------
(Signature of Limited Partner)
-----------------------------------------
(Street Address)
-----------------------------------------
(City) (State) (Zip Code)
Signature Guaranteed by:
------------------------------------------
If REIT Stock is to be issued, issue to:
Name: ________________________________
Please insert social security or identifying number: ______________
<PAGE>
EXHIBIT E
[FORM OF LOCK-UP LETTER]
<PAGE>
LOCK-UP LETTER
________ ___, 199__
American General Hospitality Corporation
American General Hospitality Operating Partnership, L.P.
c/o American General Hospitality Corporation
3860 West Northwest Highway
Suite 300
Dallas, Texas 75220
Ladies and Gentlemen:
Reference is made to the Master Alliance Agreement, dated as of
January ___, 1997 (the "Agreement"), by and among the undersigned, WHC
Development Corporation, a Delaware corporation, American General Hospitality
Corporation, a Maryland corporation (the "COMPANY"), and American General
Hospitality Operating Partnership, L.P., a Delaware limited partnership (the
"OPERATING PARTNERSHIP"), pursuant to which the undersigned will receive either
shares of common stock, par value $0.01 per share (the "COMMON STOCK"), of the
Company or units of limited partnership interest in the Operating Partnership
("OP UNITS").
In order to induce the Company and the Operating Partnership to
consummate the transactions contemplated by the Agreement, the undersigned,
intending to be legally bound, hereby agrees that, in the case of OP Units,
without the prior written consent of the general partner of the Operating
Partnership, and in the case of the Common Stock, the Company, for a 180-day
period commencing on the date hereof (the "LOCK-UP PERIOD") the undersigned will
not (and will not announce or disclose any intention to), and shall cause each
of its affiliates not to, directly or indirectly, offer to sell, sell, solicit
an offer to buy, contract to sell, grant any option for the sale of, or
otherwise transfer or dispose of, any shares of Common Stock or OP Units
received pursuant to the Agreement or pursuant to the Amended and Restated
Agreement of Limited Partnership of the Operating Partnership; provided,
--------
however, that the foregoing shall not restrict any transfer of Common Stock or
- -------
OP Units acquired pursuant to this Agreement to WYN or any direct or indirect
wholly-owned subsidiary of WYN, or any bona fide pledge to secure indebtedness
---- ----
or any transfer upon foreclosure thereof, if the transfer or pledge is subject
to the condition that the transferee is bound by the foregoing restrictions.
The undersigned acknowledges that any sale or transfer of any shares
of Common Stock or OP Units in violation of this Letter will be null and void.
The undersigned acknowledges that it is impossible to measure the damages that
will accrue to the Company
<PAGE>
and/or the Operating Partnership by reason of a failure of the undersigned to
comply with the provisions of this Letter. Therefore, if the Company and/or the
Operating Partnership shall institute any action or proceeding to enforce the
provisions hereof, the undersigned agrees that the Company and/or the Operating
Partnership shall be entitled to injunctive relief, and the undersigned waives,
and shall not allege, any claim or defense to such action or proceeding,
including, without limitation, any claim or defense that the undersigned has an
adequate remedy at law.
IN WITNESS WHEREOF, each of the parties hereto has executed this Lock-
Up Agreement, or caused this Lock-Up Agreement to be duly executed on its
behalf, as of the date first written above.
WHC FRANCHISE CORPORATION
By:___________________________
Name:
Title:
-2-
<PAGE>
EXHIBIT F
[FORM OF REGISTRATION RIGHTS AGREEMENT]
<PAGE>
REGISTRATION RIGHTS AGREEMENT
dated as of ___________ ___, 1997
between
AMERICAN GENERAL HOSPITALITY CORPORATION
and
WHC FRANCHISE CORPORATION
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), is made and entered
into as of __________ ___, 1997, by and among American General Hospitality
Corporation, a Maryland corporation (the "Company"), and WHC Franchise
Corporation, a Delaware corporation ("Wyndham").
RECITALS
--------
The parties hereto have entered into the Master Agreement (as hereinafter
defined), which contemplates, among other things, the execution and delivery of
this Agreement by the parties hereto.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following terms have
-----------
the following meanings when used herein with initial capital letters:
Common Stock: The Common Stock, $.01 par value, of the Company.
------------
Demand Notice: As defined in Section 3 hereof.
-------------
Demand Registration: As defined in Section 3 hereof.
-------------------
Exchange Act: The Securities Exchange Act of 1934, as amended.
------------
Losses: As defined in Section 7 hereof.
------
Master Agreement: The Master Alliance Agreement dated January 9, 1997
----------------
among the Company, American General Hospitality Operating Partnership, L.P.,
Wyndham and WHC Development Corporation.
OP Units: Units of limited partnership interest in American General
--------
Hospitality Operating Partnership, L.P., a Delaware limited partnership.
-2-
<PAGE>
Piggyback Registration: As defined in Section 4 hereof.
----------------------
Prospectus: The prospectus included in any Registration Statement
----------
(including without limitation a prospectus that discloses information previously
omitted from a prospectus filed as part of an effective registration statement
in reliance upon Rule 430A promulgated under the Securities Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Registrable Securities covered by such
Registration Statement and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
Registrable Securities: The Shares, until, in the case of any such Share,
----------------------
(i) it is effectively registered under the Securities Act and disposed of in
accordance with the Registration Statement covering it, (ii) it is saleable by
the holder thereof pursuant to Rule 144(k), or (iii) it is distributed to the
public by the holder thereof pursuant to Rule 144.
Registration Statement: Any registration statement of the Company under
----------------------
the Securities Act that covers any of the Registrable Securities pursuant to the
provisions of this Agreement, including the related Prospectus, all amendments
and supplements to such registration statement (including post-effective
amendments), all exhibits and all material incorporated by reference or deemed
to be incorporated by reference in such registration statement.
Rule 144: Rule 144 under the Securities Act, as such Rule may be amended
--------
from time to time, or any similar rule or regulation hereafter adopted by the
SEC.
SEC: The Securities and Exchange Commission.
---
Securities Act: The Securities Act of 1933, as amended.
--------------
Sellers' Counsel: As defined in Section 6 hereof.
----------------
Shares: All shares of Common Stock acquired by a Wyndham Holder pursuant
------
to the Master Agreement, including those acquired
-3-
<PAGE>
upon exchange of OP Units acquired by a Wyndham Holder pursuant to such
Agreement.
Shelf Registration Statement: A Registration Statement which covers the
----------------------------
sale of Registrable Securities pursuant to Rule 415 under the Securities Act, as
such Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the SEC.
Underwritten registration or underwritten offering: A registration in
--------------------------------------------------
which securities of the Company are sold to an underwriter for reoffering to the
public.
Wyndham Holder: Wyndham or its parent, Wyndham Hotel Corporation, a
--------------
Delaware corporation, or any other direct or indirect wholly-owned subsidiary of
Wyndham Hotel Corporation.
2. (a) Shelf Registration. By October 31, 1997, the Company shall file a
------------------
Shelf Registration Statement providing for the sale by Wyndham Holders of
Registrable Securities and shall thereafter file such additional Shelf
Registration Statements, if any, as shall be necessary to cause all Registrable
Securities held by Wyndham Holders from time to time to be covered by a Shelf
Registration Statement. The Company shall use all reasonable efforts to cause
such Shelf Registration Statement(s) to be declared effective by the SEC as soon
as practicable. The Company agrees to use its reasonable efforts to keep the
Shelf Registration Statement(s) continuously effective for a period expiring on
the date on which all of the Registrable Securities have been sold pursuant to
the Shelf Registration Statement(s) or pursuant to a Demand Registration or
Piggyback Registration or until all of the Registrable Securities have become
eligible for sale pursuant to Rule 144(k) promulgated under the Securities Act
and, further agrees to supplement or amend the Shelf Registration Statement(s),
if and as required by the rules, regulations or instructions applicable to the
registration form used by the Company for such Shelf Registration Statement or
by the Securities Act or by any other rules and regulations thereunder for shelf
registration.
(b) Postponement or Suspension of Shelf Registration.
------------------------------------------------
Notwithstanding the foregoing, the Company shall not be required to file a Shelf
Registration Statement or to keep a Shelf Registration
-4-
<PAGE>
Statement effective if the negotiation or consummation of a transaction is
pending or an event has occurred, which negotiation, consummation or event would
require additional disclosure by the Company in the Registration Statement of
material information which the Company, in its good faith business judgment, has
a bona fide business purpose for keeping confidential and the non-disclosure of
---- ----
which in the Registration Statement could reasonably be expected to cause the
Registration Statement to fail to comply with applicable disclosure
requirements; provided, however, that the Company may not delay, suspend or
-------- -------
withdraw a Registration Statement for such reason for more than 60 days or more
often than twice during any period of 12 consecutive months.
3. Demand Registration. (a) Request for Registration. At any time after
------------------- ------------------------
the date that is six months following the date on which Shares are first
acquired by a Wyndham Holder, Wyndham Holders of Registrable Securities will
have the right, by written notice delivered to the Company (a "Demand Notice"),
to require the Company to register (a "Demand Registration") Registrable
Securities under and in accordance with the provisions of the Securities Act in
connection with an underwritten offering of Registrable Securities proposed to
be effected by one or more Wyndham Holders; provided, however, that the Company
-------- -------
shall be required to effect only one such Demand Registration on behalf of
Wyndham Holders. Subject to Section 3(b) hereof, the Company may include in a
Demand Registration shares of Common Stock to be issued by it.
(b) Priority on Demand Registrations. The Wyndham Holders will cause
--------------------------------
the managing underwriter or underwriters of a proposed underwritten offering
pursuant to a Demand Registration on behalf of the Wyndham Holders to permit the
Company to include therein shares of Common Stock to be issued by it on the same
terms and conditions as Registrable Securities of the Wyndham Holders included
therein. Notwithstanding the foregoing, if the managing underwriter or
underwriters of such offering deliver an opinion to Wyndham and the Company to
the effect that the total amount of securities which Wyndham Holders and the
Company propose to include in such offering is such as to materially and
adversely affect the success of such offering, then the amount of securities to
be included therein for the account of the Company will be reduced (to zero if
necessary) to the extent necessary to reduce the total
-5-
<PAGE>
amount of securities to be included in such offering to the amount recommended
by such managing underwriter or underwriters.
(c) Filing and Effectiveness. The Company will file a Registration
------------------------
Statement relating to any Demand Registration within 60 calendar days of the
date on which the Demand Notice is given and will use all reasonable efforts to
cause the same to be declared effective by the SEC as soon as practicable. The
Wyndham Holders of Registrable Securities will be permitted to withdraw in good
faith all or part of the Registrable Securities from a Demand Registration at
any time prior to the effective date of such Demand Registration, in which event
the Company will promptly amend or, if applicable, withdraw the related
Registration Statement.
(d) Postponement of Demand Registration. The Company will be entitled
-----------------------------------
to postpone the filing period of any Demand Registration if the negotiation or
consummation of a transaction is pending or an event has occurred, which
negotiation, consummation or event would require additional disclosure by the
Company in the Registration Statement of material information which the Company,
in its good faith business judgment, has a bona fide business purpose for
---------
keeping confidential and the non-disclosure of which in the Registration
Statement could cause the Registration Statement to fail to comply with
applicable disclosure requirements; provided, however, that the Company may not
-----------------
delay the filing of a Registration Statement for such reason for more than 60
days.
4. Piggyback Registration. (a) Right to Piggyback. If at any time the
---------------------- ------------------
Company proposes to file a registration statement under the Securities Act with
respect to a primary offering of any class of equity securities (or securities
convertible into, exchangeable for or exercisable for a class of equity
securities of the Company) by the Company (other than a registration statement
(i) on Form S-4, S-8 or any successor form thereto, (ii) filed in connection
with an exchange offer or an offering of securities solely to the Company's
existing stockholders or (iii) filed solely in connection with an offering made
solely to employees of the Company), then the Company will give written notice
of such proposed filing to Wyndham at least 30 calendar days before the
anticipated filing date. Such notice will offer Wyndham Holders of Registrable
Securities the opportunity to register such amount of Registrable Securities as
each such holder may request (a
-6-
<PAGE>
"Piggyback Registration"). Subject to Section 4(b) hereof, the Company will
include in each such Piggyback Registration all Registrable Securities with
respect to which the Company has received a written request for inclusion
therein. The Wyndham Holders of Registrable Securities will be permitted to
withdraw all or part of the Registrable Securities from a Piggyback Registration
at any time prior to the effective date of such Piggyback Registration.
(b) Priority on Piggyback Registrations. The Company will cause the
-----------------------------------
managing underwriter or underwriters of a proposed underwritten offering on
behalf of the Company to permit Wyndham Holders of the Registrable Securities
requested to be included in the registration for such offering to include
therein all such Registrable Securities requested to be so included on the same
terms and conditions as any securities of the Company included therein.
Notwithstanding the foregoing, if the managing underwriter or underwriters of
such offering deliver an opinion to Wyndham and the Company to the effect that
the total amount of securities which Wyndham Holders, the Company and any other
persons having rights to participate in such registration propose to include in
such offering is such as to materially and adversely affect the success of such
offering, then the amount of securities to be included therein (i) for the
account of Wyndham Holders on the one hand (allocated among such holders as
determined by Wyndham), and (y) for the account of all such other persons
(exclusive of the Company), on the other hand, will be reduced (to zero if
necessary) pro rata in proportion to the respective amounts of securities
requested to be included therein to the extent necessary to reduce the total
amount of securities to be included in such offering to the amount recommended
by such managing underwriter or underwriters. The managing underwriter or
underwriters, applying the same standard, may also exclude entirely from such
offering all Registrable Securities proposed to be included in such offering to
the extent the Registrable Securities are not of the same class as securities of
the Company included in such offering.
5. Registration Procedures. In connection with the Company's
-----------------------
registration obligations pursuant to Sections 2, 3 and 4 hereof, the Company
will effect such registrations to permit the sale of such Registrable Securities
in accordance with the intended
-7-
<PAGE>
method or methods of disposition thereof, and pursuant thereto the Company will
as expeditiously as possible, in each case, to the extent applicable:
(a) Prepare and file with the SEC a Registration Statement or
Registration Statements on any appropriate form under the Securities Act
available for the sale of the Registrable Securities by the Wyndham Holders
thereof in accordance with the intended method or methods of distribution
thereof, and cause each such Registration Statement to become effective and
remain effective as provided herein; provided, however, that before filing a
-------- -------
Registration Statement or Prospectus or any amendments or supplements thereto
(including documents that would be incorporated or deemed to be incorporated
therein by reference) the Company will furnish to Wyndham, the Sellers' Counsel
and the managing underwriters, if any, copies of all such documents proposed to
be filed, which documents will be subject to the review of Wyndham, the Sellers'
Counsel and such underwriters.
(b) Prepare and file with the SEC such amendments and post-effective
amendments to each Registration Statement as may be necessary to keep such
Registration Statement continuously effective for the applicable period
specified in Section 3; cause the related Prospectus to be supplemented by any
required Prospectus supplement, and as so supplemented to be filed pursuant to
Rule 424 (or any similar provisions then in force) under the Securities Act; and
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such Registration Statement during the applicable
period in accordance with the intended methods of disposition by the sellers
thereof set forth in such Registration Statement as so amended or to such
Prospectus as so supplemented.
(c) Notify Wyndham, the Sellers' Counsel and the managing
underwriters, if any, promptly, and (if requested by any such person) confirm
such notice in writing, (i) when a Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to a Registration
Statement or any post-effective amendment, when the same has become effective,
(ii) of any request by the SEC or any other federal or state governmental
authority for amendments or supplements to a Registration Statement or related
Prospectus or for additional information, (iii) of the
-8-
<PAGE>
issuance by the SEC or any other federal or state governmental authority of any
stop order suspending the effectiveness of a Registration Statement or the
initiation of any proceedings for that purpose, (iv) if at any time during the
term of this Agreement the representations and warranties of the Company
contained in any agreement contemplated by Section 5(n) hereof (including any
underwriting agreement) cease to be true and correct, (v) of the receipt by the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable Securities for sale in
any jurisdiction or the initiation or threatening of any proceeding for such
purpose, (vi) of the occurrence of any event which makes any statement made in
such Registration Statement or related Prospectus or any document incorporated
or deemed to be incorporated therein by reference untrue in any material respect
or which requires the making of any changes in a Registration Statement,
Prospectus or documents so that, in the case of the Registration Statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading and, in the case of the Prospectus, it will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated or that is necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and (vii)
of the Company's reasonable determination that a post-effective amendment to a
Registration Statement would be appropriate.
(d) Use every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement, or the lifting of any
suspension of the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction, at the earliest possible
moment.
(e) If requested by the managing underwriters, if any, or Wyndham, (i)
promptly incorporate in a Prospectus supplement or post-effective amendment such
information as the managing underwriters, if any, and Wyndham agree should be
included therein as may be required by applicable law and (ii) make all required
filings of such Prospectus supplement or such post-effective amendment as soon
as practicable after the Company has received
-9-
<PAGE>
notification of the matters to be incorporated in such Prospectus supplement or
post-effective amendment; provided, however, that the Company will not be
-------- -------
required to take any actions under this Section 5(e) that are not, in the
opinion of counsel for the Company, in compliance with applicable law.
(f) Furnish to Wyndham, the Sellers' Counsel and each managing
underwriter, if any, without charge, at least one conformed copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements (but excluding schedules, all documents incorporated or
deemed incorporated therein by reference and all exhibits, unless requested in
writing by such holder, counsel or underwriter).
(g) Deliver to Wyndham, the Sellers' Counsel and the underwriters, if
any, without charge, as many copies of the Prospectus or Prospectuses relating
to such Registrable Securities (including each preliminary prospectus) and any
amendment or supplement thereto as such persons may request; and the Company
hereby consents to the use of such Prospectus or each amendment or supplement
thereto by each of the selling Wyndham Holders of Registrable Securities and the
underwriters, if any, in connection with the offering and sale of the
Registrable Securities covered by such Prospectus or any amendment or supplement
thereto.
(h) Prior to any public offering of Registrable Securities, to
register or qualify or cooperate with the selling Wyndham Holders of Registrable
Securities, the underwriters, if any, and their respective counsel in connection
with the registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or blue sky laws of such jurisdictions within the United States as
any seller or underwriter reasonably requests in writing; use all reasonable
efforts to keep each such registration or qualification (or exemption therefrom)
effective during the period such Registration Statement is required to be kept
effective and do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdiction of the Registrable Securities
covered by the applicable Registration Statement; provided, however, that the
-------- -------
Company will not be required to (i) qualify generally to do business in any
jurisdiction in which it is not then so qualified or (ii) take any action that
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<PAGE>
would subject it to general service of process in any such jurisdiction in which
it is not then so subject.
(i) Cooperate with the selling Wyndham Holders of Registrable
Securities and the managing underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold and enable such Registrable Securities to be in such denominations and
registered in such names as the managing underwriters, if any, shall request at
least two business days prior to any sale of Registrable Securities to the
underwriters.
(j) Use all reasonable efforts to cause the Registrable Securities
covered by the applicable Registration Statement to be registered with or
approved by such other governmental agencies or authorities within the United
States except as may be required solely as a consequence of the nature of such
selling holder's business, in which case the Company will cooperate in all
reasonable respects with the filing of such Registration Statement and the
granting of such approvals as may be necessary to enable the seller or sellers
thereof or the underwriters, if any, to consummate the disposition of such
Registrable Securities.
(k) Upon the occurrence of any event contemplated by Section 5(c)(vi)
or 5(c)(vii) hereof, prepare a supplement or post-effective amendment to each
Registration Statement or a supplement to the related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Securities being
sold thereunder, such Prospectus will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(l) Use all reasonable efforts to cause all Registrable Securities
covered by such Registration Statement to be (i) listed on each securities
exchange, if any, on which similar securities issued by the Company are then
listed or, if no similar securities issued by the Company are then so listed, on
the New York Stock Exchange or another national securities exchange if the
securities qualify to be so listed or (ii) authorized to be quoted on the
-11-
<PAGE>
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
or the National Market System of NASDAQ if the securities qualify to be so
quoted; in each case, if requested by Wyndham or the managing underwriters, if
any.
(m) To the extent not previously accomplished, (i) engage an
appropriate transfer agent and provide the transfer agent with printed
certificates for the Registrable Securities in a form eligible for deposit with
The Depository Trust Company and (ii) provide a CUSIP number for the Registrable
Securities.
(n) Enter into such agreements (including, in the event of an
underwritten offering, an underwriting agreement in form, scope and substance as
is customary in underwritten offerings) and take all such other actions in
connection therewith (including those requested by Wyndham or, in the event of
an underwritten offering, those requested by the managing underwriters) in order
to expedite or facilitate the disposition of such Registrable Securities and in
such connection, whether or not an underwriting agreement is entered into and
whether or not the registration is an underwritten registration, (i) make such
representations and warranties to the Wyndham Holders of such Registrable
Securities and the underwriters, if any, with respect to the business of the
Company and its subsidiaries, the Registration Statement, Prospectus and
documents incorporated by reference or deemed incorporated by reference, if any,
in each case, in form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings and confirm the same if and when
requested; (ii) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be reasonably
satisfactory to the managing underwriters, if any, and the Wyndham Holders of
the Registrable Securities being sold) addressed to such selling Wyndham Holders
and each of the underwriters, if any, covering the matters customarily covered
in opinions requested in underwritten offerings and such other matters as may be
reasonably requested by such holders and underwriters, including without
limitation the matters referred to in Section 5(n)(i) hereof; (iii) use its best
efforts to obtain "comfort" letters and updates thereof from the independent
certified public accountants of the Company (and, if necessary, any other
certified public accountants of any subsidiary of the Company or of any business
acquired by the Company for which financial statements and
-12-
<PAGE>
financial data is, or is required to be, included in the Registration
Statement), addressed to each selling Wyndham Holder of Registrable Securities
and each of the underwriters, if any, such letters to be in customary form and
covering matters of the type customarily covered in "comfort" letters in
connection with underwritten offerings; and (iv) deliver such documents and
certificates as may be requested by the Wyndham Holders of the Registrable
Securities being sold, the Sellers' Counsel and the managing underwriters, if
any, to evidence the continued validity of the representations and warranties of
the Company and its subsidiaries made pursuant to clause (i) above and to
evidence compliance with any customary conditions contained in the underwriting
agreement or similar agreement entered into by the Company. The foregoing
actions will be taken in connection with each closing under such underwriting or
similar agreement as and to the extent required thereunder.
(o) Make available for inspection by a representative of the selling
Wyndham Holders, any underwriter participating in any disposition of Registrable
Securities, and any attorney or accountant retained by such selling holders or
underwriter, all financial and other records, pertinent corporate documents and
properties of the Company and its subsidiaries, and cause the officers,
directors and employees of the Company and its subsidiaries to supply all
information reasonably requested by any such representative, underwriter,
attorney or accountant in connection with such Registration Statement; provided,
--------
however, that any records, information or documents that are designated by the
- -------
Company in writing as confidential at the time of delivery of such records,
information or documents will be kept confidential by such persons unless (i)
such records, information or documents are in the public domain or otherwise
publicly available, (ii) disclosure of such records, information or documents is
required by court or administrative order or is necessary to respond to
inquiries of regulatory authorities, or (iii) disclosure of such records,
information or documents, in the opinion of counsel to such person, is otherwise
required by law (including, without limitation, pursuant to the requirements of
the Securities Act).
(p) Comply with all applicable rules and regulations of the SEC and
make generally available to its security holders earning statements satisfying
the provisions of Section 11(a) of
-13-
<PAGE>
the Securities Act and Rule 158 thereunder (or any similar rule promulgated
under the Securities Act) no later than 45 calendar days after the end of any
12-month period (or 90 calendar days after the end of any 12-month period if
such period is a fiscal year) (i) commencing at the end of any fiscal quarter in
which Registrable Securities are sold to underwriters in a firm commitment or
best efforts underwritten offering, and (ii) if not sold to underwriters in such
an offering, commencing on the first day of the first fiscal quarter of the
Company, after the effective date of a Registration Statement, which statements
shall cover said 12-month period.
(q) In connection with any underwritten offering, cause appropriate
members of its management to cooperate and participate on a reasonable basis in
the underwriters' "road show" conferences related to such offering.
The Company may require each seller of Registrable Securities as to which
any registration is being effected to furnish to the Company such information
regarding the distribution of such Registrable Securities as the Company may,
from time to time, reasonably request in writing and the Company may exclude
from such registration the Registrable Securities of any seller who unreasonably
fails to furnish such information within a reasonable time after receiving such
request.
Each Wyndham Holder of Registrable Securities will be deemed to have agreed
by virtue of its acquisition of such Registrable Securities that, upon receipt
of any notice from the Company of the occurrence of any event of the kind
described in Section 5(c)(ii), 5(c)(iii), 5(c)(v), 5(c)(vi) or 5(c)(vii) hereof,
such holder will forthwith discontinue disposition of such Registrable
Securities covered by such Registration Statement or Prospectus until such
holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 5(k) hereof, or until it is advised in writing by the
Company that the use of the applicable Prospectus may be resumed, and has
received copies of any additional or supplemental filings that are incorporated
or deemed to be incorporated by reference in such Prospectus.
6. Registration Expenses. (a) All fees and expenses incident to the
---------------------
performance of or compliance with this Agreement by
-14-
<PAGE>
the Company will be borne by the Company whether or not any of the Registration
Statements become effective. Such fees and expenses will include, without
limitation, (i) all registration and filing fees (including without limitation
fees and expenses (x) with respect to filings required to be made with the
National Association of Securities Dealers, Inc. and (y) of compliance with
securities or "blue sky" laws (including without limitation fees and
disbursements of counsel for the underwriters or selling holders in connection
with "blue sky" qualifications of the Registrable Securities and determination
of the eligibility of the Registrable Securities for investment under the laws
of such jurisdictions as the managing underwriters, if any, or holders of a
majority of the Registrable Securities being sold may designate)), (ii) printing
expenses (including without limitation expenses of printing certificates for
Registrable Securities in a form eligible for deposit with The Depository Trust
Company and of printing prospectuses), (iii) messenger, telephone and delivery
expenses, (iv) fees and disbursements of counsel for the Company, (v) fees and
disbursements of all independent certified public accountants referred to in
Section 5(n)(iii) hereof (including the expenses of any special audit and
"comfort" letters required by or incident to such performance), (vi) any fees
and expenses of any "qualified independent underwriter" or other independent
appraiser participating in an offering pursuant to Section 3 of Schedule E to
the By-laws of the National Association of Securities Dealers, Inc., (vii)
Securities Act liability insurance if the Company desires such insurance, and
(viii) fees and expenses of all other persons retained by the Company. In
addition, the Company will pay its internal expenses (including without
limitation all salaries and expenses of its officers and employees performing
legal or accounting duties), the expense of any annual audit, the fees and
expenses incurred in connection with the listing of the securities to be
registered and the fees and expenses of any person, including special experts,
retained by the Company. In no event, however, will the Company be responsible
for any underwriting discount or selling commission with respect to any sale of
Registrable Securities pursuant to this Agreement or for the fees or
disbursements of counsel to the Wyndham Holders ("Sellers' Counsel").
7. Indemnification. (a) Indemnification by the Company. The Company
--------------- ------------------------------
will, without limitation as to time, indemnify and hold
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<PAGE>
harmless, to the fullest extent permitted by law, each Wyndham Holder of
Registrable Securities registered pursuant to this Agreement, the officers,
directors and agents and employees of each of them, each person who controls
such holder (within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act) and the officers, directors, agents and employees of any
such controlling person, from and against all losses, claims, damages,
liabilities, costs (including without limitation the costs of investigation and
attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising out
of or based upon any untrue or alleged untrue statement of a material fact
contained in any Registration Statement, Prospectus or form of Prospectus or in
any amendment or supplement thereto or in any preliminary prospectus, or arising
out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as the same are based solely upon
information furnished in writing to the Company by such Wyndham Holder expressly
for use therein; provided, however, that the Company will not be liable to any
-------- -------
Wyndham Holder of Registrable Securities to the extent that any such Losses
arise out of or are based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any preliminary prospectus if either (A)
(i) such holder failed to send or deliver a copy of the Prospectus with or prior
to the delivery of written confirmation of the sale by such Wyndham Holder of a
Registrable Security to the person asserting the claim from which such Losses
arise and (ii) the Prospectus would have completely corrected such untrue
statement or alleged untrue statement or such omission or alleged omission; or
(B) such untrue statement or alleged untrue statement, omission or alleged
omission is completely corrected in an amendment or supplement to the Prospectus
previously furnished by or on behalf of the Company with copies of the
Prospectus as so amended or supplemented, and such Wyndham Holder thereafter
fails to deliver such Prospectus as so amended or supplemented prior to or
concurrently with the sale of a Registrable Security to the person asserting the
claim from which such Losses arise.
(b) Indemnification by Holders of Registrable Securities. In
----------------------------------------------------
connection with any Registration Statement in which a Wyndham Holder of
Registrable Securities is participating, such Wyndham Holder of Registrable
Securities will furnish to the
-16-
<PAGE>
Company in writing such information as the Company reasonably requests for use
in connection with any Registration Statement or Prospectus and will indemnify,
to the fullest extent permitted by law, the Company, its directors and officers,
agents and employees, each person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling persons, from and
against all Losses arising out of or based upon any untrue statement of a
material fact contained in any Registration Statement, Prospectus or preliminary
prospectus or arising out of or based upon any omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, to the extent, but only to the extent, that such untrue statement or
omission is contained in any information so furnished in writing by such Wyndham
Holder to the Company expressly for use in such Registration Statement or
Prospectus and was relied upon by the Company in the preparation of such
Registration Statement, Prospectus or preliminary prospectus.
(c) Conduct of Indemnification Proceedings. If any person shall
--------------------------------------
become entitled to indemnity hereunder (an "indemnified party"), such
indemnified party shall give prompt notice to the party from which such
indemnity is sought (the "indemnifying party") of any claim or of the
commencement of any action or proceeding with respect to which such indemnified
party seeks indemnification or contribution pursuant hereto; provided, however,
-------- -------
that the failure to so notify the indemnifying party will not relieve the
indemnifying party from any obligation or liability except to the extent that
the indemnifying party has been prejudiced materially by such failure. All fees
and expenses (including any fees and expenses incurred in connection with
investigating or preparing to defend such action or proceeding) will be paid to
the indemnified party, as incurred, within five calendar days of written notice
thereof to the indemnifying party (regardless of whether it is ultimately
determined that an indemnified party is not entitled to indemnification
hereunder). The indemnifying party will not consent to entry of any judgment or
enter into any settlement or otherwise seek to terminate any action or
proceeding in which any indemnified party is or could be a party and as to which
indemnification or contribution could be sought by such indemnified party under
this Section 7, unless such judgment, settlement or other termination includes
as an unconditional term
-17-
<PAGE>
thereof the giving by the claimant or plaintiff to such indemnified party of a
release, in form and substance satisfactory to the indemnified party, from all
liability in respect of such claim or litigation for which such indemnified
party would be entitled to indemnification hereunder.
(d) Contribution. If the indemnification provided for in this Section
------------
7 is unavailable to an indemnified party under Section 7(a) or 7(b) hereof in
respect of any Losses or is insufficient to hold such indemnified party
harmless, then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, will, jointly and severally, contribute to the amount paid or
payable by such indemnified party as a result of such Losses, in such proportion
as is appropriate to reflect the relative fault of the indemnifying party or
indemnifying parties, on the one hand, and such indemnified party, on the other
hand, in connection with the actions, statement or omissions that resulted in
such Losses as well as any other relevant equitable considerations. The
relative fault of such indemnifying party or indemnifying parties, on the one
hand, and such indemnified party, on the other hand, will be determined by
reference to, among other things, whether any action in question, including any
untrue or alleged untrue statement of a material fact or omission or alleged
omission of a material fact, has been taken or made by, or related to
information supplied by, such indemnifying party or indemnified party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses will be deemed to include any legal
or other fees or expenses incurred by such party in connection with any action
or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were determined by pro rata
--- ----
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provision of this Section 7(d), an indemnifying party that
is a selling Wyndham Holder of Registrable Securities will not be required to
contribute any amount in excess of the amount by which the total price at which
the Registrable Securities sold by such indemnifying party and distributed to
the public were
-18-
<PAGE>
offered to the public exceed the amount of any damages which such indemnifying
party has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
The indemnity, contribution and expense reimbursement obligations of the
Company hereunder will be in addition to any liability the Company may otherwise
have hereunder or otherwise. The provisions of this Section 7 will survive so
long as Registrable Securities remain outstanding, notwithstanding any transfer
of the Registrable Securities by any holder thereof or any termination of this
Agreement.
8. Rule 144. The Company will file the reports required to be filed by
--------
it under the Securities Act and the Exchange Act, and will cooperate with any
Wyndham Holder of Registrable Securities as such holder reasonably requests
(including without limitation by making such representations as any such holder
may reasonably request), all to the extent required from time to time to enable
such Wyndham Holder to sell Registrable Securities without registration under
the Securities Act within the limitations of the exemptions provided by Rule
144. Upon the request of any Wyndham Holder of Registrable Securities, the
Company will deliver to such holder a written statement as to whether it has
complied with such filing requirements.
9. Underwritten Registrations. In connection with an underwritten
--------------------------
offering to be effected pursuant to a Demand Registration, the investment banker
or investment bankers and manager or managers that will manage the offering will
be selected by Wyndham; provided, that such investment banker or manager shall
--------
be reasonably satisfactory to the Company. If any Piggyback Registration is an
underwritten offering, the Company will have the right to select the investment
banker or investment bankers and managers to administer the offering.
10. Miscellaneous. (a) Remedies. In the event of a breach by the
------------- --------
Company of its obligations under this Agreement, each Wyndham Holder of
Registrable Securities, in addition to being
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<PAGE>
entitled to exercise all rights granted by law, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company agrees that monetary damages would not be adequate compensation for any
loss incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it will waive the defense that a
remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company has not, as of the date
--------------------------
hereof, and will not, on or after the date hereof, enter into any agreement with
respect to its securities which is inconsistent with the rights granted to the
holders of Registrable Securities in this Agreement or otherwise conflicts with
the provisions hereof.
(c) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of
Wyndham.
(d) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing and will be deemed given (i) when
made, if made by hand delivery, (ii) upon confirmation, if made by telecopier,
or (iii) one business day after being deposited with a reputable next-day
courier, to the parties as follows:
(x) if to the Company
American General Hospitality Corporation
3860 West Northwest Highway
Suite 300
Dallas, Texas 75220
Attention: Steven D. Jorns
(y) if to Wyndham or any Wyndham Holder of Registrable
Securities:
WHC Franchise Corporation
Suite 2300
-20-
<PAGE>
2001 Bryan Street
Dallas, Texas 75201
Attention: General Counsel
with a copy to:
Locke Purnell Rain Harrell
Suite 2200
2200 Ross Avenue
Dallas, Texas 75201
Attention: M. Charles Jennings, Esq.
(e) Successors and Assigns. This Agreement will inure to the benefit
----------------------
of and be binding upon the successors and assigns of each of the parties
(including any pledgee acquiring securities by foreclosure) and will inure to
the benefit of each holder of any Registrable Securities. Notwithstanding the
foregoing, no transferee will have any of the rights granted under this
Agreement (i) until such transferee shall have acknowledged its rights and
obligations hereunder by a signed written statement of such transferee's
acceptance of such rights and obligations, (ii) if the transferor notifies the
Company in writing on or prior to such transfer that the transferee shall not
have such rights, or (iii) if such transferee was not a party to this Agreement
on the date hereof (or an affiliate of a party hereto) and acquired Registrable
Securities in open-market purchases or pursuant to an underwritten public
offering.
(f) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed will be deemed to be an original and all of which taken
together will constitute one and the same instrument.
(g) Headings. The headings in this Agreement are for convenience of
--------
reference only and will not limit or otherwise affect the meaning hereof.
(h) Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AS APPLIED TO CONTRACTS MADE
AND PERFORMED WITHIN THE STATE OF TEXAS, WITHOUT REGARD TO PRINCIPLES OF
CONFLICT OF LAWS.
-21-
<PAGE>
(i) Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein will remain in full force and effect and will in
no way be affected, impaired or invalidated, and the parties hereto will use
their best efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
(j) Entire Agreement. This Agreement is intended by the parties as a
----------------
final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the registration rights granted by the Company with respect to the
Registrable Securities. This Agreement supersedes all prior agreements and
understandings among the parties with respect to such registration rights.
(k) Attorneys' Fees. In any action or proceeding brought to enforce
---------------
any provision of this Agreement, or where any provision hereof is validly
asserted as a defense, the prevailing party, as determined by the court, will be
entitled to recover reasonable attorneys' fees in addition to any other
available remedy.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
AMERICAN GENERAL HOSPITALITY
CORPORATION
By:______________________________________
Name:_________________________________
Title:________________________________
-22-
<PAGE>
WHC FRANCHISE CORPORATION
By:______________________________________
Name:_________________________________
Title:________________________________
-23-
<PAGE>
EXHIBIT 21.1
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE COMPANY
STATE OR OTHER JURISDICTION
OF INCORPORATION OR
SUBSIDIARY ORGANIZATION/TYPE OF ENTITY
- -------------------------------------- ------------------------------------
<S> <C>
AGH GP, Inc. Nevada/Corporation
AGH LP, Inc. Nevada/Corporation
American General Hospitality Operating Delaware/Limited Partnership
Partnership, L.P.
AGH UPREIT LLC Delaware/Limited Liability Company
AGH SECAUCUS LLC Delaware/Limited Liability Company
AGH DFW South LLC Delaware/Limited Liability Company
2929 Williams Limited Liability Company Delaware/Limited Liability Company
3199 Glendale Joint Venture Ohio/General Partnership
MDV Limited Partnership Texas/Limited Partnership
Madison Motel Associates Wisconsin/General Partnership
183 Hotel Associates, Ltd. Texas/Limited Partnership
Richmond Williamsburg Associates, Ltd. Texas/Limited Partnership
455 Meadowlands Associates, Ltd. Texas/Limited Partnership
DFW South I Limited Partnership Texas/Limited Partnership
Lake Buena Vista Partners, Ltd. Florida/Limited Partnership
</TABLE>
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-11
(File No. 333-19585) of our reports dated November 27, 1996, on our audits of
the financial statements and financial statement schedule American General
Hospitality Corporation; dated September 19, 1996, on our audits of the
financial statements and financial statement schedule of AGH Predecessor
Hotels; dated April 8, 1996, on our audits of the financial statements and
financial statement schedule of Other Initial Hotels; and dated November 26,
1996, on our audit of the financial statements of Days Inn Lake Buena Vista
hotel. We also consent to the reference to our firm under the caption
"Experts."
Coopers & Lybrand L.L.P.
Dallas, Texas
January 16, 1997